have destroyed both families and the businesses that their ancestors built. As previous research has established, good governance has a positive impact on the performance and reputation of companies, including their ability to attract lower cost debt and equity capital from external sources. Encouraging even the most basic principles of good governance for family-owned enterprises, therefore, is fundamental to the advancement of a strong economy. So what is corporate governance? As stated in a previous article, it is simply the system of processes, structures, policies and rules by which organizations (i.e., listed corporations, charities, not-forprofits and, yes, family-owned enterprises) are directed and controlled. The primary purpose of corporate governance - and working diligently to get the right governance arrangements in place - is to improve an organization’s performance and make it more successful. How? By promoting high quality decision making, safeguarding the organization’s assets, and fostering accountability, transparency and fairness throughout the organization’s operations. For example, a good family governance system develops a strong organizational structure that clarifies roles, responsibilities, decision making authorities and reporting lines among the family member-owners, managers and employees. When family and non-family members have conflicts – either personally or professionally - a sound governance system helps resolve them in a sensitive and just manner. Good governance arrangements also provide clear policies and procedures for employing family members. They offer fair and unbiased merit-based promotions and rewards. And they ensure the right selection of both family and non-family members to succeed, lead and manage the business. When done right, well governed family companies perform better than poorly governed ones. Each family’s governance system however, must be designed to meet its particular needs and goals. To try and copy another family’s governance system would most likely be an exercise in frustration and futility as no two families are really ever completely alike. Indeed, the overarching principle in the world of governance is that one size does not fit all. Each family’s governance system must therefore be uniquely their own. And be warned: since the road to good family governance is never a straight path, a significant
amount of cooperation, commitment and compromise on the part of all family members - as well as ongoing education- is required if the family’s governance system is going to actually work. Moreover, as the family business and its members changes over time, the need to change the existing family governance system may also need to occur. Consequently the initial design of a family’s governance system should not be seen as an immutable fait accompli and so rigid that it is incapable of change. Rather it should be seen as a sort of living organism that derives its strength from both important past practices and the family’s culture and yet which is still also capable of alteration with changing circumstances and requirements. As Darwin so aptly noted: It is not the strongest species which survives over time but rather the most adaptable. In terms of its design, a family governance system is typically made up of several key components and documents that help a family make critical decisions and arbitrate disputes. The “family assembly” and “family council” are considered the building blocks of every family’s governance system. The Family Assembly is usually comprised of all family members who are old enough to understand and intelligently participate in the governance process. Its primary role is to act as the legislative branch of the family initiating family policies and procedures. As a family’s wealth increases and becomes multigenerational, an elected Family Council often emerges - as a matter of efficiency - to manage the family business in accordance with the family’s goals and objectives, nurture future generations, and regulate family members’ participation within the family’s various business enterprises. As such, it acts as the executive branch of the family, creating, and executing the policies and procedures approved by the Family Assembly to achieve long-term success. The Council’s work is also supplemented by a separate Board of Directors (which should include suitably qualified, non-family members) to provide direct oversight of the business. Another vital component of a family’s governance system is a Judicial Council. This entity is typically comprised of key family members who enjoy a high level of respect throughout the family. Their primary function is to settle family conflicts that cannot be solved by the family’s established conflict resolution mechanisms and their decisions are always deemed final. There may also be
family Subcommittees which are created to deal with specific projects (e.g. the family’s annual retreat) or address topics of particular interest to a group of family members. In addition to these formal structures, there are a number of key documents which every family needs to create to successfully govern their operations. The most important is the Family Constitution which specifies the relationship between the business and the family and lays out the roles, compositions and powers of the various governance bodies discussed above. As a statement of principles, the constitution outlines the family’s commitment to selected core values as well as the vision, and mission of the business. It especially defines how family members can meaningfully participate in the governance of the business. Putting together the governance arrangements, as just described, for a family and its businesses, however, is not a task that should be taken lightly or rushed. It will take time and having outside advisors is highly recommended to assist in navigating what can often be a challenging undertaking. In conclusion, a solid family governance system is essential for ensuring the sustainability and longevity of every family owned enterprise. It can offer indispensable solutions to almost all family ownership challenges — and peace among succeeding generations. However, too many family-owned businesses frequently leave themselves vulnerable because they do not act proactively to deal with their unique governance problems. Yet, more resources are now readily available than ever before for those families wanting to transition to a modern governance system. So here’s the big, uncomfortable question for members of family owned Caribbean enterprises: to what extent do you have a family governance system in place that is capable of dealing with the eight problems raised in this article and survive past the third generation? If you think that there is room for improvement, you might want to consider attending the upcoming conference on “Establishing Great Governance in Family Owned Caribbean Enterprises” on December 2 and 3 which is being put on by the Caribbean Governance Training Institute. After all, it’s not education which is expensive, but rather ignorance. ¤
BusinessFocus Mar / Apr
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