Why You Should Start Planning the Governance of Your Family Business

Running a family business is good business

As a family business you are running the world’s oldest and most dominant form of business organizations where the voting majority is in the hands of the controlling family and where the founder(s) intend to pass the business on to descendants. According to the Family Business Network, family businesses often represent more than 70 percent of the overall businesses in a country and play a key role in the economy growth and workforce employment. In Spain, for example, about 75 percent of the businesses are family-owned and contribute to 65 percent of the country’s Gross National Product (GNP) on average. Similarly, family businesses contribute to about 60 percent of the aggregate GNP in Latin America.

So if you are running a family business, whether a small and medium-sized company or a large conglomerate that operates in multiple industries and countries, you are in good company.  Some family businesses with which you might be familiar are: Salvatore Ferragamo, Benetton, and Fiat Group in Italy; L’Oréal, Carrefour Group, LVMH, and Michelin in France; Samsung, Hyundai Motor, and LG Group in South Korea; BMW, and Siemens in Germany; Kikkoman, and Ito-Yokado in Japan; and finally Ford Motors Co, and Wal-Mart Stores in the United States.

You are also running a form of business that is increasingly acknowledged as outperforming non-family counterparts in terms of sales, profits, and other growth measures in several studies, such as Denis Leach and John Leahy publication on “Ownership Structures, Control and the Performance of Large British Companies” in the Economic Journal or in Thomson Financial study for Newsweek. In that study, Thomson Financial created a unique index for family and non-family firms in six major indexes in Europe, and tracked them over 10 years. The study showed that family companies outperformed their rivals on all of these indexes, from London’s FTSE to Madrid’s IBEX. In Germany, the family index climbed 206 percent, while the non-family stocks increased just 47 percent. In France, the family index surged 203 percent, while its counterpart rose only 76 percent. Family businesses also outperformed their counterparts in Switzerland, Spain, Britain and Italy.

But most family business have a short life span beyond the founder’s stage

Some 95 percent of family businesses do not survive the third generation of ownership, says the Family Business Network. And according to the Family Business Institute, only about a third of family-owned businesses survive into the second generation, 12 percent make it into the third, and a mere 3 percent to the fourth.

Your family can be your greatest strength, but it can also be your key weakness, leading to inefficiencies and internal conflicts, and jeopardizing the company’s survival prospects, highlights the IFC Family Business Governance Handbook.

The key to survival? Adapt governance to your business growth stages

Family businesses can improve their odds of survival by setting in place the right governance structures adapted to their growth stages and by starting the educational process of the subsequent generations in this area as soon as possible. These steps will allow for efficient communication channels and a clear definition of the roles and expectations of every person involved in the family business.

For more information about the studies quoted in this article:

• Consult IFC Family Business Governance Handbook
• Explore data and resources from the Family Business Network
• Consult Denis Leach and John Leahy  study in the Economic Journal
• Read more family business stories in the Newsweek article referring to the Thomson Financial study

Explore more resources about IFC Family Business Governance

1. How strong is your governance? Try out the Sample Listed Family Business Governance Self-Assessment Tool
2. What governance is adapted to your family business growth
3. Is succession planning taboo in your family business
4. Roles and conflict resolution in your family business
5. Communication and conflict resolution in your family business
6. Family managers versus outside managers in your family business
7. Setting up the shareholder policy of your family business
8. How to set up an effective board in your family business