C Corporate Governance G in the Family Business in the Family - PowerPoint PPT Presentation

C Corporate Governance G in the Family Business in the Family Business JUSTIN CRAIG PhD JUSTIN CRAIG PhD Co-Director Australian Centre for Family Business Bond University Australia Bond University, Australia New Zealand Governance Centre Inaugural Conference Friday 15 Friday 15 – Saturday 16 August 2008 Saturday 16 August 2008

Agenda Agenda � Family Business � Family Business � Significance & Academic Legitimacy � Differences � System perspective � System perspective � Family Business Corporate Governance � Typical questions and responses � Forums (Family Councils/Family Charter) � Forums (Family Councils/Family Charter) � Triggers � ACFB research projects � Agency � Agency � Stewardship � Insights from case families � AGES integrated framework � AGES integrated framework � Conclusion

Significance: Top Tier Journals p g

Legitimacy: Leading Institutions Legitimacy: Leading Institutions

Business Families are Significant Business Families are Significant

Family Businesses are Significant Family Businesses are Significant

Family Businesses are Significant Family Businesses are Significant Non-family N f il (85%) Listed (# 2130) (# 2130) Family (15%) Non-rural business Non-rural business (# 1.82Mn) Family (67%) Non listed Non-listed B Businesses in i i (# 1.81Mn) Australia Non-family (# 1.96Mn) (33%) (33%) Rural business (# 0.10Mn) Sources : 1. Australian Bureau of Statistics (ABS), Cat nos. 8165.0 & 7106.0 2. Australian Security Exchange (AXE) 3. Australian Centre for Family Businesses (ACFB)

Corporate Governance: Key Elements Corporate Governance: Key Elements � Integrity, understanding of roles and responsibilities, honesty & fairness, transparency… Jane Diplock AO � What is different about family businesses ? Or Or… � What is different about business families?

Family Businesses are Different Family Businesses are Different � The goal structure within a family business is inherently conflicted. � The need to balance between � a family's personal goals (e.g., the accumulation of y p g ( g personal and family wealth), � the well-being of family participants, and � to satisfy multiple commercial stakeholder objectives (e.g., profits and sales growth) (Steier, Chrisman & Chua, 2004; Randøy & Goel, 2003).

Family Businesses are Different Family Businesses are Different � Potential to be more efficient as decision � Potential to be more efficient as decision- making and ownership functions are shared � Concentration of ownership and control C t ti f hi d t l provides an advantageous position of monitoring the firm (Lee, 2004). � Firms controlled and managed by family Firms controlled and managed by family owners will generate more resources due to lower agency costs (L lower agency costs (Le-Breton Miller & Miller, 2006) B t Mill & Mill 2006)

Family Businesses are Different Family Businesses are Different � In family firms that are publicly traded, there is evidence that founding-family ownership benefits outweigh the cost, i.e., they outperform firms without founding firm owners (Anderson & Reeb, 2003a, 2003b). (A d & R b 2003 2003b) � Conflicts arise when the power wielded by the influencing family enables them to pursue the influencing family enables them to pursue the family’s interest to the detriment of the firm or other shareholders other shareholders (Demsetz & Lehn, 1985).

Family Businesses are Different Family Businesses are Different � In these situations, founding families are I th it ti f di f ili in an exceptional position to pursue their interests through: interests through: � control of cash within the firm (Ditmar, Mahrt-Smith, & Servaes, 2003), ) � distribution of profits (Anderson & Reeb, 2003a), � workplace inefficiencies due to family nepotism (Burkhart, Gromb, & Panunzi, 1997; Burkhart, Panunzi, & Shleifer, 2003), � decisions regarding resource allocation decisions regarding resource allocation (Densetz & Lehn, 1985).

Two Opposite Systems pp y Family System Family System Business System Business System Socialistic Culture Capitalistic Culture Born into – psychological Born into psychological By choice By choice – professional professional contract contract Emotion based – Task based – love/affirmative achievement/results Goals – harmony/love Goals – profits/wealth Strategy – Strategy – Incremental/adaptive Radical/Transformative Informal – seniority & Informal seniority & Formal Formal – qualifications/merit qualifications/merit equality Inward looking Outward looking

Three Dimensional Model Three Dimensional Model Maturity BUSINESS AXIS Expansion/formalization Expansion/formalization Young Entering Passing Start-up Working o g business business the the the the together family business baton Controlling owner g FAMILY AXIS Sibling partnership Cousin consortium OWNERSHIP AXIS Source: Gersick 1 9 9 7

Management Family Business Systems Family Business Systems Ownership Family

Governance Structures Governance Structures Board of Directors of Directors E Executive ti F Family il Management Council

Family Businesses/Business Families Family Businesses/Business Families � Governance related comments & appropriate � Governance-related comments & appropriate responses � We are too small � But you are intending to grow! � We don’t want to tell outsiders our family issues � They need to understand family in order to direct your business! b i ! � How much does it cost? � How much will it benefit?! � What will a Board look like? Wh t ill B d l k lik ? � Match it to your current and/or future needs. � How will this benefit? � Strategic focus; financier confidence; succession clarity; St t i f fi i fid i l it ownership conflict averted; supplier confidence; JV partners likely; next generation involvement expectations clarified.

Best Practice Governance Forums Best Practice Governance Forums � Move in the direction of a real Board of Directors � Family Council � Family Constitution/Charter F il C tit ti /Ch t � Family Retreat a y et eat

Family Council Family Council � A governance body focusing on family affairs � It is to the family what the board of It i t th f il h t th b d f directors is to the business

Family Council: Forms Family Council: Forms � Direct descendants only � All adult family members, including spouses � Children often attend, especially Child f d i ll young adults young adults

Family Council: Role Family Council: Role � Promote communication � Provide forum for resolution of family P id f f l ti f f il conflicts conflicts � Support education of next-generation � Support education of next-generation family members y � Develop family participation policies p y p p p

Family Council: Benefits Family Council: Benefits � Build stronger families by preserving family � Build stronger families by preserving family values, traditions, and history � Re-commit the family to the business, which Re commit the family to the business, which builds a stronger business � Provide a family forum so members won’t all y want to sit on board of directors � Allow planning of future family participation, p g y p p , ownership, and control of business � Allow ongoing problem solving and conflict g g p g resolution � Help the next generation develop wealth

Family Charter/Constitution Family Charter/Constitution � Family Charter with clear policies � Formalization of informal practices and p conventions � The clarity is often more important than the rule � The clarity is often more important than the rule itself

Family Charter/Constitution y Typical Components: Rights and Obligations of the Individual • Family Vision - Core Purpose & Values y p • Family Code of Conduct • Business Vision - Core Purpose & Values • Business Code of Conduct Business Code of Conduct • Shareholders Agreement/Ownership Succession/Longevity • Management - Roles, Structure/Decision Making and Succession • Conflict of Interest Conflict of Interest • • Family Education and Mentoring Policy • Employment Policy (Family & Non Family Members) • Compensation/Performance Evaluation Policy Compensation/Performance Evaluation Policy • Media Policy • Philanthropy •

Governance Triggers Governance Triggers • Financier requests • Owners not working in Owners not working in business request Ownership Management Family • Professional managers • Generational transfer • Growth/JV partners • Growth/JV partners • Marriages • Marriages

Richard Owens Richard Owens “The best thing I have ever done was constitute an Advisory Board” constitute an Advisory Board “I should have done it a lot earlier” “We meet three times a year formally “We meet three times a year formally…but we but we meet informally and communicate often” “I used to have an informal structure but since formalizing we haven’t looked back” Richard Owens OAM, Chairman ROI Pty. Ltd.