Corporate governance refers to the structures, strategies, principles, policies and processes by which businesses, and the senior executives thereof are led, managed, supervised, measured and controlled.
Governance style defines the attitude, culture and integrity of an organisation. It therefore forms a major component of risk management.
In many family business environments, executives involved in governance may be tasked with protecting both the business and selected family members from risk.
The main objective of effective governance is to ensure that an entity discharges its operational responsibilities, and achieves its strategic objectives, in accordance with: (a) agreed Values, Visions, Strategies, Plans and Goals and (b) its legal, commercial and financial obligations.
Governance bodies help to achieve this by: (a) providing strategic input and guidance and (b) mentoring, assessing and supervising the performance of senior operational staff (especially CEOs and senior executives).
Directors and Boards of Directors
Good governance is the primary responsibility of a Business Board.
The Board looks after shareholders’ interests by enforcing the business’s governance obligations, including its commercial performance, in the form of sustainable profitability.
The Board should ensure that the business recognises its legal, contractual, social, and other obligations to all stakeholders, including employees and customers, investors, creditors, suppliers, own industry, markets and local communities.
Board members must have sufficient and relevant skills and understanding to review and challenge financial information and executive / management performance. They must also be able to exercise appropriate levels of analytical and decision making independence to discharge their governance responsibilities.
By definition, Directors should not be involved in the day-to-day operations of the business unless they have specific, defined, operational roles and responsibilities. Otherwise, as a result of their natural status, they can cause great confusion amongst employees, and seriously undermine the authority of other operational staff.
Directors carry clearly defined and quite onerous legal responsibilities under Corporations Law. Being a director of a company can expose an individual to personal liability if the company does something seriously wrong, or gets into financial difficulties while on their watch. For this reason it has become increasingly important to ensure that:
- Directors and officers are always protected by adequate and appropriate insurance policies;
- Directors understand their legal responsibilities and potential personal liabilities;
- Directors’ personal assets are not put at risk as a direct result of their directorship.
Quite frankly, anybody who is willing to accept a directorship in a family business without spending at least a year getting to know the business extremely well, is probably somebody you don’t want on your board, because they don’t understand the risks involved in being a director!
This is why most new directors, and most family businesses with new or substantially revised boards, elect to create an Advisory Board, rather than a Business Board, to discuss and advise on governance and strategic issues, and to pass their advice on to the actual Business Board (which may comprise only one person) to formalise any decisions that need to be made, and to take responsibility for said decisions.
Advisory Boards are “Clayton’s Boards” (the Boards that aren’t Boards). They are informally constituted bodies created to provide strategic and governance advice to the management of a business.
Because they have no legal standing or formal compliance requirements, Advisory Boards can be more flexible than Boards of Directors. They have no formal authority to do anything other than advise the business on issues. As a consequence, at least in theory, none of its members can be held responsible for any of the business’s actions or results.
It’s critically important that members of an Advisory Board are not represented to the world at large as being directors of the business, as this could remove their protection from liability, by making them “deemed directors”.
Many family businesses establish Advisory Boards in times of challenge or crisis to benefit from the knowledge and experience of professional executives and/or professional advisers, without the time delays, expense or formality of appointing a Board of Directors.
Advisory Board Member (“ABMs”) and Non-Executive Directors (“NEDs”)
Advisory Board members can be regarded as consultants who’ve been brought it to help the company on a regular basis. They participate in specific Advisory Board activities.
NEDs sit on ordinary Business Boards. There is no legal distinction between Executive (working) and Non-Executive (non-working) Directors. As a consequence, NEDs have the same legal duties, responsibilities and potential liabilities as their working counterparts. Although not as involved in the daily affairs of the business, they are expected to have a considerable depth of understanding of what’s going on, and to have the same level of commitment to its success.
Essentially, the Advisory Board’s role is to provide an informed, creative and objective contribution to the business (and its Board) by providing independent and constructive ideas and comments. ABMs: “should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct.”
All Board members (Board of Directors and Advisory Board) should be capable of seeing company and business issues in a broad perspective. ABMs are usually chosen because they have a breadth of experience, are of an appropriate calibre and have particular personal qualities. Additionally, they may have some specialist knowledge that will help provide the business with valuable insights or perhaps, key contacts in related industries.
Of the utmost importance is their independence to the management of the company and any of its ‘interested parties.’ This means they can bring a degree of objectivity to business and Board decision making, and play a valuable role in monitoring executive management.
The Advisory Board should appoint people of sufficient calibre and number for their views to carry significant weight in the business. Their most important attribute is their ability and willingness to exercise independent judgement.
Ideally, the Board will be balanced so no individual or small group can dominate decision-taking.
Functions of Advisory Board Members and Non-Executive Directors
ABMs (and NEDs) are expected to focus on strategic and governance matters. They should not get involved in operational issues, unless asked for advice, or given a specific project.
Business owners, CEOs and family directors should use their ABMs and NEDs for guidance and advice on serious matters of concern, both business and personal. They should also seek their input on contentious issues before they are raised at Board or other meetings.
ABMs (and NEDs) should be responsible for monitoring the performance of senior managers, especially family members, and with particular regard to progress made towards achieving agreed objectives.
They can also help to set remuneration for senior personnel, and family members, usually benchmarking to the open market (ie: pay what the contribution is worth and would cost if you had to recruit another to replace them). They may also have a role in hiring and firing senior staff, including family members!
ABMs (and NEDs) have a critical role to play in succession planning, where their objectivity and experience can have a major impact on the progress of the process.
Family Businesses can be quite isolated and may benefit greatly from outside contacts and opinions. ABMs and NEDs can help to connect the business, and its key people, with useful external networks
Separation of Roles and Responsibilities
There should be a recognisable separation of powers and duties between the governance body and the executive, in any organisation. Blending or confusing the two roles compromises the integrity of the governance function by removing its core independence and objectivity. This makes it harder to enforce accountability.
In a family setting, it’s normal to find key people occupying multiple positions, from several different roles. This is where it becomes even more essential to appoint at least two non-family independents with the character, authority and obligation to (responsibly) speak their minds and hold all relevant family members, business staff and advisers accountable for their performance.
One concern is that such an empowered person could turn “rogue” and harm the family, and/or the business. If this occurs the family, acting as a group according to clear rules of appointment, can always remove them.
It’s well-established family business best practice to separate the role of Chair from that of CEO in the business, and to have one family and one non-family person in either role. This is done specifically to avoid the inevitable tensions and complications of having one family member sitting in judgement over another in your top spots – where it really really matters.
The same separation of powers concept should be applied to a Family Council. This usually means appointing a non-family person to the role of Chair, specifically to provide guidance to, and independent oversight of, the activities and performance of the Executive Director (usually a family member), and other family members.
Non-family, non-executive appointees can act as mentors to all family members. They should also be tasked with assisting and chasing family members on issues like mutual obligations.