Is it safe, or wise, for family businesses to base their corporate governance on the version used by companies whose shares are publicly traded? We’ll call the public company version, ‘conventional governance’.

It is important to grasp that conventional governance is based on distrust. Rules, in the form of codes and guidelines, formal mechanisms and stringent enforcement are felt to be needed to mitigate the type of opportunistic management behaviour that results in reduced shareholder returns.

Various recent corporate scandals involving management have led to a demand for more rules, which is interesting given how often the complaint is that there is too much ‘red tape’.

Anyway, more governance of the conventional type will be to the detriment of an approach that prefers governance that achieves the following.

  • Reflects relationships of loyalty and trust.
  • Encourages teamwork.
  • Avoids unnecessary bureaucracy, management by rulebook and short-term performance measurement.

The type of governance just described appeals to a lot of family businesses. They naturally develop their governance based on relationships of loyalty and trust.

Management responsibilities are often allocated among family members, and the ‘outsiders’ who are treated as ‘family’, based on trusting each other’s talents. They know each other well enough to understand their respective strengths and weaknesses, and therefore trust each other to deliver.

As a result, each business function is handled by the fewest number capable of doing so; you don’t need others looking over their shoulder or ‘governing’ them to keep them honest.

Hierarchical, top-down governance structures, with excessive monitoring and reporting are not what many family businesses want. Even so, it is often suggested that conventional governance should be adapted for use in family businesses. Given how unsuccessful conventional governance seems to have been in solving the problems it is meant to solve, maybe it is time to suggest that this argument is entirely the wrong way around?

The corporate scandals that have emerged since the 2008 financial meltdown have led to increased discussion about a new type of capitalism. In 2012, the UK government asked Professor John Kay, a visiting Professor at the London School of Economics, to recommend ways to transform UK equity markets. His report recommended that there needed to be a change of culture in the stock market, away from short termism in favour of restoring relationships built on long term trust and confidence. It also speaks glowingly of stewardship being a strategic objective for companies.

Governance based on ‘relationships’, ‘long term’, ‘trust’ ‘and stewardship’? These terms are used frequently to describe family businesses. Could it be that that the family business model, so often disparagingly dismissed as dysfunctional, now represents the best hope for companies on the world’s stock markets?

That debate is worth having. For the moment we can safely conclude that families in business together should look at conventional governance with care, and even a bit of cynicism. If they feel that they suffer from the same problems that conventional governance is trying to resolve – lack of trust between owners and management – then some aspects of conventional governance could fit. Otherwise, a family needs to develop corporate governance that reflects their own values and aspirations.

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