Governance questions for keeping companies in the family

11 March 2004

How can a family-controlled company meet international corporate governance codes and simultaneously maintain a strategy, which would allow successive generations to run the business?

It is a thorny question, made pertinent by a survey from PriceWaterhouse Coopers (PWC) this week revealing that almost half of Irish family business have no formal succession plan in place, while just one in five businesses pay attention to the skills and training needs of family members.

Of course this is not just an issue in Ireland. The majority of medium-sized businesses across Asia are controlled by families. Across the other side of the world in Canada, more than four out of five businesses are family controlled, although statistics show that only three out of ten of them survive in this form to the second generation and one in ten to the third.

The succession issue in very large businesses has also attracted much publicity this year with the controversial but accepted appointment of James Murdoch to the chief executive's post in British Sky Broadcasting, a UK company controlled by his father Rupert's News Corporation.

Rules and codes on the role of family members on boards or in management vary considerably but a common thread running through guidelines is the importance of independent directors in selection and remuneration processes, and in board procedures.

For example only two in four Irish business surveyed by PWC complied with the general rule that board meetings should be held no less frequently than quarterly.

PWC, which has a family business centre established to improve the professionalism of these companies, has some helpful advice for those involved in succession planning. It says family companies should have a succession plan in place, which is reviewed annually.

It also suggests questions, which those who control family companies should repeatedly ask themselves:

• How do I choose among several potential successors?
• When should I retire?
• How can I keep active after retirement?
• How can my successor be trained through formal education and in practice?
• How can my key employees be motivated and stay committed?
• What is a fair arrangement for my family members involved in the business and those who are not?
• Who would constitute the best management team?
• Who should sit on an advisory board?

McKinsey, the management consultants, acknowledge that few family businesses survive through generations, but notes that the successful ones are those that do have committed to good governance.

It recently interviewed the leaders of 11 large family-controlled businesses in the US, Europe and emerging markets to understand what these companies do right. In an analysis in the McKinsey Quarterly, they say:

" Those that have endured for generations tend to include outsiders on their boards and base hiring and promotion on merit. Transparency and meritocracy may not be in the interest of some family members but do help build a strong organization that benefits the family as a whole, as well as other stakeholders in the business."

Many medium sized companies are wrestling with this problem, and it would be interesting to hear from those who believe they have tackled it successfully - providing for continuity of ownership and ongoing prosperity, while also meeting the requirements of corporate governance.