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Anticipating Governance Catalysts in a Family-Owned Business

Oct 23, 2014
From the Audit Committee Institute

Board Perspectives Series

For public companies, formalized governance systems and processes are required—by government agencies and securities exchanges. At private companies, largely those held by entrepreneurs and families, only relationships—blood and business—inform how the company is run.

Indeed, the vision and passion of the founder or owners is what drives the success of these businesses. Yet, success inevitably leads to key transition points, where professional governance can make the difference between growth and decline.

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Family-owned companies can be greatly enhanced and strengthened by self-imposed professional governance standards, including independent directors and audit and compensation committees, when facing the specific challenges of growing the business, managing transitions, and financing the company.

Succession Planning. For family-owned and entrepreneur-led businesses without outside investors, chief executive transitions can be a significant challenge. It can be intimidating for children, relatives, and even professional managers to replace a founder/CEO. They often worry that a charismatic leader may only be stepping aside from the day-to-day but will continue to permeate the workplace. Moreover, family members in line for executive positions may ascend too early and without the right training, or not at all, leaving the company with a leadership vacuum. A professional board charged with supporting and overseeing executives and validating a sustaining strategy for the business can help diffuse the emotion of succession planning.

Managing Shareholder (Family) Dynamics. For closely-held companies, shareholders are raised and shares are inherited. Yet business owners may end up passing on their ownership without transferring their passion for the business. Sometimes “the chosen one” doesn’t work out and other shareholders-by-birth choose different professions, “diversifying” away from the family business while still participating economically in the company’s ups and downs.

Extending down to the third generation and beyond, the company’s interested parties and shareholders have a far different composition than a singular founder or founders. An initial step in separating the business of the business from the business of the family could be the formation of a family council, from which a representative or two would serve on the board. Such a council would also help isolate the company from the extremes of family politics.

Product and Geographic Expansion. A growing family and shareholder base, of course, will look to the business to grow alongside them, organically, through business development, and by acquisition. Bringing in partners, or motivating high-achieving employees, who may expect a tangible equity stake in the new business can challenge a company that isn’t structured to extend real ownership to any individual outside of the family. A willingness to evolve ownership to key employees and partners beyond the family can help everyone, but only if there is equity in place and available for opportunistic moves.

Financing Growth. Entrepreneur-led and family-owned businesses tend to start small and grow on the back of bank loans and non-equity financing. Significant capital, however, rarely comes with strings attached only to assets. Minority investors often bring governance demands, particularly when it comes to board representation. In today’s marketplace, with ever cautious banks limiting their risk, a more advanced governance structure—a board with independent voices and independent counsel—can help put in place an ownership structure that can accommodate additional investors and allow their voices to be heard.


More from KPMG:

Closing the Gaps: An Ongoing Challenge for Private Company Boards

Private Markets Group - Homepage

KPMG Family Business - Global site


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