As a family-owned business transitions to the next generation, various challenges may arise. Employees might find themselves serving multiple family members with differing priorities or even competing with them for positions within the organisation. Additionally, emotions and family politics can threaten the continuity of the business.
These challenges present significant risks. To mitigate these risks, business owners need to address potential issues directly and consider practical ways to separate ownership and management.
The Need for Professional Management
As a business and the family owning it grow, professional management becomes necessary. Initially, non-family staff are hired, and external shareholders may join the business. With each new generation, the number of shareholders increases.
Families bring value through industry experience but also add complexity and risk. This can make it difficult to secure investor trust and capital, potentially compromising long-term sustainability if not managed properly.
As the family business grows and professionalises, employing both family and non-family professionals, it becomes essential to formalise ownership structures, power, and processes. Separating ownership and management is a key part of corporate governance to ensure continued profitability and sustainability. At this stage, the family might also consider establishing a family office.
Benefits of Separating Ownership and Management
Separating ownership and management offers numerous benefits. Professional management ensures business sustainability through diverse skills, maintaining continuity even if future heirs are not involved in daily operations.
Separation also optimises capital. While each shareholder has investment preferences, management can identify the best options and manage assets effectively to maximise profits for all shareholders.
There are disadvantages, such as slower decision-making and reduced flexibility. Conflicts of interest can arise between operators and managers. However, these can often be managed through sound governance, and the benefits typically outweigh the drawbacks.
Implementing an Effective Separation Strategy
Well-designed governance structures can separate the “business of the family” from the “business of the business,” driving profits while maintaining family harmony.
Drawing Up Agreements
Creating owner agreements that govern activity within the business helps separate ownership and management. These agreements include a family constitution and a shareholders’ agreement or board charter.
Establishing Strong Boards
Strong governance involves a board with both family members and external professionals. This balance ensures diverse perspectives and effective separation of ownership from management.
Board appointment processes vary, but it is crucial to select directors that fit the organisation’s culture and skill requirements.
Implementing Governance Structures and Policies
To minimise conflicts, it is essential to implement governance structures and procedures. These include accountability measures for directors and protection for shareholders, such as appointing non-family executive directors and establishing remuneration committees. Policies for financial rewards and incentives should align with shareholder interests and be based on tangible factors like share prices or profitability.
These structures and policies should be tailored to the family business’s unique needs but aim to effectively reduce risks.
Conclusion
Families and family offices that separate ownership and management with effective governance measures can ensure long-term business success and family harmony. This approach allows family members to remain involved, adding value through their industry experience while avoiding challenges that could harm shareholder value and the business itself.
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