Governance in family business during COVID-19

By Dr. Vinod Surana

With a looming pandemic that is leading economies to lean towards a K-shape recovery, it is apparent that the brunt of the economic crisis is being felt differently across different businesses and industries. A category of business going through unique changes is the family business.

Extremely intriguing data points towards the fact that multigenerational family businesses are experiencing the pandemic differently as compared to those in non-family businesses. ‘Banyan Global’, a family business advisory firm surveyed over 190 families from 20 countries across different industries. Majority of the companies surveyed stated that they are negatively impacted by the pandemic. Almost all the leaders of various family business organisations were concerned about short term cash flow and revenue loss. Very few, however, had concerns about their survival and well-being as a family business.

The long term impact worry is negligible as the thought of losing their company, preservation of culture and losing control is almost non-existent. Success for many family businesses is providing family members with long-term employment while, for some it’s about leaving a positive legacy. The key-point to note here is that no matter the goal, family businesses focus on longevity. Yet, a looming question on the minds of family business owners is: what will happen to business continuity post the pandemic? The answer to that lies within the governance structure of a business organisation.

Governance has always been a key factor in driving family businesses to their success.A well-planned governance structure helps hasten the transition process while safeguarding the business and financial assets. Setting up governance also helps in defining rules of engagement while formalising the ownership structure.

There are typically two separate but related set of rules when it comes to the governance structure:

i) The family’s behaviour and how it relates towards the business and

ii) How the family behaves and relates in the business.

For a family business to be successful, certain attributes must pre exist amongst the family, namely: ethics, commitment, plough back, personal involvement, relationship with stake holders, long hours, low debt and quick decision making. Quick decision making however, is an attribute that is present only if the ownership and executive authority lies with the same person.

Family business owners also find it necessary to give future generations the space to make decisions and mistakes while being under the guidance of present day family business owners. This must be done without making future owners clones of present day owners.

The pandemic has forced many families to seriously consider and swiftly implement succession planning.Inheritance process begins from childhood and not at the eleventh hour. It must be remembered that Succession Planning is a process and not an overnight decision to be made. Many families must choose between multiple children while being fair and just. Under such a circumstance one must approach and appoint a competent  neutral outside advisor.There must be a shared vision and “buy-in” by all family members for successful and smooth succession.

In times where agility is at a premium, businesses face the challenge of finding the right path from an informal, centralised, decision-making process to a more empowered top team. According to McKinsey, a leading management consultancy firm strong governance is one that revolves around an active board of directors comprising of family members and professionalswho steer the business while a separate council manages family matters. These measures help in avoiding excessively formal governance processes and slow decision making.

Another useful method to ensure that a family business thrives is by appointing a bouncing board. A bouncing board typically comprises of non-competitive business owners from different industries who provide insightful advice that will benefit the business organization.

Trust, according to the Harvard Business reviewis said to be the ‘essential currency’ at the realm of governance.Family owners must trust that,leaders of the organisation have the best interest of all stakeholders in mind while making decisions about allocation of scarce capital and organisational changes.

Management, income, control and equity are considered the four pillars of governance. This must be kept in mind during a crisis as a necessity to revisit the governance structure arises. The questions of what can be improved and what is working arises during such times.

While planning the structure of governance the three C’s: Communication Clarity and Compassion must be kept in mind.  The key drivers of a family business: Genesis, Growth, Next generation, Governance and Giving back must form the basis in deciding the governance structure.

 The setting up of a family council will prove useful in a situation where the family has to question the efficient management of family affairs. A well-documented family constitution can also help in keeping future generations in check. The reports of a management information system set up as a part of the governance must deem it necessary to capture information that requires the families attention holistically. These may include information related to the family’s finance, investment portfolio and its investment in the partner companies.

When a crisis hits, attention is understandably drawn towards cash flow and valuation. It is during such times that the structure and processes families put into governance helps them yield high returns. Which is why the structure of an organisation must be engaged, empowered and utilised in an effective manner so that the firm is positioned to endure  long phases of a crisis.