Family Business Governance Handbook
Family Business Governance Handbook
Family Business Governance Handbook
Fourth Edition: Available in Albanian, Arabic, Azeri, Chinese, English, French, Georgian, Khmer,
Macedonian, Mongolian, Montenegrin, Myanmar language, Portuguese, Russian, Serbian,
Spanish, Turkish, Ukranian, Urdu, and Vietnamese.
Disclaimer
The IFC Family Business Governance Handbook (Handbook) is produced by
the staff of IFC, a member of the World Bank Group. The judgments and con-
clusions contained herein should not be attributed to, and do not necessarily
reflect the views of IFC or its Board of Directors or the World Bank or its Executive
Directors, or the countries they represent. The material in this Handbook is set
out in good faith for general guidance, but IFC and the World Bank do not
guarantee the accuracy of the data and accept no responsibility for any con-
sequence of its use.
4
EnglishFamBusInsideB:EnglishFamBus InsideB 5/20/08 4:08 PM Page 5
Foreword
The purpose of the IFC Family Business Governance H andbook is to help IFC
investment and advisory services staff to identify and address basic family busi-
ness governance issues with their family business clients. The H andbook may
also serve as a guidance tool for IFC clients that are looking to strengthen their
family governance practices. The Handbook complements the IFC Corporate
Governance Methodology tools for family companies that are currently used
within IFC to assess the governance of family business clients.
Sanaa Abouzaid
Corporate Governance Group
Environment, Social & Governance Department
IFC
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433 U.S.A
Telephone: 202-458-1614
Email: [email protected]
5
EnglishFamBusInsideB:EnglishFamBus InsideB 5/20/08 4:08 PM Page 6
6
EnglishFamBusInsideB:EnglishFamBus InsideB 5/20/08 4:08 PM Page 7
Acknowledgements
The author would like to express her appreciation to all the individuals who partic-
ipated in the development of this Handbook.
Included among those who contributed to the Handbook are: Natalya Arabova,
First Freight Company (Russia); Ayman Eltarabishy, The George Washington
University (United States); Leo Goldschmidt, Bank Degroof (Belgium); Darrin
Hartzler, Davit Karapetyan, Sebastian Molineus, and Cecilia Rabassa, IFC/World
Bank; Herbert Steinberg, Mesa Corporate Governance (Brazil); and John Ward,
Kellog School of Management (United States). Each provided invaluable input in
developing and reviewing the content of the Handbook.
The author would also like to thank Joe Achkar, SABIS (Lebanon); and Alfredo
Carvajal Sinisterra, Carvajal Group (Colombia), for sharing some examples of their
family governance practices in the Handbook.
Special thanks go to Sandra Guerra, Better Governance (Brazil); Kiril Nejkov, Fabio
Isay Saad, Enrique Sanchez-Armass, Anderson Caputo Silva, and Medhat Bassily,
IFC/World Bank, for their review of the translated versions of the Handbook.
Our appreciation also goes to Jewel Caguiat and Maya Polishchuk, IFC, who
were instrumental in supervising the design, printing, and distribution of the
Handbook.
7
EnglishFamBusInsideB:EnglishFamBus InsideB 5/20/08 4:08 PM Page 8
8
Table of Contents
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1. Family Business Definition and Characteristics – Strengths and
Weaknesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2. Stages of Growth in a Family Business . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1. The Founder(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2. The Sibling Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3. The Cousin Confederation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
3. Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.1. Importance of Independent Directors . . . . . . . . . . . . . . . . . . . . . 43
3.2. Definition of Director Independence . . . . . . . . . . . . . . . . . . . . . . 44
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
10
Introduction
Family businesses constitute the world’s oldest and most dominant form of busi-
ness organizations. In many countries, family businesses represent more than 70
percent of the overall businesses and play a key role in the economy growth
and workforce employment. In Spain, for example, about 75 percent of the
businesses are family-owned and contribute to 65 percent of the country’s GNP
on average.1 Similarly, family businesses contribute to about 60 percent of the
aggregate GNP in Latin America.2
Family businesses range from small and medium-sized companies to large con-
glomerates that operate in multiple industries and countries. Some of the well-
known family businesses include: Salvatore Ferragamo, Benetton, and Fiat
Group in Italy; L’Oreal, Carrefour Group, LVMH, and Michelin in France;
Samsung, Hyundai Motor, and LG Group in South Korea; BMW, and Siemens in
Germany; Kikkoman, and Ito-Yokado in Japan; and finally Ford Motors Co, and
Wal-Mart Stores in the United States.
It is also a fact that most family businesses have a very short life span beyond
their founder’s stage and that some 95 percent of family businesses do not sur-
vive the third generation of ownership.3 This is often the consequence of a lack
of preparation of the subsequent generations to handle the demands of a
growing business and a much larger family. Family businesses can improve their
odds of survival by setting the right governance structures in place and by start-
ing the educational process of the subsequent generations in this area as soon
as possible.
This Handbook will focus on the unique corporate governance challenges that
family businesses face and propose structures and practices that can mitigate
these challenges and ensure the viability of the business. The Handbook gives
an international perspective since it focuses on characteristics of family busi-
nesses that can be observed across countries. The suggested governance
structures of the Handbook will need to be adapted to the local requirements
and regulations of family businesses before being applied in a specific country.
11
1 The Family Business Network, www.fbn-i.org/fbn/main.nsf/doclu/facts.
2 The Family Business Network, www.fbn-i.org/fbn/main.nsf/doclu/facts.
3 The Family Business Network, www.fbn-i.org/fbn/main.nsf/doclu/facts.
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
This high performance is the result of the inherent strengths that family businesses
have compared to their counterparts. Some of these strengths include: 6
4 Denis Leach and John Leahy, “Ownership Structures, Control and the Performance of Large British Companies”, Economic
12
Journal, 1991.
5 Newsweek, www.msnbc.msn.com/id/4660477/site/newsweek.
6 Sir Adrian Cadbury, Family Firms and Their Governance: Creating Tomorrow’s Company from Today’s (Egon Zehnder
International, 2000); John Ward, “The Family Business Advantage: Unconventional Strategy”, Families in Business, 2002.
INTRODUCTION
• Reliability and Pride. Because family businesses have their name and rep-
utation associated with their products and/or services, they strive to
increase the quality of their output and to maintain a good relationship
with their partners (customers, suppliers, employees, community, etc.).
This high rate of failure among family businesses is attributed to a multitude of rea-
sons. Some of these reasons are the same ones that could make any other busi-
ness fail such as poor management, insufficient cash to fund growth, inadequate
control of costs, industry and other macro conditions. However, family businesses
also show some weaknesses that are especially relevant to their nature. Some of
these weaknesses are:
13
7 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
• Informality. Because most families run their businesses themselves (at least
during the first and second generations), there is usually very little interest in
setting clearly articulated business practices and procedures. As the fami-
ly and its business grow larger, this situation can lead to many inefficiencies
and internal conflicts that could threaten the continuity of the business.
The evolution of ownership and management within most family businesses goes
through the following stages:
This is the initial step of the family business’ existence. The business is entirely owned
and managed by the founder(s). Most founders might seek advice from a
small number of outside advisors and/or business associates but they will make
14
8 John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991); Kelin E. Gersick, John
A. Davis, Marion McCollom Hampton, Ivan Lansberg, Generation to Generation: Life Cycles of the Family Business
(Harvard University Press, 1997).
INTRODUCTION
the majority of the key decisions themselves. This stage is usually characterized by
a strong commitment of the founder(s) to the success of their company and a rel-
atively simple governance structure. Overall, this stage contains limited corporate
governance issues compared to the next two stages since both the control and
ownership of the company are still in the hands of the same person(s): the
founder(s). Perhaps the most important issue that will need to be addressed dur-
ing the life of the founder(s) is succession planning. For the family business to sur-
vive into its next stage, the founder(s) should make the necessary efforts to plan
for their succession and start grooming the next leader(s) of the company.
This is the stage where management and ownership have been transferred to the
children of the founder(s). As more family members are now involved in the com-
pany, governance issues tend to become relatively more complex than those
observed during the initial stage of the business’ existence. Some of the common
challenges of the sibling partnership stage are: maintaining siblings’ harmony, for-
malizing business processes and procedures, establishing efficient communica-
tion channels between family members, and ensuring succession planning for key
management positions.
At this stage, the business’ governance becomes more complex as more fam-
ily members are directly or indirectly involved in the business, including children
of the siblings, cousins, and in-laws. Since many of these members belong to
different generations and different branches of the family, they might have
diverse ideas on how the company should be run and how the overall strate-
gy should be set. In addition, any conflicts that existed among the siblings in the
previous stage would most likely be carried to the cousin generation as well. As
a consequence, this stage involves most family governance issues. Some of the
most common issues that family businesses face at this stage are: family mem-
ber employment; family shareholding rights; shareholding liquidity; dividend
policy; family member role in the business; family conflict resolution; and family
15
vision and mission.
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
The following table summarizes the key family governance issues faced by fam-
ily businesses during their development cycle: 9
Each stage presents different challenges and issues that if properly managed
can ensure the continuity of the family business. Most family-owned companies
are successful during their infancy stage thanks to the tremendous efforts
made by the founder(s) as they are implicated in all aspects of the business. In
the longer term though, it becomes necessary to set up the right governance
structures and mechanisms that will allow for efficient communication chan-
nels and a clear definition of the roles and expectations of every person
involved in the family business.
16
9 John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991).
SECTION I
FAMILY MEMBER ROLES IN THE
GOVERNANCE OF THEIR BUSINESS
In a typical non-family business, any involved individual can be an employee,
a manager, an owner, a director, or some combination of these roles. In a
family-owned business however, matters become more complex as an indi-
vidual can have multiple roles and responsibilities. These multiple roles are usu-
ally associated with different incentives, which increases the challenges that
family businesses face as opposed to their non-family counterparts.10
1- Owners (Shareholders)
Owners in a family business have several roles and motivations that can
sometimes lead to conflicting opinions. For example, a decision to reinvest
profits in the company instead of distributing them as dividends can be dif-
ferently seen by the various owners depending on their other roles in the
business. An owner who works in the family business might not object to
such a decision since he/she is already receiving a salary from the compa-
ny. On the other hand, this situation would look different from the perspec-
tive of an owner who does not work in the business and relies on dividends
as a main source of income. This owner would actually be interested in
receiving higher and more frequent dividends.
Matters usually get more complex as the family business grows and its own-
ers hold different roles, with different incentives. Some of the roles that an
owner in a family business can have are:
• Owner only.
• Owner/manager.
• Owner/family member.
• Owner/family member/manager.
• Owner/director.
• Owner/family member/director.
17
• Owner/family member/director/manager.
10 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
18
that can increase conflicts among family members is the level of access to infor-
FAMILY MEMBER ROLES IN THE GOVERNANCE OF THEIR BUSINESS
mation about the company and its activities. This can be problematic as the
members who work in the business usually have access to such information in a
timely manner while those outside of the business can’t access it in the same way.11
Family businesses should establish the necessary communication channels and
institutions to keep all family members informed about the business, strategy, chal-
lenges, and the overall direction where the company is heading.
The next three sections of this Handbook will focus on the governance bodies of
a family business by defining the roles, rights, and responsibilities of the sharehold-
ers/family members, the directors of the board, and the managers.
19
11 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998); Ivan
Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999).
12 International Finance Corporation, http://ifcln1.ifc.org/ifcext/corporategovernance.nsf/Content/WhyCG.
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
This section described how several issues that family businesses face arise from
the numerous roles that their members can have. These issues, added to the
constant challenges that any business faces, make it harder for family business-
es to survive. This is probably one of the reasons for the high failure rate
observed among family businesses. Family businesses can of course increase
their survival chances by paying particular attention to their governance and
establishing the necessary mechanisms that are needed in this area. Some of
these mechanisms are discussed in the next section of this Handbook.
20
SECTION II
FAMILY GOVERNANCE
The family aspect is what differentiates family companies from their counter-
parts. As a consequence, the family plays a crucial role in the governance of
its business. When the family is still at its initial founder(s) stage, very few family
governance issues may be apparent as most decisions are taken by the
founder(s) and the family voice is still unified. Overtime, as the family goes
through the next stages of its lifecycle, newer generations and more members
join the family business. This implies different ideas and opinions on how the
business should be run and its strategy set. It becomes mandatory then to
establish a clear family governance structure that will bring discipline among
family members, prevent potential conflicts, and ensure the continuity of the
business. A well functioning family governance structure will mainly aim at:
Developing such a governance structure will help build trust among family
members (especially between those inside and outside of the business),
and unify the family thus increasing the viability chances of the business.
The major constituents of a family governance structure are:
21
the business.
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
• Family institutions, which can have different forms and purposes, e.g. fam-
ily assembly, family council, and other family committees.
1- Family Constitution
Definition: The family constitution is also referred to as “Family Creed”, “Family
Protocol”, “Statement of Family Principles”, “Family Rules and Values”, “Family Rules
and Regulations”, and “Family Strategic Plan”. The family constitution is a statement
of the principles that outline the family commitment to core values, vision, and mis-
sion of the business.13 The constitution also defines the roles, compositions, and pow-
ers of key governance bodies of the business: family members/shareholders, man-
agement, and board of directors. In addition, the family constitution defines the
relationships among the governance bodies and how family members can mean-
ingfully participate in the governance of their business.14
The family constitution is a living document that evolves as the family and its busi-
ness continue to evolve. As a consequence, it is necessary to regularly update
the constitution in order to reflect any changes in the family and/or the business.
Components: The form and content of family constitutions differ from one fam-
ily business to another depending on the size of the family, its stage of devel-
opment, and the degree of involvement of family members in the business.
However, a typical family constitution will cover the following elements:
13 These principles can range from basic (when the family is still at its founder(s) stage) to detailed and more specific as the
22
family size gets larger.
14 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998);
Daniela Montemerlo and John Ward, The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your
Business (Family Enterprise Publishers, 2005); Craig Aronoff, Joseph Astrachan, and John Ward, Developing Family Business
Policies: Your Guide to the Future (Family Enterprise Publishers, 1998).
FAMILY GOVERNANCE
Although most family companies don’t have a formal constitution, they usual-
ly have an informal set of rules and customs that determine the rights, obliga-
tions, and expectations of family members and other governance bodies of
the business. As the family increases in size, it becomes crucial to develop a
written and formal constitution that is shared among all family members.
One very important area of the family constitution is the definition of family
member employment policies. Many family businesses that didn’t set up clear
employment policies for their members end up with more employees from the
family than the company needs. Some of these employees might not even be
suitable for the jobs that they are given within the business. Even worse, some
family businesses find themselves acquiring businesses that have no relationship
with their original business or keeping some unprofitable business lines just to
make sure that everybody in the family gets a job within the company.
Once at the sibling partnership stage, families in business should formalize their
family members’ employment policies. This would require setting up clear rules
about the terms and conditions of family employment within the firm. Some of
these rules would clearly state the conditions of entry, staying, and exit from the
business. The policy should also cover the treatment of family member employ-
ees in comparison with non-family employees.
The content of family employment policies differs from one family business to
another. There is no right set of rules that all family businesses have to follow in
this area. For example, some families completely forbid any of their members
from working in the family business. Other families allow their members to work
in the business but impose certain conditions on them such as the minimum
required level of education, prior work experience, and age limits. In develop-
ing its family employment policy, the family should focus on the rules, condi-
tions, and processes that allow it to attract and motivate the best competence
available (whether from within the family or outside of it). It is also very impor-
tant to set employment conditions that do not discriminate against or favor
family members. This would help establish an atmosphere of fairness and moti-
vation for all employees of the family business.
23
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
Finally, once developed and agreed upon by the family, the written employ-
ment policy should be made available to all family members. This will help set
the right expectations about family employment among all family members.
CASE STUDY 1
SABIS®—Family Employment Policy
SABIS® is an international, college-preparatory education system with roots in the
19th century. Schools in the SABIS® School Network provide Pre-K and K-12 students
with a distinctively rigorous, college-preparatory education. SABIS®’ unique educa-
tional system is currently being successfully implemented in 50 schools in 14 coun-
tries with 40,000 students around the world. SABIS® and its team of experienced pro-
fessionals are dedicated to offering educational management products and serv-
ices to a membership network of private and public schools.
The first school in the SABIS® School Network was founded in 1886 in the suburbs of
Beirut, Lebanon. The name SABIS® is actually derived from the first letters of the last
names of the founders: the Saad and the Bistany families. As of August 2007, there
were 25 family members, 10 of them were working at SABIS®.
IFC’s investment in SABIS® in 2005 was related to the new SABIS® International School
in Adma, Lebanon. SIS-Adma was a greenfield elementary and secondary school
designed to accommodate 1,700 students. IFC invested $8 million towards the new
facilities which have become both the flagship school and international headquar-
ters of SABIS®. IFC has also provided advice to SABIS® in its efforts to build a sound
family business governance structure.
A. Employment Philosophy
The driving force behind our decisions should be the best interest of the organiza-
tion and not that of individual family members.
1. We would like to attract the most qualified people to SABIS®, both family
and non-family.
2. A job at SABIS® is neither a birthright nor an obligation for family members.
3. Once hired, family members will be treated as all other non-family
employees.
24
15 Adapted and summarized from the 2006 Family Employment Policy of SABIS®.
FAMILY GOVERNANCE
SABIS® must have a position available for which the applying family member is qual-
ified. SABIS® will not create a position for a family member unless the growth of the
business justifies it, which is to be decided by the Board. Furthermore, non-family
employees will not be dismissed to make room for family members.
C. Prerequisite Qualifications
1. Educational Requirements:
A university degree (bachelor or higher, from a reputable university approved
by SABIS®) is required for employment in any position within the company.
3. Age Limit:
In line with our employment philosophy, the company should not be con-
sidered a “shelter” for family members in search of a job. Hence, in the
case of family members seeking employment with SABIS® after the age of
40, the Board will examine their professional career path and the reasons
they did not join earlier before making a decision about their application.
25
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
(continued)
D. Family Employment–Specifics
1. Family members who wish to join SABIS® should inform the President/CEO of
their desire to join. They would then be asked to complete the standard
application form.
2. Family members will then go through the standard interviewing, assessment
and selection process.
3. The final decision for hiring, or rejecting, a family candidate rests with the
Board.
4. Once a family member becomes an employee, he/she will be treated as
any other non-family employee. Family employees will be trained, super-
vised, evaluated, and promoted like other employees.
5. Family employees will have regular performance reviews (through the stan-
dard channels) and will be given feedback on how they are doing, and
guidance on how to improve their performance. Additionally, the Group
VP–OD will also review their performance for possible guidance or action in
view of their prospective career plans within the company.
6. In order to contribute to the development and advancement of family
members, a “Development Plan” will be elaborated for every family mem-
ber working at SABIS®. This plan would encompass training, continuing edu-
cation, coaching, mentoring, special projects and assignments, job rota-
tions, etc.
7. As part of their performance management and self-development, family
employees will be asked to provide a yearly self-assessment, including per-
sonal development objectives for the following year.
8. In the area of promotion and advancement of family employees, a recom-
mendation will be made by their supervisor or by the company’s manage-
ment, with the final decision being taken by the Board.
9. The grounds for dismissing a family member include continued poor per-
formance, unacceptable personal conduct, and any other grounds on
which a non-family employee may be dismissed.
10. If a family member has been dismissed by the company, he/she will not be
reconsidered for employment.
11. If a family member has left SABIS® voluntarily, he/she may return to work at
SABIS® subject to the approval of the Board, if an appropriate position is
vacant. This would generally be limited to one time only.
26
FAMILY GOVERNANCE
E. Compensation
Compensation and benefits of family employees will be based on their position, respon-
sibilities, qualifications and performance, and will be comparable to that of non-family
employees in the same position and with similar qualifications. They will receive
compensation and benefits based on being employees, and not on the shares
they own. As owners, they will be compensated through the return on their shares.
1. In-laws Employment:
Family member spouses who wish to join SABIS® will go through the standard
interviewing, assessment, and selection process. The final decision for hiring,
or rejecting, a family member spouse will rest with the Board, which would
meet without the family member in question and vote confidentially.
4. Continuing Education:
Standard company policy will apply both to continuing education (towards
a degree), and to professional development (e.g. training, seminars, and
conferences). In the case of continuing education, if the family employee
would like additional financial contribution from the SABIS® Family Council,
above what the company may provide employees, a request to this end
will be put forward to the Family Council by the President/CEO. The Family
Council will then study the request and take a decision accordingly.
27
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
For some families it is crucial to clearly define shareholding policies at the earliest
stages of the family’s existence. This usually helps set the right expectations
among family members regarding shares’ ownership rights, e.g., whether in-laws
and other related family members are allowed to own shares or not. A good
shareholding policy would also define the mechanisms that allow family mem-
bers to sell their shares if they prefer cash instead. Indeed, as the shareholders’
pool grows larger, most shareholders will end up with a smaller percentage of the
company’s shares that would yield lower dividends (if the company is paying div-
idends at all). This situation can create frustration among these minority share-
holders and lead to conflicts with salary receiving family members.
Providing the shareholders with a liquidity option for their shares could help
avoid many conflicts and increase the business’ chances of survival. Some
family businesses establish a Shares Redemption Fund in order to buy back any
shares that family members would like to liquidate. The Fund is usually financed
by contributing a small percentage of profits to it every year.
Family members should be well informed about the purpose and activities of
any established family governance institutions. It is also very important to make
sure that family members distinguish between the role of these institutions and
the governing bodies of the business such as the board of directors and senior
management. This can be achieved by developing written procedures for
these institutions and sharing them with all family members.
28
FAMILY GOVERNANCE
Definition: Also called “Family Forum”, the family assembly is a formal forum for
discussion for all family members about business and family issues. During the
founder(s) stage of the business, the family assembly is replaced by a more fre-
quent and informal “Family Meeting”. These informal meetings allow the
founder(s) to communicate family values, generate new business ideas, and
prepare the next generation of the family business’ leaders. As the family and
the business get more complex (sibling and cousin stages), it becomes crucial
to establish a formal family assembly.
Membership: As a general rule, family assemblies are open to all family mem-
bers. However, some families prefer to set certain membership restrictions such
29
as minimum age limits, participation of in-laws, and voting rights during the
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
assembly. The scheduling and chairing of the family assembly is usually han-
dled by the family patriarch or some other respected family figure. In larger
families, this task is usually given to the family council.
Definition: Also called “Family Supervisory Board”, “Inner Council” and “Family
Executive Committee”, the family council is a working governing body that is
elected by the Family Assembly among its members to deliberate on family
business issues. The council is usually established once the family reaches a crit-
ical size, i.e. more than 30 members. In this situation, it becomes very difficult for
the family assembly to have meaningful discussions and make prompt and
qualified decisions. The family council is established at this point as a represen-
tative governance body for the family assembly in coordinating the interests of
the family members in their business.
• Being the primary link between the family, the board, and senior man-
agement.
• Suggesting and discussing names of candidates for board member-
ship.
• Drafting and revising family position papers on its vision, mission, and
values.
• Drafting and revising family policies such as family employment, com-
pensation, and family shareholding policies.
• Dealing with other important matters to the family.
30
16 Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999);
Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
FAMILY GOVERNANCE
The family council should have a chairman, who is also appointed by the fam-
ily assembly. The chairman leads the work of the council and is the main con-
tact person for the family. It is also a good practice to appoint a secretary of
the council that keeps minutes of meetings and makes them available to the
family. Depending on the complexity of issues facing the family, the council
would meet from 2 to 6 times per year. Decisions are usually approved by
majority votes of the council’s members.
The following table outlines the major differences between the family meeting,
family assembly, and family council:
31
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
(continued)
Number of Depends on the stage 1-2 times a year. 2-6 times a year.
Meetings of the business’ devel-
opment. When the
business is growing
fast, can be as fre-
quent as once a week.
32
FAMILY GOVERNANCE
Membership: The family office is a quite separate operation from the business,
although a few of its members may work in the business as well. The office is
usually populated by professional managers who monitor the investments, tax
compliance, insurance, financial planning, and intra-family transactions such
as gifts of stocks and estate plans.17
Families in business might find it useful to develop other types of institutions that
cover areas of particular interest to them. Some of these institutions are:18
Career Planning Committee: Serves to establish and oversee entry policies for
family members interested in joining the family business. This committee also
helps monitor the careers of family members, offers career mentoring and
keeps shareholders and the family council informed on their development. The
career planning committee can also be very useful in advising family members
who choose not to work in the family business on their external careers.
33
17Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999).
18Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999);
Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
CASE STUDY 2
The Carvajal Group
Family Protocol–Table of Contents
The Carvajal Group is a leading privately-owned Colombian multinational compa-
ny with businesses in 19 countries, primarily in Latin America. The Carvajal Group
operates in 12 different sectors, the largest of which are: paper manufacturing and
conversion; school and office supplies; telephone directories; publishing and edit-
ing; and plastic and paper packaging.
The Carvajal Group was founded in 1904 in Cali, Colombia, by Manuel Carvajal
Valencia who established a printing company called La Imprenta Comercial. Over
time, the company expanded into other businesses and regions to become one of
Latin America’s most respected multinational firms.
IFC’s two investments in the Carvajal Group, in 2004 and 2006, had a purpose of
supporting the Group in its strategic and modernization plans. The most recent IFC
investment in the Carvajal Group is related to the revamping and modernization of
the Group’s information systems. IFC has also provided advice to the Carvajal
Group in the area of corporate governance.
B. Family Institutions
1. Family Assembly
a. Objective of the Family Assembly
b. Functions of the Family Assembly
2. Family Council
a. Objective of the Family Council
b. Composition of the Family Council
c. Functions of the Family Council
d. Decisions of the Family Council
e. Frequency of Meetings of the Family Council
34
19 Adapted and summarized from the 2002 version of the Family Protocol of The Carvajal Group.
FAMILY GOVERNANCE
F. Shareholding Policies
1. Sale of Shares
a. Right of First Refusal
b. Conditions of Sale
2. Liens on Shares
3. Issuances of Shares
4. Reserve Fund
a. Objective of the Reserve Fund
b. Board of Directors of the Reserve Fund
5. Conflicts of Interest
a. Investment in Other Companies
b. Transactions with the Company
c. Other Activities
35
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
(continued)
I. Family Activities
1. Social Meetings
2. Informative Meetings
3. Communication
4. History of the Company
M. Resolution of Conflicts
O. Definitions
36
SECTION III
BOARD OF DIRECTORS IN A
FAMILY BUSINESS
The board of directors is a central institution in the governance of most
companies, including family-owned ones. The role, structure, and compo-
sition of the board of directors vary from one family business to another.
These are usually determined by the size and complexity of the business
and the maturity of the owning family.
During the first years of their existence, most family businesses create a
board of directors in order to comply with legal requirements. Known as a
“paper board”, its purpose is usually limited to approving the company’s
financials, dividends, and other procedures that require board approval by
law. These boards usually meet about once or twice a year (depending on
the local regulation) and their sessions last for a very short period of time.
The board in this case is generally composed exclusively of family members
and –in some cases- a few well trusted non-family senior managers. It is also
very common to see the same individuals serve as managers and board
directors, while being the company’s owners. Such a governance structure
adds little value to the family business as each element of this structure
(board, management, and family) could separately play a more active
and constructive role within the governance of the company. As a conse-
quence, roles are mixed, possibly leading to conflicts and inefficiencies in
overseeing the company and its strategic decision.
37
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
Before moving to a fully professional board that has the ability to act in the best
interest of the business, independently from the management and controlling
shareholders, many family businesses set up an advisory board that comple-
ments the skills and qualifications of their current directors. In this case, the advi-
sory board closely works with the company’s board of directors and senior
management to address any key strategic issues that the business is facing.
1- Advisory Boards
38
20 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
BOARD OF DIRECTORS IN A FAMILY BUSINESS
The most practical size for an advisory board is from 3 to 7 members. Keeping
the size of this board small will help maintain its effectiveness and make it pos-
sible for its members to clearly communicate their ideas to the rest of the
group. Members of the advisory board are usually experts in the family busi-
ness’ industry and market, or in other areas such as finance, marketing, and
international markets. They also provide expertise and experience when the
family business moves into new activities or countries. The advisory board usu-
ally meets 3 to 4 times a year, depending on the family business’ size and com-
plexity of operations. The CEO and a few senior managers from the family busi-
ness can also be part of the advisory board in order to coordinate and orient
the meetings’ discussions towards the company’s needs.
In order to ensure the objectivity of the advisory board members, the following
individuals should not be part of this board:21
39
21 Richard Narva and Beth Silver, “How to Create Effective Governance in a Family Controlled Enterprise”, NACD Directors
York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
Advisory Board
2- Board of Directors
The core roles of a well performing board of directors are to set the overall strat-
egy of the firm; oversee the management performance; and ensure that an
40
appropriate corporate governance structure is in place, including a robust
BOARD OF DIRECTORS IN A FAMILY BUSINESS
The board of a family-owned company should add value to the business, and
not replicate activities already handled by other bodies of the company. For
example, the board should guide, but not get involved in the day-to-day man-
agement of the company as this is fundamentally the task of the company’s
management. Moreover, directors should have the necessary resources and
freedom to oversee and challenge the decisions and other actions performed
by the management and/or family members.
In addition to strategy and oversight, some of the main tasks assigned to the
board of directors include:23
The composition and size of the board of directors will depend on the size and
complexity of the company’s operations. Although there is no simple formula
for determining the proper number of directors for all family businesses, best
practice recommends having a manageable board size, i.e. 5 to 9 members.
The advantages of a smaller board size include an increased efficiency as
directors will have better chances for communicating, listening to each other,
and keeping the discussions on track. In addition, it is easier to organize board
meetings and to reach the quorum for a smaller group than a larger one.
41
23 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
The following table summarizes some of the criteria that good directors should
possess:
Directors are elected by the company shareholders and are supposed to act
in the best interest of the company and to exercise care in doing so. The fol-
lowing are the main duties of directors:24
42
24 NACD, “The Board of Directors in a Family-Owned Business”, Director’s Handbook Series, 2004.
BOARD OF DIRECTORS IN A FAMILY BUSINESS
Duty of Loyalty: In performing their duties, directors must be loyal to the com-
pany, putting this loyalty ahead of any other interests. Directors cannot person-
ally benefit from any action taken on behalf of the company. Under the duty
of loyalty, directors must:
• Put the interests of the company above any personal or other interests.
• Immediately disclose any conflicts of interest to the rest of the board.
• Abstain from voting on matters that could involve a personal conflict
of interest.
3- Independent Directors
Establishing a strong and independent board is a wise decision that most fam-
ilies in business take once their company’s operations reach a critical size and
complexity. A study conducted in the United States of more than 80 family-
owned companies run by the third or later generation, showed that the exis-
tence of an active and outside (non-family-controlled) board was the most
critical element in the survival and success of these companies.25
43
25 John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
business board to gain the knowledge and expertise that it is missing. Truly inde-
pendent directors will also challenge the family thinking and add more disci-
pline to the board meetings. In addition, the presence of independent direc-
tors during board meetings will discourage family members from wasting valu-
able time on family issues and concentrate on the business strategy and over-
sight instead. Finally, independent directors can also play the “buffer” role
among different family members in case these have contradictory views on
business issues.
44
26 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
BOARD OF DIRECTORS IN A FAMILY BUSINESS
1. has not been employed by the Company or its Related Parties in the past
five years;
2. is not, and is not affiliated with a company that is an advisor or consultant
to the Company or its Related Parties;
3. is not affiliated with a significant customer or supplier of the Company or its
Related Parties;
4. has no personal service contracts with the Company, its Related Parties, or
its senior management;
5. is not affiliated with a non-profit organization that receives significant fund-
ing from the Company or its Related Parties;
6. is not employed as an executive of another company where any of the
Company's executives serve on that company's board of directors;
7. is not a member of the immediate family of an individual who is, or has
been during the past five years, employed by the Company or its Related
Parties as an executive officer;
8. is not, nor in the past five years has been, affiliated with or employed by a
present or former auditor of the Company or of a Related Party; or
9. is not a controlling person of the Company (or member of a group of indi-
viduals and/or entities that collectively exercise effective control over the
Company) or such person’s brother, sister, parent, grandparent, child,
cousin, aunt, uncle, nephew or niece or a spouse, widow, in-law, heir,
legatee and successor of any of the foregoing (or any trust or similar
arrangement of which any such persons or a combination thereof are the
sole beneficiaries) or the executor, administrator or personal representa-
tive of any Person described in this sub-paragraph who is deceased or
legally incompetent,
and for the purposes of this definition, a person shall be deemed to be "affiliated"
with a party if such person: (i) has a direct or indirect ownership interest in; or (ii) is
employed by such party; “Related Party” shall mean, with respect to the Company,
any person or entity that controls, is controlled by or is under common control with
the Company.
45
27 International Finance Corporation, http://www.ifc.org/ifcext/corporategovernance.nsf/Content/CGTools-
FamilyFounderUnlisted.
SECTION IV
SENIOR MANAGEMENT IN A
FAMILY BUSINESS
Senior managers are an essential part of the family business governance
structure and their quality directly affects the company performance and
family wealth. The senior managers are in charge of implementing the
strategic direction set out by the board of directors and managing the
daily operations of the company. Having the right managers at the head
of the company is a key element of family business success.
As the company grows in size and its business operations become more
complex, a more formal management structure, a decentralized decision
making process, and a qualified management body become necessary to
deal with the complexity of the business and the more challenging day-to-
day operations. Unfortunately, many family businesses ignore the need for
professionalizing their businesses and keep senior management positions
exclusively for family members. Although many of these family members
are skilled managers that add value to their business, often they are not
qualified to perform such duties. Even in the cases where all family mem-
bers are good managers, they may not have the specialized skills and
expertise that the growing and more complex company requires.
Successful families in business understand that in the longer term, some
family members should step down and be replaced by more professional
46
and skilled outsiders.
SENIOR MANAGEMENT IN A FAMILY BUSINESS
Ensuring that the family-owned company has the right senior managers is a
process that should start early, even as early as during the founder(s) stage of
the family business. Some of the steps of this process are:
The following table summarizes how family businesses address some employment
issues depending on whether they are prioritizing the family or the business:28
Employment Open door policy for all family Only qualified family members join
Policy members. The family-owned the company. Conditions for
company often becomes a family employment are clearly set
safety net for those who can not and contain requirements
succeed outside the business. concerning education and prior
work experience outside of the
family business.
47
28 Mike Cohn, “Does your Company Put Family or Business First?”, The Business Journal of Phoenix, January 2005.
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
(continued)
Business Business resources are used for Business resources are used strate-
Resources family members’ personal needs gically. There is a clear separation
Allocation (housing, cars, personal of business and family assets.
purchases, etc.) Budgeting and planning are
important; earnings are used for
growth initiatives or paid out as
dividends.
48
SENIOR MANAGEMENT IN A FAMILY BUSINESS
This section of the Handbook will mainly provide some basic advice on estab-
lishing a sound CEO succession planning process within the family business.
Most of this advice can also be used for ensuring a smooth succession for the
other senior managers of the family business.
Families in business might ignore the necessity of planning for the succession of
their CEO for a multitude of reasons. Some of these reasons include:30
49
29Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
30Ivan Lansberg, “The Succession Conspiracy”, Family Business Review, June 1988; Fred Neubauer and Alden G.Lank, The
Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
The CEO succession planning process usually differs from one family business to
another depending on the complexity of the business, the degree of involve-
ment of the family in it, and the availability of competent CEO candidates from
within the family. The following is a step-by step process that can help family
businesses get better prepared for their CEO succession:31
Starting Early: Many family business advisors recommend starting the selection
process of the next CEO as early as when the current CEO is appointed. This will
ensure the continuity of the business and provide the company with a new
CEO that was carefully chosen and well-prepared to succeed to the current
one. The early start of the CEO selection process is particularly important if the
next CEO is expected to be chosen from within the family. In this case, the
process of selecting and grooming the next CEO from the younger generation
would take longer than if the CEO is to be chosen from outside the family.
In most family businesses, it is the current CEO who initiates the succession plan-
ning process. An active board can also play an important role by insisting on
the establishment of a succession plan in case the current CEO is not taking this
on early enough.
50
31 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
SENIOR MANAGEMENT IN A FAMILY BUSINESS
Some family businesses decide to hire an external CEO if no good CEO candi-
dates are available from within the family or its employees. In this case, a com-
mittee of the board (Nomination Committee for example) should lead the suc-
cession planning of the CEO. The committee would start by setting the selec-
tion criteria for the next CEO before searching for suitable candidates. In addi-
tion, many family-owned businesses find it useful to employ professional head-
hunters to get access to a wider pool of candidates.
Seeking Advice: Particularly while narrowing the list of potential successors, the
CEO should get advice from the external independent directors of the board.
If these don’t exist, trusted senior non-family managers should be consulted.
Some families also find it useful to get the opinion of the family council in the
selection process, especially if the CEO candidate is from the family.
51
SECTION V
FAMILY BUSINESS GOING PUBLIC
Going public may offer several advantages to family businesses and their
shareholders, including:
Improvement of the Company’s Financial Position: This is a direct result from sell-
ing the company’s shares to the public. The stronger financial position makes it
easier for the company to seek loans and to negotiate the terms of these loans.
52
32Monica Wagen, “Perspectives on Going Public”, Family Business, Spring 1996; Fred Neubauer and Alden G. Lank,
The Family Business: its Governance for Sustainability (Routledge New York, 1998).
FAMILY BUSINESS GOING PUBLIC
Greater Visibility: Going public gives family businesses increased prestige and
visibility in the market. Markets tend to perceive public companies as profes-
sionally managed and more transparent (audited accounts and periodic pub-
lication of financial statements and performance data). As a result, a family
business that goes public might increase its visibility in the market.
Loss of Privacy: This is probably the most unwelcome outcome of going public
for family businesses. Indeed, once public, the family business will have to reveal
more information than before, including: detailed financial statements and
other performance measures, and any advantages given to family members.
Increased Liability: Public companies have a higher liability than their counter-
parts. For example, public companies have to make sure that all the informa-
tion that they provide to their shareholders and to the market is accurate.
Additional Costs: The initial cost of going public can be quite substantial. Some of
the potential components of this cost are: underwriter’s commission, auditing fees,
legal fees, and any registration costs. In addition, once public, the company will
53
33 Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
incur additional costs such as audit fees, periodic disclosure of financial informa-
tion costs, and any other compliance requirements’ fees for public companies.
54
(e.g., tag-along rights).
55
Conclusion
Family businesses are the backbone and the main driver of growth in many, if
not most economies. Because of their nature, family businesses face many
additional challenges to those that their counterparts have to deal with. Some
of these challenges can be addressed by adopting a sound corporate gover-
nance structure within the company. This governance structure should clearly
define the roles, responsibilities, rights, and interaction among the company’s
main governing bodies.
Finally, it is very important that families in business become aware of the impor-
tance of these issues and start building an adequate corporate governance
structure as soon as possible. Waiting until the size of the family is very large, and
its business operations more complex would make it very difficult to address the
already existing conflicts between family members. A timely and clear gover-
nance structure would make it easier to maintain family cohesion and its mem-
56
bers’ interest in the family and its business.
Bibliography
Craig Aronoff, Joseph Astrachan, and John Ward, Developing Family Business
Policies: Your Guide to the Future (Family Enterprise Publishers, 1998).
Denis Leach and John Leahy, “Ownership Structures, Control and the
Performance of Large British Companies”, Economic Journal, 1991.
Fred Neubauer and Alden G.Lank, The Family Business: its Governance for
Sustainability (Routledge New York, 1998).
John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise
Publishers, 1991).
57
IFC FAMILY BUSINESS GOVERNANCE HANDBOOK
Mike Cohn, “Does your Company Put Family or Business First?”, The Business
Journal of Phoenix, January 2005.
Newsweek, www.msnbc.msn.com/id/4660477/site/newsweek.
Sir Adrian Cadbury, Family Firms and Their Governance: Creating Tomorrow’s
Company from Today’s (Egon Zehnder International, 2000).
58