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Good governance key to family-run firms’ success

WCD, KPMG report outlines companies’ winning strategies
By: - Research Section Head / @Inq_Researchers
/ 11:01 PM June 28, 2015

What does it take for a business to last several generations?

Aside from vision, passion, focus and dedication, family-owned ventures need one more thing: Good leadership.

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Family-owned businesses, like countries, need good governance for long-term success, according to the recently released report, “Enduring Across Generations: How Boards Drive Value in Family-Owned Businesses” by Women Corporate Directors (WCD) and KPMG.

 

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Practical tips

“From helping to define and calibrate the strategy, grooming future leaders, and navigating family dynamics, to bringing independent perspectives into the boardroom dialogue, an effective board can be an invaluable asset to a family-owned business,” Sue Townsen, KPMG Partner and Co-chair of KPMG’s Women’s Advisory Board, said in a statement.

The report posted on the

KPMG website includes insights and practical governance tips culled from owners, board members, executives, and advisors engaged in various family businesses in five continents.

The report also presents the benefits of good governance and the three governance enablers: Clarity, culture, and communication, which are key elements in a company’s decision-making process.

“Clearly, solid governance is paramount to a company’s success because it serves as a guide for the shared philosophy, practices and culture of any organization and its professionals,” Sharon Dayoan, head of audit at R.G. Manabat & Co., Philippine member of KPMG, a global audit, tax and advisory firm, said in a release.

“Whichever style of board is used, three elements serve as enabling forces: Clarity of roles, responsibilities, and how decisions are made; an understanding of the culture—the vision and values—and how that impacts decision-making and implementation; and communication—transparency and information flow that enables the board to fully understand the challenges and opportunities facing the business,” the report said.

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“A strong vision and commitment to operating in a responsible manner can serve as a touchstone when recruiting talent, from junior positions all the way up to the board, and inform decision making at every level. As the millennial generation —which is known for caring deeply about sustainability and the values of the companies they buy from, sell to and work for—takes its place in the global economy, a company’s long-term vision and deeply rooted values can provide a strong competitive advantage,” the report also noted.

Citing board seats as “expensive real estate,” the report emphasized the importance of filling these seats with people who have the right skills and are willing and able to “devote the time to help management and owners advance the company’s needs and prepare to address its challenges.”

“A strong board works together in a way that enables the group as a whole to add value well beyond the sum of its parts,” the report added.

Businesses looking to build a “strong board” must aim for diversity, “fit” and experience.

“Build a diverse board. Look for differences in background and perspective that will add to the richness of the conversation,” the report recommended.

“Recruit for fit as well as experience. Seek out a mix of directors who will be able, collectively, to raise tough questions and offer constructive advice,” it added.

Board dynamics

Other factors to consider when building a board include the future direction of the company, expectations of various stakeholders and family and board dynamics.

“A family business board is only as strong as its weakest link. For this reason, every member of the board—family member or independent director—should be sharply focused on his or her effectiveness,” the report said.

Sigrid Simons de Muller, WCD commissioner from Panama, said in the report: “Once a family business consultant told me: ‘Family is about love, business is about making money.’ My experience confirms that independent board members can help defuse the emotions that overflow from family to business, bringing objectivity to the decision-making process.”

A company’s long-term survival is also hinged on its ability to implement succession, the report also noted.

“Succession planning—both long-term and as a plan that can be activated immediately in the event of crisis—is critical to the company’s survival, and as a matter of strong governance, it is the responsibility of the board to ensure that a plan is in place,” the report said.

However, the next generation should only join the business if they are passionate about it, said Liora Katzenstein, WCD commissioner from Israel, who was quoted in the report. “[It must be something] they will really, really want to devote their life to.”

“The key is to start early,” said the report, citing Filipino WCD commissioner Pacita Juan’s experience of having her nephews begin by “working in the office during the summer and, gradually, becoming part of management and eventually joining the board.”

“Governance provides an edge for family businesses— roles are clear; decisions are made objectively; and the various stakeholders work together to ensure healthy growth of the business over the long term,” the report said.

Clear roles

“In the experience of the commissioners, solid governance rests on a foundation of clear roles and responsibilities, an organization where there is a strong culture— with alignment of the company’s vision and deeply held values—as well as open communication,” it added.

WCD, a global organization of women corporate directors, has over 3,500 members in more than 6,500 boards worldwide.

US-based audit, tax and advisory firm KPMG International, on the other hand, has member firms in 155 countries.

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