When grandad is also chief executive

It's one thing to have squabbling brothers and sisters around the dinner table, but it's quite another to have them in the boardroom, writes BRENDAN PEACOCK

When it comes to family business there are seldom well-defined roles set out. Usually, the founder assumes all responsibility until this is no longer possible - either through a lack of capacity and skills, advanced age or unforeseen events.

To prevent a collapse of the business at this point, it is vital for a formal family governance structure to evolve to ensure that the business can survive generational succession.

Paula Bagraim, partner at Maitland in Cape Town, said family governance can play a critical role for high net-worth families. "The term family governance refers to the way in which a family makes decisions, the way it governs itself. Poor family governance can erode family business values as well as relationships within the family."

Unless family members are all working towards a common goal and in a clearly defined manner, there is a risk of interference and conflict.

"Family business governance is a significant global issue, especially because many South African high net-worth families have an asset base and family members spread across the world."

The lack of a succession strategy in family business has proven a major weakness time and again. According to Bagraim, the timing of transition to the next generation and the resolution of sibling rivalry are equally important.

As family businesses grow, the need often arises for non-family members to fill new roles, which can also posedifficulties.

"Often entrepreneurs dedicate their time, attention and resources to expanding their business. There is no time to plan for a future in which they will not be personally in charge," she said.

Bagraim said that if a family wants to pass its business on to the next generation, it should prepare for future challenges such as:

•  How to deal with the loss of a family leader and select a new one;
•  How to share collective decision-making and wealth;
•  Who can work inside the business;
•  What business activities family members can undertake on their own account; and
•  How to deal with a member who emigrates or wishes to leave the business.

"Failure to have a clear succession plan can lead to failure of both the business and family relationships," Bagraim said.

"Likewise, where the founder of a business is not willing to 'let go' it can also have a negative effect on the transition of a family business.

"Even if there is a succession plan, the founder will often postpone the transition until it becomes too late for the plan to succeed. Business founders often agree to hand over control but will actively be involved behind the scenes to continue to run the business.

"A proper succession plan must include agreed timing to bring the next generation into the business," she added.

The King Lear situation is obviously tricky.

"When the founder gives control of family business or family wealth to one child, the other children are likely to resent it. Sibling rivalry can adversely affect the market value of the business and weaken its stability," said Bagraim.

The solution lies in formally defined interaction and a kind of social contract that will bind all family members when it comes to succession, career development, financial compensation, retirement ages and ownership splits.

"Successful family businesses have one thing in common: they are well-governed and well-managed. A family's governance structure is the family's rules and systems under which the family's business and wealth are held and preserved," said Bagraim.

She said a family council played a vital role in family governance.

"The family council is a selected group of family members who are elected by the larger family to represent the interests of the family.

"The family council may elect a chairperson, akin to a CEO. Planning for long-term success of the family business is the key priority for the family council."

Any action should be based on a family constitution - the long-term guiding principles and goals of the family which have been developed by all stakeholders, agreed upon and set down in writing.

"It will establish a forum and process for decision-making, it will set out what each family member can expect to receive in terms of shares, salary and other benefits from the family business.

"It will provide a mechanism to introduce younger family members to the family business and its governance structures. It will also provide a dispute resolution mechanism that avoids family members having to resort to litigation," said Bagraim.

All businesses will need education and training programmes.

"One emerging trend in wealthy families is the hiring of independent parties to direct, oversee and plan the educational needs of family members best suited to the particular needs of the family business.

"Families with excellent education have an enduring asset that will always benefit their businesses," Bagraim said. She added that some family businesses were setting up family funds to support and encourage new entrepreneurial ventures.