MNE3704

FAMILY BUSINESS MANAGEMENT

Ms MS RADEBE
Department of Applied Management
University of South africa
Pretoria

university
of south africa
Learning unit 7
GOVERNANCE OF THE FAMILY BUSINESS: BOARDS
OF DIRECTORS AND SHAREHOLDER MEETINGS

304 AIM OF LEARNING UNIT 7

305 The aim of learning unit 7 is to elaborate critically on ways to establish and maintain
boards of directors, trustee and shareholder meetings, as well as establishing and main-
taining family councils, family assemblies, and family offices.

LEARNING OUTCOMES

y Analyse the effects of the board contribution within a family-owned business.

y Evaluate the selection criteria for board members.
y Analyse the importance of establishing a family council.
y Critically evaluate the reasons to create a family office.

KEY TERMS

For you to be able to navigate through this unit with minimal challenges, it is important
to know the following important key concepts and their meaning as they are used in
this learning unit.

y Family board – a family board of directors blends business and family governance.
y Family meeting – the purpose of a family meeting is to foster open communication
among family members.
y Family council – this is a forum where all the issues pertaining to the family and
business are discussed openly from the family perspective, agreed upon and con-
veyed to the board of directors.

306

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307 SCHEMATIC OVERVIEW OF LEARNING UNIT 7
308 Below is a schematic overview of learning unit 7.

309

Figure 7.1: A systematic overview of learning unit 7

7.1 INTRODUCTION
310 Reading: Page 211 of chapter 9 in the prescribed book

Governance is a complicated subject when it comes to family businesses because of the

311

sometimes competing agendas of family, ownership, and business management. Gover-

nance refers to the ability to optimally discipline and control the nature of the relationship
between family members, shareholders, and managers in such a way that the enterprise
prospers, while the family promotes and protects its unity – as much for the family’s sake
as for the company’s, given that family unity represents a source of value that can be
translated into a competitive advantage.

Ownership structure and different classes of stock (e.g., voting and nonvoting) are es-
312

sential to effectively governing the corporation across generations of owners. Boards of

directors/advisory boards, family councils, family assemblies, shareholders’ meetings, and
top management teams provide the rest of the foundation for effectively governing the
interaction between ownership, management, and the family.

7.2 THE BOARD OF DIRECTORS

313 Reading: Page 211 of chapter 9 in the prescribed book

The board of directors is a legal entity, usually prescribed in the articles of incorporation.
314

This status gives the board unique rights and responsibilities, such as reviewing the
performance of the CEO and conceivably initiating his or her termination, although this
would be highly unusual in the world of family-owned companies. Many family-owned
businesses prefer to restrict membership on the board of directors to family members
and use an advisory board as a complement to the board of directors. Most boards of

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directors emphasise their monitoring of management responsibility with their mission
guided by the implications of the agency theory.

315

Figure 7.2 An example of the board of directors

The primary responsibilities of a board of directors include reviewing the financial status
316

of the firm, deliberating on company strategy, looking out for shareholders’ interests, en-
suring the ethical management of the business, being a respectful critic of management,
reviewing the CEO’s performance and holding top management accountable, advising
the CEO on substantive subjects, monitoring and mediating to reduce conflict between
shareholders with divergent interests, bringing a fresh perspective to issues, and assisting
in the succession and continuity process. Independent directors perform a particularly
valuable function for family firms, where their dominant role on boards has been shown
to significantly improve the financial performance of the firm.

Activity 7.3 Reasons why the board of directors is necessary to a family-

owned business

Read the following article on the role of the board of directors:

In approximately 250 words, critically analyse the influence and effects of board contribu-
tions in a family-owned business.

− Motivate how the board of directors of a family-owned business can assist in planning.
− Explain how the loneliness that top managers can experience can be bridged.

38Feedback on activity 7.3

Have you considered the following in your discussion?

y assist in planning for the future

y provide help with objectives of the financial analysis
y outsiders can add perspective and problem solving
y bridging the loneliness experienced by top managers
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 Activity 7.4 What are the contributions by a board to a family-owned
business?

In approximately 250 words, describe the role/contribution of a board to a family-owned

business regarding the strategy of the company?

39 Feedback on activity 7.4

In your response, you should place emphasise on the board’s advisory responsibility such as
the following:

y Review the financial status of the firm.

y Deliberate on the strategy of the company.
y Look out for the interests of the shareholders.
y Promote and protect the unity and long-term commitment of the owning family.
y Mitigate potential conflicts between shareholders, including majority and minority
shareholders.
y Ensure the ethical management of the business and the application of adequate
internal controls.

Read the case study on page 218 to gain a better understanding of the role of the board of
317

directors.

7.3 RECRUITMENT AND SELECTION

318 Reading: Page 217 of chapter 9 in the prescribed book

Many families, particularly multigenerational families with many members, write a policy
319

on family board membership. In this document, it is not unusual to see requirements for
family members on the board, including specific professional experience, term limits,
selection, and duties as family board members.

Unlike an advisory board, a board of directors is a legal entity with both advisory and
320

monitoring responsibilities. An advisory board, which consists of independent outsid-

ers, is sometimes used in lieu of having independent directors on the statutory board
of directors. This is a viable, although not preferred, alternative for smaller family firms.
The first recruit to a company’s board is critical – his or her reputation, competence and
willingness to serve on the board will play a significant role in the ability to attract other
highly qualified candidates.

Read this article to gain a better understanding of the criteria for selecting an indepen-
321

dent board of directors:

https://boardappointments.com/2022/10/28/what-are-the-selection-criteria-for-inde-
322

pendent-board-member/

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 Activity 7.5 Criteria for board member selection

In approximately 100 words, evaluate the criteria for board member selection and evalu-
ate the role of effective board members – refer to page 220.

40 Feedback on activity 7.5

In your response, you should take into consideration the selection criteria for the independent
members of the board. This should include, inter alia, the general expectations.

Activity 7.6 The role of board member selection

In approximately 250 words, critically discuss the role of effective board members.

41Feedback on activity 7.6

In your response, you should have considered the expectations of board members as contribu-
tors to the leadership of the company – refer to page 222 of your prescribed book.

7.4 GOVERNANCE OF THE BUSINESS FAMILY: FAMILY MEET-

INGS, COUNCILS, AND FAMILY OFFICES
323 Reading: Chapter 10 in the prescribed book

A family council is a governance body that focuses on family and ownership matters,
324

frequently developing family-participation policies and dealing with liquidity issues and
estate planning. As the family moves to later generations, larger numbers of members,
and greater ability to govern itself, assisted by a family council, the family council often
becomes a supra-board where shareholders’ needs lead to strategic decision making by
the owning family.

A family assembly creates participation opportunities for all members of larger multigen-
325

erational families at least once a year. Family meetings and family councils are a reliable
forum for the education of family members about the business. In family meetings, family
members learn about the rights and responsibilities that accompany being an owner-
manager as well as about the important distinctions between ownership, management,
and family membership. They also provide a forum to minimise the potential for conflict
within the family.

The real challenge is to create an optimal balance of ownership, family, and management
326

that fosters positive family-business interaction through family communication and fam-
ily governance. Organised family meetings, away from the workplace and kitchen table,
constitute the best forum for achieving and maintaining this optimal balance.

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 Activity 7.6 Tasks to be performed during a family meeting

In approximately 200 words, analyse and elaborate on the tasks that should be performed
during a family meeting.

42Feedback on activity 7.6

In your response, you should have considered the following:

y Update family members not active in the business about the state of the business:
financial results, management, strategy, and the competitive dynamics of the industry.
y Provide an opportunity for good communication.
y Educate family members about the difference between ownership, management of
the business, and family membership.
y Engage family members in responsible ownership.

7.5 THE FAMILY COUNCIL

327 Reading: Pages 234 to 235 of chapter 10 in the prescribed book

A family council is a governance body that focuses on family matters, frequently de-
328

veloping family-participation policies. Strategic decision making, while less frequent, is

also a function of a family council, usually in later generations. In these cases, the family
council acts as a family supra-board, where owner goals influence the decision making
of business boards and top-management teams.

Furthermore, research on family business continuity suggests it is necessary to have a

329

strong family governance structure to support the business. The family must learn to
be good owners and shareholders as well as, or even instead of, being good managers.
Family members must be accountable to their businesses and take on the responsibility
of securing the future of the business or, in some cases, selling the business.

Open and safe processes for sharing information among family members in family
330

meetings are prerequisites for effective planning, policy making, and decision making
by family groups.

Read this article as it provides interesting facts about what constitutes a family council.
331

Activity 7.7 Establish a family council

In approximately 250 words, critically explain when a family should establish a family
council.

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 43Feedback on activity 7.7

In your response, you should have considered that the family must learn to be good owners
and shareholders as well as, or even instead of, being good managers. Family members must
be accountable to their businesses and take on the responsibility of securing the future of the
business or, in some cases, selling the business.

A family often grows to the point that it is too large to have productive working meetings with
all family members present. More often, the idea of holding formal family meetings does not
occur until the family has grown significantly in size and family members recognise that the
size of the family prevents effective meetings. This large family group might then choose to
be represented by a family council. The family council is a governance body that focuses on
family and ownership matters and is to the family what the board of directors is to the busi-
ness. The family council meets on a regular basis and discusses issues relevant to the family
as business owners.

Activity 7.8 Creating a family office

In approximately 250 words, give a brief account on why a family creates a family office.

44 Feedback on activity 7.8

In your response, you should have considered that the main purpose of a family office is to as-
sist shareholders with the responsibilities born out of their ownership relative to the company
– and in the process, they often help make the owner-company relationship a more positive
and disciplined one.

A family office supports a business model for the enterprising family that puts the family at
the heart of the family-business strategy and family-wealth decision making. This means
that transgenerational strategies that include entrepreneurship, philanthropy, investments
in real estate, private equity and other alternative investment classes can all be part of the
family’s enterprise from generation to generation – read pages 237 and 238 to gain a better
understanding.

7.6 SUMMARY
It is important that family members be informed of the unique responsibilities and chal-
332

lenges of employment in family business. They should be advised that in most cases they
will be held to a higher standard of conduct and performance than other employees. We
support an internship program to introduce future generations to the company.

In the last learning unit, we will focus on the uniqueness of the strategic planning process
333

in the family business, estate planning and the owner’s plan.

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 ADDITIONAL READING
https://work.chron.com/simple-job-descriptions-board-officers-12744.html.
334

https://boardappointments.com/2022/10/28/what-are-the-selection-criteria-for-inde-
335

pendent-board-member/.
https://familybusinesspartnership.com/what-is-a-family-council/.
336

RELEVANT CASE RESOURCES

The Kropps Company’s family constitution represents a sophisticated blueprint for the
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operation of all these governing bodies.

338 Consider the following questions while reading this case resource:

(1) What does this family constitution state is the desired relationship between the
Kropps Family and the Kropps Companies management?
(2) What benefits might non-family management derive from this family constitution?
(3) What are some of the implications of this family constitution for family shareholders
of Kropps Companies?
(4) What bodies or institutions does this family constitution rely on for effectively gov-
erning the relationship between owner-managers, family shareholders not active
in management, and non-family managers at Kropps?
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