If you ask the directors of a family-owned company how they approach their governance responsibilities, their response is likely to be along the following lines:
- We have meetings every so often, when we can fit them in
- We sometimes have an agenda but typically we just talk about what’s been happening recently in the business to share information
- Our discussions are based on today’s hot topics, typically what the current problems are
- If I don’t understand something I stay quiet and go with the flow
- We leave decisions about strategy and risk to management because they know our operations better than we do
- We don’t burden each other with post-meeting tasks as we’re busy enough already
- We don’t like to talk about where we might be failing as this could cause discomfort and embarrassment
- We use director meetings to catch up with each other on our family lives over a nice lunch
Sound familiar?
I see this casual, ad hoc approach to family business governance all the time.
A lot of family company directors have been appointed solely due to their family connection, which of itself is not an issue. But the key problem with this approach is that it’s extremely unlikely they are satisfying the legal responsibilities and fiduciary duties imposed on them by the Corporations Law as well as a myriad of regulations from other statutes including Fair Work, Safe Work, privacy and data protection laws, tax department or environmental laws.
As the US Gulf War leader General Norman Schwarzkopf might have put it, they are “unconscious incompetents”. Not only don’t they know what they need to know, they also don’t know that they don’t know.
Being a company director is a serious undertaking. Directors need to have a thorough understanding of their legal obligations, not least because of the penalties they could be exposed to. Unfortunately the Australian courts have regularly been busy dealing with directors who are insufficiently aware of these responsibilities.
But an equally significant problem is that these family companies don’t have the benefit of proper oversight of their business operations. A family business can get away with this approach when they are micro or small, but as they grow and their operations become more complex, oversight of management becomes critical. Strategic business decisions can be made without proper examination of potential outcomes or risks; management is not held to account for those decisions; and unwise or unhealthy business practices can be fostered. In extreme cases, directors can effectively be held hostage by management, or pushed aside as irrelevant.
So, what should family company directors do to avoid this situation?
- Director education
It’s never too late for directors to educate themselves.
There are a variety of resources available to family company directors to help them upskill in the knowledge they need to fulfil their duties. Formal education can be obtained form the Australian Institute of Company Directors, or specifically relating to family businesses, the Family Business Association. These courses tend to take a one-size-fits-all approach, so seeking a more tailored approach to director education is worth considering. For example, Family Boards offers comprehensive and tailored training to educate family company boards on their director responsibilities and best practices.
2. Governance tools
Governance tools (ie processes and policies to drive best practices for boards) can greatly assist directors to fulfil their duties, guide their decision-making and properly consider strategy and risk. Some examples include:
- Board Charter: a detailed list of rules and protocols company boards should employ such as setting agendas, conduct of meetings, preparation of board papers, roles and responsibilities, approach to risk assessment, role of the Chair, and how the board will interact with management.
- Risk Appetite Assessment: a key board responsibility is to agree and set the risk appetite of the company. A proper assessment of risk appetite provides guardrails so that a pre-approved approach to risk applies in all major decision-making.
- Code of Conduct: how the board agrees it will operate as a team, including expected behaviours and consequences of breaches.
- Conflict of Interest Processes: how the directors will identify potential conflicts, when and how directors are expected to notify conflicts when they arise, and how to deal with conflicts which are identified.
- Delegations of Authority: defining who is responsible for making which decisions (ie directors, shareholders or management) and setting financial parameters for those decisions.
Family Boards has a long history of assisting family companies to develop the tools and processes that are essential to good governance.
Robert Powell FCA GAICD is the founder and managing director of Family Boards Pty Limited, a specialist consultancy helping family companies achieve best practice in succession planning, wealth transition, board governance and risk management. He is a Chair of the business leader peer support group Leadership Think Tank Australia, an accredited specialist adviser member of the Family Business Association (AU), a Graduate of the Australian Institute of Company Directors, and a Fellow of Chartered Accountants Australia & New Zealand. He can be contacted at Robert@familyboards.com.au
