In your family business, the same individual can hold multiple leadership roles and responsibilities. As these multiple roles are often associated with different motivations, it can sometimes lead to conflicting opinions, making the governance of your business complex. Setting up a clear shareholders policy, employment policy, framework for the board of directors, and communication and conflict resolution mechanisms for your family members could help you mitigate such risks.
Owners in your family business have several roles and motivations that can sometimes lead to conflicting opinions. For example, a decision to reinvest profits in the company instead of distributing them as dividends can be seen differently by your various owners, depending on their other roles in your business. An owner who works in the family business might not object to such a decision since he/she is already receiving a salary from the company. On the other hand, this situation would look different from the perspective of an owner who does not work in the business and relies on dividends as a main source of income. Matters usually get more complex as your family business grows and its owners hold different roles, such as owner/manager, owner/director etc.
Setting up a clear shareholders, liquidity and dividend policy could help ease such discussions.
Managers (Senior Management)
Managers in your family business will also have different motivations depending on their other roles within the business. A common issue in this area is the unequal treatment of family and non-family managers. In many family businesses, part or all of the senior management positions are strictly reserved for family members. This could negatively impact the motivation and performance of non-family managers who know that no matter how hard they work, they will never be part of the senior management of the company. As a consequence, many family businesses find it very hard to attract and retain talented, non-family employees.
Setting up a clear and fair employment policy, (for your best employees motivated and interested in the growth of the company. Such policy would align the employees’ incentives to their performance, regardless of whether they are part of the family or not.
Directors (Board of Directors)
When it comes to board membership, most family businesses reserve this right to members of the family and, in a few cases, to some well trusted, non-family managers. This practice is generally used as a way of keeping the family control over the direction of its business. In the previous example of dividend distribution, family directors who are also managers in the business would naturally encourage reinvesting profits in the company so as to increase its growth potential. On the contrary, family directors who do not work in the business would rather make the decision of distributing the profits as dividends to family shareholders. These contradicting views can lead to major conflicts in the board and negatively impact its functioning.
Family Members (the Family and its institutions)
Your family members can have different responsibilities, rights, and expectations from their business. This situation can sometimes lead to conflicts and issues that might jeopardize the continuity of your family business. One issue that can increase conflict among your family members is the level of access to information about the company and its activities. This can be problematic as the members who work in your business usually have access to such information in a timely manner, while those outside of the business often do not have the same level of access.
Establish the necessary communication channels and institutions to keep all your family members informed about the business, strategy, challenges, and the overall direction where the company is heading.
For more information: consult IFC Family Business Governance Handbook
Explore more resources about IFC Family Business Governance
- How strong is your governance? Try out the Sample Listed Family Business Governance Self-Assessment tool
- Why it is important to start planning the governance of your family business
- What governance is adapted to your family business growth
- Is succession planning taboo in your family business
- Communication and conflict resolution in your family business
- Family managers versus outside managers in your family business
- Setting up the shareholder policy of your family business
- How to set up an effective board in your family business
Copyright © 2000 – 2017, International Finance Corporation. All Rights Reserved.
2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.