Creating a governance system

By Grant Robinson
Illustration: John Sapsford

Boards may not be standard in a family-owned business, but with the interest in governance, they’re more common

The majority of chartered accountants in public practice or industry have worked with private companies that are in the truest sense a family business — that is, the ownership is made up of family members who also work in the business. Some family businesses are only such in the broader sense as while not related by blood, the owners have the same issues of a family business. Whichever the category, most entrepreneurs have to create their own exit strategy if they want to have a choice to decide to keep or sell their businesses, and to sell internally or externally. In order to have the luxury of such choices, a governance structure within the business is essential. In other words, the business needs to have a professional system of communication and decision making.

Governance structures include many aspects of the business: a business plan, formal meetings and reporting to annual meetings. Generally, most entrepreneurs pride themselves in leading nimble organizations without formal decision-making systems, as they feel these may lead to too much bureaucracy.

But the reality is, as businesses grow, formal systems are developed. Decision making, often done by working with Mom, Dad or the entrepreneur when the business is small, needs to be institutionalized. As a business grows, the benefit of formal systems is that the entrepreneur can create greater business value by ensuring the business is more than just the person. This is especially critical when siblings and cousins are trying to connect with the business.

But discussing how to build governance structures and make decisions in a more professional way within such ownerships can be difficult, because often mentioning these topics causes the communication lines to shut down.

The topic needs to be broached in an organic way. For example, focusing on advisory boards and annual meetings is a great start. Most entrepreneurs have an advisory board. An advisory board can be something as basic as the owner consulting with a business adviser when major decisions need to be made.

US-based Larry Hause and Cary Tutelman of The Board School, a course designed to help family-operated businesses understand how boards of directors operate, describe boards as fitting in seven levels (please see table on previous page).

Their table illustrates that while there can be an informal or formal system, it is likely that every entrepreneur has an advisory board at some level. And that is the beginning of a governance structure.

Then there are annual meetings. While people may not even remember attending such a meeting or what was discussed, such meetings are recorded and documented with signed minutes, at least once every five years. The idea would be to hold such a meeting with an adviser in attendance and use this to conduct a formal meeting. This is an early step in creating a governance structure.

Entrepreneurs wanting to have the choice of when to sell and to whom need to professionalize their governance structure. Implementing formal structures to bring advisers together to formulate ideas is valuable from a management standpoint. The process of having a formal meeting, where people need to be organized, creates a solid structure and promotes discussion. More specifically, it distracts people from day-to-day matters long enough so they think about and focus on where the company is going, either in the shorter term or in the longer term. A professionalized governance structure also gives the entrepreneur the opportunity to turn the business into a true investment, as the business is not dependent on the owner to make it operate day to day. By doing so, the business is more valuable. Taking time away from the business also ensures the entrepreneur doesn’t get burned out over the little issues.

To create a level two or level three advisory board, it is best to compare the legal and the de facto (see table).

For private companies, it can be difficult to attract outsiders to serve on a board of directors because the legal liabilities that come with a board seat may not seem worth the efforts to a potential board member. However, setting up an advisory board without legal decision-making powers just as a knowledgeable group that understands the business can be a good source of ideas for entrepreneurs, families or management teams, and as such add great value to the business.

When setting up an advisory board, it must be clear what its aim and focus are. For example, its focus could be the operations side of the business, which has a shorter term or a management focus, or, alternatively, it can have a longer term strategic or ownership focus. Many entrepreneurs are comfortable with the management focus on their business and the issues they need to deal with. The real benefits of an advisory board can be the cultivation of an environment where the longer term strategic direction of the organization is examined and an energy created to define the future and find ways to get there.

By creating such a board, the governance structure is enhanced. The advisory board needs information for meetings, an agenda, meeting rules and follow up after the meeting. All this drives a greater professionalism within the organization.

Although some people may need persuasion to join a board, finding people who are qualified for the task is not hard. It’s as simple as just asking someone. In setting up a board, once the focus of management or ownership is determined, it is a matter of seeking out someone who is deemed compatible with the company’s values and who works well in a team environment. It should never be assumed someone won’t be interested, let the person decide. Generally, entrepreneurs are more than happy to serve on advisory boards if they feel they are going to make a difference. And that is key — the board has to be real. In other words, members must feel they are valued and respected as experts and that what they have to offer is respected and will be seriously considered. People don’t sit on boards for the money; they do it for the satisfaction of helping.

As for the entrepreneur, the benefit of a board is that he or she gets an outside perspective of his or her business, a perspective that can be beneficial to the operations or the long-term strategic direction. It gives the owner an opportunity to think of the business as an investment, get a big-picture view of what is happening and where the business is going. The board process increases value to the entrepreneur on a personal energy level and on a financial level.

Such a process also leads to annual meetings. And in this lies a benefit to a business adviser as such meetings are an opportunity to meet all the owners and develop relationships with, for example, the children of the founder or the second- or third-generation family members. And that may lead to expanded business opportunities as well, which may have been difficult if the adviser is an unknown entity. It is a safe meeting, with structure as well as a learning environment where an adviser can share information with family members. In addition, an adviser’s input can help clients create an effective meeting.

A governance structure begins with the use of advisory boards and annual shareholders meetings benefit the entrepreneur and their families. These two tactics are usually a comfortable way for advisers to ensure they meet the owners and at the same time help them create the choice of keeping or selling the business.

Grant C. Robinson, FCA, is a partner with Robinson & Co. LLP in Guelph, Ont. He is also Technical editor for Business adviser