Home' Charter : 1011 Charter Contents 40 Charter I October 2011
Opinion > Enterprise
Few family businesses have independent
directors on their boards.
Sue Prestney FCA
Irecently attended an interesting symposium
on family business research and education
organised by Family Business Australia.
Many of the papers presented at that
symposium concerned family business
governance. This is clearly a hot topic,
where the disparity between accepted
best business practice and what family
businesses actually do (and want to do) is
very evident. Family business attitudes to
boards of directors is a good example.
The MGI Australian Family and Private
Business Survey 2010 conducted by RMIT
University found that only 42 per cent of family
businesses responding to the survey had a
board of directors. A 2011 survey by KPMG
and Family Business Australia also found that
more than half of the surveyed frms did not
have a board or governing body.
PROTECTING FAMILY INTERESTS
We know from working with family
businesses that many appoint just the one
mandatory director, after ensuring as far as
possible that asset protection measures
are in place for that person. This leaves
other family members protected from the
potential application of the Corporations Act,
particularly in respect of insolvent trading,
and the need to provide personal guarantees
to fnanciers. They understand that the
directors’ obligations under the Corporation
Act extend to people who, although not
appointed directors, act as directors. So it is
no surprise that families in business go out
of their way not to have boards of directors
or, indeed, have any governing body or
gathering other than management meetings.
For families in business, protecting family
assets is critical, bearing in mind that many
have already mortgaged their homes to
support funding for the business and cannot
afford further exposure.
The MGI survey also found that, of those
family businesses that did have boards,
46 per cent were composed of just two
persons. It is probably safe to assume that
many of these were mum-and-dad boards.
Very few (15 per cent) of the respondents
to the MGI Survey with boards had non-
family board members. The main reason
given for this was privacy – families are
generally inherently private about their
fnancial position (even between each other)
and this extends to their business.
We know the benefts that outside
directors can provide to a family business.
It is a way the business can gain access to
new skills and fll in gaps in the knowledge
base and experience of family members,
including knowledge of governance issues.
Just having an experienced external board
member can ensure the board pays attention
to big-picture issues, such as strategy and
risk management, rather than focus on
operational issues. They can also provide
access to new networks, giving the business
entrée to new customers, new markets and
people of infuence.
Non-family directors give a family business
board a degree of objectivity in relation to
family-in-business issues. Decisions such
as the employment of family members, their
remuneration and performance, entitlements
and dividend policy can then be made on
an apparently more objective basis, taking
the pressure from the owner/managers, who
will most often be dad and/or mum. Such
decisions are then more likely to be accepted
by family members with less kitchen-table
lobbying. A suitably experienced non-family
board member can also provide a valuable
sounding board for an often-isolated owner/
manager and a mentor to successors.
While there were other factors contributing
to the lack of external directors, privacy was
by far the main reason given by 53 per cent
of respondents to the MGI survey. Given
the advantages that external directors can
provide, forgoing these is a big price to pay
for privacy. Yet that is the decision that many
family business owner/managers have made.
The KPMG survey found that family
business participants to their focus groups
were concerned about the cultural distillation
that may result from having non-family
directors and senior executives. As family
businesses are often an extension of the
personality and values of the owners, it is
not diffcult to understand how important
personal cultural preservation is to them,
even if preserving it means the business is
less than optimally managed.
SACRIFICING FINANCIAL AMBITION
The MGI survey found that 72.5 per cent of
respondents had not fully implemented the
practice of planning for the ongoing growth of
the business. Indeed many family businesses
eschew growth maximisation, preferring to
keep gearing and risk to a minimum. This
may not ultimately be in the best interests of
the economy in general, where employment
and taxation revenue beneft from businesses
maximising their full potential. In the trade-off
between the desire for growth maximisation
and maintaining the privacy, security and
culture of the family, it is the fnancial ambition
that is frequently sacrifced. In recognising the
enormous contribution family businesses make
to our economy and our culture, we need to
acknowledge that there are other valid reasons
for being in business than purely fnancial gain.
There is no doubt that much can, and
should, be done to improve governance and
management of family businesses without
it impinging on their autonomy or culture,
through family business constitutions, real
boards and strategic planning.
However if family businesses fail to adopt
best business practices, it is often because
they have values and culture that they feel are
more important to protect. For those of us who
are their suppliers, customers and employees
this is often hard to argue against.
Sue Prestney FCA is from MGI Melbourne and is
the Institute’s spokesperson on SMEs.
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