The protective purpose of family business governance

Carlos Arbesu _Family Business

Last week I had the opportunity to moderate a panel about family governance dynamics in the European Family Business Conference which took place in Barcelona, organized by Campden.

As we moved through the topics the discussion became focused on an interesting question: what is the purpose of the board of directors and what is the purpose of the family council? The question arose because of a Business School professor´s quote that said: “the purpose of the board of directors is to protect the business from the family”.

Is it true? Should the board of directors in a family business put its focus on restraining the activity of the family members that could inappropiately affect the business? The question is tricky but it caught my attention and thoughts for a while and finally I reached an answer, in fact, the question needs two answers:

1.    The purpose of the board of directors is to protect the family from the business.

This is its aim. Directors act as a bridge between shareholders and management. They are serving in the board as a result of the nomination from the shareholder´s assembly. Directors must defend the interests of the business, as conceived by the shareholders.

So taking into account that in a Family Business, shareholders and the family used to be one and the same, it is obvious that the board and its directors are there to serve and protect their interests. Serving and protecting the interests of family shareholders does not imply going against the business. The hitch here comes when family members act against the business in management or in taking governance decisions. In those cases independent directors must defend the business but research has shown that independent directors are not the right persons to deal with those family wrongdoings. This should be the task of the family council and their advisors.

As an independent director of family business boards, I more often find situations in which directors have to defend the shareholders and family interests from non-family management deviations. The following could help as examples:

•    Excessive reinvesting in the company, affecting dividend policies.
•    Strategy follows the organization and not the other way around as it should be
•    Slow timing of critical decision-making
•    Lack of willingness and energy to confront changes in management when needed
•    Manipulation of relevant facts, limited or partial information from non-family managers

2.    The purpose of the Family Council is to protect the business from the family

When it comes to protect the business from the family, the family council is the governance body to deal with the matter. Probably the board should first ask for help but the right context for discussions about family members messing with the business is the family council.

As always, I would be really thankful if you let me know your opinions, critiques and suggestions about this post. Ideas must be shared, discussed and improved. Also, I would be thankful if you cooperate on the diffusion of this post in the networks (Twitter, Linkedin, Facebook…) to allow more people to get access to it and discuss it.

Thank you very much and have a happy day!

Leave a Reply