|
|||
|
NEWS ABOUT CORPORATE GOVERNANCE -
The Board of Directors on the Agenda ®
Year I – No. 2 Editor: Luciano Carvalho Ventura “The
Board of Directors and the Family Business”. 1
– The Origins of the Family Business Since
the beginning of time, human beings have accumulated wealth, in addition
to developing means of defense and of transferring this wealth to future
generations. This process of accumulating wealth has always been
challenging and no less testing is the process of protecting and
transferring such gains. History abounds in examples of nations, countries,
companies, families, and individuals whose wealth has vanished over time. These
setbacks in maintaining and transferring wealth have grown in proportion
to the increasing complexity of today’s world and to the many different
varieties of wealth (property, financial investments, etc.), and the
process of protecting and transferring companies to the next generation
has, by far, been the hardest and complicated of all. Here, we are talking
about the family business, one that, as a rule, is born of the success of
a single entrepreneur, whose chief personal characteristics, among others,
are the capacity for risk-taking, dedication, persistence, and a degree of
independence well above the average. Statistics
show that most family businesses have a short life span, since only thirty
percent (30%) continue into the second generation and, of these, a mere
ten percent (10%) survive a third generation.
Clearly, the succession process is the leading survival risk faced
by this type of company. Only a carefully planned and
controlled succession policy will ensure the transfer of a company by its
founder to the successors/heirs. Here,
a board of directors of exactly the right size and a core of good
corporate governance play a vital role in this complex and hazardous
process in the cycle of any family business, as we shall see further on. 2–
Definition and Importance of Family Businesses Strictly, speaking, no
specific definition of a family business will ever meet with everyone’s
agreement. However, the
majority of individuals who have made in-depth studies of this type of
organization agree that a company can be thus defined when a) its values
coincide with those of a particular family, b) majority control is in the
hands of one or more families, c) some shareholders/partners are members
of the board of directors or of the executive management, and, last but
not least, d) a younger generation is involved thus, guaranteeing the
intent of continuity. If, on the one hand, no
specific feature defines a family business, there is a general consensus
that family businesses play a significant role in the economy of any
country. This is more than
confirmed by the statistic on family businesses in the US, where 95% of
companies producing half the country’s GDP are family businesses and
also employ 42% of its entire work force.
As
pointed out above, one of the greatest, if not the greatest, risk faced by
any family business, is its process of succession. An
effective board of directors and one that includes some outside members
allows the founder to securely monitor his/her company’s business
progress, with the reassurance of being able to gradually withdraw from
its day-to-day operations, without undue risk to the company; the recipe
for lowering the risk factor in the process of succession. Moreover,
in the hands of this type of board of directors, the successor can be
trained and the chances of
the company’s stability and business operations are increased as well,
upon the exodus of the founder, regardless of whether this was planned or
is totally unexpected. Another
important benefit arising from the board of directors of a family business
is the opportunity to improve the quality of its management thanks to the
contributions of highly qualified outside board members.
Given that it is virtually impossible to bring together the ideal
combination of knowledge and experience, or even a serious interest in
becoming involved in the business among the members of a single family,
outside directors’ inputs can be of vital importance in filling these
professional gaps, thus greatly enhancing the company’s overall
efficiency. This is already
happening in Brazil since, side by side with innumerable family businesses
that have availed themselves of this type of contribution, there are
professionals in the market exclusively dedicated to working as members of
family business boards. A
further benefit of a board of directors in a family business is that it
enables the majority shareholders or partners to play a role in the
management of the company, without necessarily becoming actively involved
in its day-to-day operations. It
is a known fact that, as from the transition from the second (2nd)
to the third (3rd) generation, most companies cease being a
company of individuals and are transformed into corporations.
It is precisely at this moment, where ownership becomes separated
from management, that the majority owners not involved in the operation
need their own forum of action to monitor their business.
And it is here that the board of directors, the main Corporate
Governance tool, is vital and extremely effective. Lastly,
as a rule, the trend for a family business board of directors with some
external members is to introduce good Corporate Governance practices.
It is worth noting that recent surveys in the US have shown that
billings and returns between 1994 and 2000 of the largest Fortune 500
family businesses were substantially higher than that of other
organizations, and also that they implemented more highly developed
Corporate Governance practices. It
is quite likely that these high levels of Corporate Governance were
significantly responsible for this increased billing and returns, and
contributed to avoiding the corporate conflict so common and so
threatening in family businesses. In
other words, these family businesses always observe the three basic
principles of Corporate Governance - transparency, fairness, and
accountability. A more detailed examination of these aspects frequently
reveals a scenario where family members with no involvement in the
business are deliberately barred from knowledge of operations by those who
actively involved. These “mystery box” companies are more likely to be
plagued by insoluble corporate conflicts.
The second cause of conflict in family businesses is the
inequitable treatment of the shareholders or heirs, and the third, is the
absence of accountability. This
last flaw is common in businesses where family members involved in the
operation neglect to account for their actions to those who are not, a
guarantee that corporate conflict will occur sooner or later.
Thus, the presence of a board of directors including some outside
members can also ensure that the company implements a minimum of
transparency, fairness, and accountability, thereby avoiding these
corporate conflicts. For
all these reasons, more and more Brazilian family businesses are seeking
to include outside members on their boards.
LCV NEWS - November-December/2005 LCV NEWS - January-February/2005 LCV NEWS - November-December/2004 LCV NEWS - September-October/2004 LCV NEWS - January-February/2004 LCV NEWS - November-December/2003 LCV NEWS - September-October/2003 LCV NEWS - January-February/2003 LCV NEWS - November-December/2002 LCV NEWS - September-October/2002 LCV NEWS - January-February/2002 LCV NEWS - November-December/2001 LCV NEWS - September-October/2001 LCV NEWS - January-February/2001 LCV NEWS - November-December/2000 LCV NEWS - September-October/2000 LCV NEWS -
July-August/2000
|
||