Chapter 8

Family Business Governance

Family Business, First Edition, by Ernesto J. Poza Copyright 2004 South-Western/Thomson Learning

Governance

Can be provided for through classes of voting and nonvoting stock Can be enhanced by contributions from

Boards of directors/advisory boards Family councils/assemblies Annual shareholders meetings Top management teams

Can provide essential help in governing familyownermanagement relationship

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Governance Structures of Family Business

Ownership Board of Directors
Shareholder Meeting

Family Assembly

Family Council

Top Management Business

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Family

Board of Directors/Advisory Board

Board of directors is a legal entity Membership on board often restricted to family members to control liability Advisory board with independent outsiders complements internal board of directors

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Makeup of Family Business Board

Small groupfive to nine members Majority should be independent outsiders Should not be friends of family Should not be businesss service providers No managers other than CEO Successors only when succession imminent At-large family representation

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Recruiting Board Members

Best candidates are successful peers Candidates should be able to work on a team Staggered terms and term limits encourage fresh perspectives Attractive compensation signifies importance of board to CEO Board members should be allowed influence, or they may leave the board
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Board Meetings

Four to six times per year Half-day meetings preferable One board retreat per year if possible

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Benefits of Board to Family Business

Outsiders provide unbiased objective views Board members bring fresher, broader perspective to business issues Board members bring with them network of contacts Board makes top managers accountable for their actions

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Family Councils

Family council is governance body focusing on family affairs Family council serves family as board of directors serves business Family councils

Promote communication Provide forum for resolution of family conflicts Support education of next-generation family members
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Contributions of Board and Council

Shareholders

Family Council

Board of Directors

Family Office Family Bank or Venture Capital Co. Family Philanthropy Liquidity Fund

CEO Top Management

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Family Assembly

Annual assembly operates in conjunction with family council Useful when size of family prevents all from sitting on family council Another vehicle for education, communication, and renewal of family bonds Creates participation opportunities for all family members at least once a year
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Annual Shareholders Meeting

Legally required by corporate law Opportunity for review of company performance Board of directors elected and other issues voted on at this meeting Only shareholders attend Usually only once a year, but special meetings may be called as necessary
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Top Management Team

Nonfamily executives in key positions on top management team ensure business health Nonfamily managers differentiate between family and management issues Nonfamily managers build confidence in governance of corporation

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