Ideas & Debate

Want to corporatise family business? Bridge the gap


I’ve had a lot of discussions recently with second generation family members who wish to “corporatise” the family business founded by their parents. Having been well educated and widely read and, in some cases, having worked for corporates themselves, they see the danger of not setting up organisational structures that will ensure the business remains sustainable for future generations.

In almost all the cases the ageing parents are still active in the business and naturally wary of allowing “outsiders” into key decision making positions that may affect the trajectory of the tightly run organisation.

But first things first. The verb corporatise means the process of converting a state organisation into an independent commercial company. In many ways, family businesses are like state organisations. Funding comes from the government [founders] and decisions on who gets to run the organisation are made by the government [founders] that can control the appointments of the executives and the flow of dividends back into their own coffers, if at all a dividend is declared.

Second generation family members are like a privatisation commission: Look, let’s sell this company to those who can bring in efficiencies and run this place much better than we can. Why? Because we are simply not interested in running this place any more and are happy to sit back and receive the dividends off someone else’s sweat in some instances, or if we are interested, then we recognise that we don’t have all the answers and perhaps an outsider can help us find the answers [in the form of an independent board of directors] or deliver the solutions [in the form of an independent chief executive officer and senior management].

Last week I wrote about the concept of an advisory board, which is a non-binding and non-legal structure that allows a family to create the semblance of a corporate governance structure, while maintaining family independence. Advisory board members would be subject matter experts and deeply experienced in their areas of expertise, giving the family non-binding but valuable insights on issues such as strategy, risk assessment, internal controls, product and route to market innovation as well as financial performance. Since the advisory board members are not registered as statutory directors in the Companies Registry, they should not bear fiduciary or legal responsibility for the company.

But how does one deal with a cantankerous founder who would want to remain as “chairman” even on the advisory board? Borrowing from the jurisdiction of the United States corporate governance jurisprudence, it may be useful to appoint a ‘lead director’. This position emerged following the early 21st Century corporate scandals such as Enron and Worldcom in the United States and was found to be an excellent bridge for independent directors where the fairly common role of chief executive officer and chairman were combined.

The lead director acts as a liaison between the independent directors and the chair and where it works well, actually takes the lead in formulating the board agenda in collaboration with the chairperson and advises the chairperson on the amount, content and timeliness of information given to the board.

By ensuring a healthy communication flow, the lead director can help the chairperson get comfortable with the concept of receiving external insights and guide advisory board members on what their responsibilities are relating to the role. The family can ensure that the lead director’s letter of appointment clearly expresses his or her role and responsibilities to avoid blurred lines and the danger of overstepping his or her mandate, not to mention pissing off an already wary founder chairperson!

It is imperative that the lead director is not an old family friend, someone who may tread gingerly around the chairperson like a cat on a hot tin roof when critical issues need to be discussed or brought to the advisory board’s agenda.

However, the lead director should be a person of significant gravitas, senior enough to command the chairperson’s as well as other family members’ respect, and has the commensurate business experience as well as emotional intelligence to provide effective leadership, build consensus and facilitate discussions sagaciously.

And maybe, just maybe, the advisory board can gently begin to encourage the founder to relinquish day to day management of the business and move to a more non-executive chairperson role that allows him to have his nose in, but fingers out.

[email protected] Twitter: @carolmusyoka