By Prof. Enrique Soriano
We are seeing more family owned businesses or FOBs interested in corporate governance today than we did a decade ago. But there are still many challenges confronting FOB’s in Asia. A founder centric and emotional nature of a family fused with the need to survive and grow a business makes it doubly difficult for a family advisor to institute governance in a reactive board. Adding to the dilemma is a family first mindset where the mantra is to keep family members happy regardless of the consequences. Other issues that breeds confusion is a culture of maintaining family relationships at all costs where every family member must stay loyal to each other. Compounding all these problems is the avoidance of family members to make changes that upset the traditional way the family does things. When you mix all these family dynamics and place them in a reactive board, it now becomes a volatile brew.
As promised in my previous article, I am sharing the implications of having an all family member cast in the Board:
a. Conflict of Interest issues are pervasive. This breeds a lot of ethical dilemmas by distorting decision making of family members protective of their own individual interests. I have sat on many boards where the personal interest of some family members clashes with what is good and beneficial to the company. The concept of fiduciary duty or single minded loyalty to the company is thrown out of the window effectively undermining the board’s decision and by extension the entire business ecosystem.
b. Mixing family needs and business needs. Founders, business owners and family members always assume that company assets belong to the family. From an ownership perspective, they are correct but from a governance perspective, company resources and assets should be used solely to grow the business ergo enhancing shareholder value. Unfortunately, some family members look at the business as their personal “ATM’s” or money faucet where they can conveniently depend on for support. Draining the coffers of the business for personal use can impact the company’s cash flow and ultimately its viability.
c. Tendency for board decisions to be biased, emotional and subjective. In a board where all members are related by blood, there is no semblance of objectivity. It is expected that family members who are co-owners (passive and active), qualified or not but with equal power will eventually clash. Differing family member goals and expectations plus jealousy and interference from some disgruntled family members (and their in-laws) can compromise board level decision making. As what family business experts Iqbal, Pendergast and Herrera mentioned in their Harvard business review article, “unlike their public-company counterparts, which focus mainly on increasing shareholder value, family business boards must act on behalf of shareholders with multiple and potentially conflicting agendas.”
d. Strong dependence on the patriarch/leader. In most cases, business owners find themselves swamped with operational issues mostly petty day to day activities instead of focusing on strategic thinking. In the end, board meetings are transformed into family gatherings without any agenda. Additionally, the degree to which the business depends on one individual, namely, the principal owner-manager, substantially affects how well a family board works. In a reactive board, submissive family members will always defer to the key business leader for any decision. There lies the problem.
The COVID-19 pandemic is the worst crisis that FOBs will ever face in their lifetimes. It is therefore critical to have qualified members of the board who can provide support to its leader. A working board composed of competent and experienced non-family members act as a platform in generating a mindset that highlights “big picture thinking” and navigates family members in looking at the “forest rather than the trees”. That is what an authentic board really provides.
To be continued…
