The power of governance in family business

Choosing the right family and corporate governance structure is closely linked to how strongly the family members identify with the business and is one of the keys to long-term success for many of these firms.

In the Successful Transgenerational Entrepreneurship Practices (STEP) 2019 Global Family Business Survey (PDF 19.8MB), planned and developed through a strategic alliance with KPMG Private Enterprise, survey participants were asked about family and corporate governance structures, the number of governance tools used in their family businesses, and the relationship between the use of governance tools and the entrepreneurial orientation and performance of their firms. A full 88 percent of family business CEOs surveyed have a medium- to high-level of identification with their business.

In recent months, the family/business kinship has perhaps become even more profound as business families confront the new reality. Many are taking this time of momentous change to reflect on the purpose of their firms and a renewed vision of the roles that the business and the family can play in broader society. The importance of the non-financial priorities of a family business, or its socio-emotional wealth, are one of its key differentiators and long-term competitive advantages. It isn’t surprising then, that many family firms are reflecting on their business purpose and family roles.

A number of family CEOs who participated in the original 2019 STEP survey were interviewed again in the late-spring and early-summer of 2020, helping us to understand how COVID-19 might have affected their views on family governance. As we heard, having a good governance structure in place, along with an established contingency plan, were two key factors in helping them sustain their business and maintain leadership continuity in response to urgent family health concerns.

These in-depth interviews with family business leaders across the globe have provided us with firsthand and profound perspectives on the factors that are impacting the performance of family businesses. I encourage you to read their stories in a series of articles co-authored with the STEP Project Global Consortium to be published on the KPMG Private website in October.

Decisions about the path forward, with family values as the foundation, are important and complex. At their heart, family governance structures should be seen as critical tools to help families communicate, solve problems, and make decisions such as this about how the family will affect the business, and the business will affect the family.

Business families generally prefer family governance structures over corporate governance structures that tend to emphasize the role of the board more that of the owner and family. North America was the only region where family business leaders preferred using corporate governance structures.

The STEP Project 2019 Family Business report found that commonly used family governance tools include professional outside consultants, a family employment policy, and formal family meetings. Other tools include family assembly, a family mission statement, a conflict resolution policy, and a formal family council. Nearly half (45 percent) of all family businesses worldwide use only one family governance tool; 22 percent adopt two tools and 33 percent use three or more. Family businesses in North America are the most likely to use three or more tools, with 54 percent reporting this.

The STEP Project 2019 Family Business report also highlighted that family businesses adopt corporate governance tools at a similar rate to family governance tools. The corporate governance tools adopted most frequently include having women on the board (31 percent), establishing a formal succession process (16 percent), implementing family bylaws (16 percent) and setting up a formal board of directors (11 percent).

One interesting finding in the STEP Project 2019 Family Business report was that the use of family governance tools increases the sense of family members’ identification with the business. In particular, family businesses that adopt three or four corporate governance tools show higher levels of entrepreneurial orientation and performance compared to family businesses that only adopt one tool. In addition, KPMG research shows that the number of business families choosing to adopt a family constitution or code of conduct are increasing, indicating that they understand the benefits of a shared vision in helping avoid conflicts. Given that consumers tend to have higher levels of trust¹ in family businesses, it’s reasonable to conclude that this trust stems in large part from the entrepreneurial orientation and unity of purpose that has made these businesses successful over the long term.

There is also a connection between family business size, maturity, and type of governance structure. Family businesses run by the founder or the second generation are more likely to rely on family governance structures, while family businesses that have been successful over several generations tend to adopt governance structures² closer to those seen in publicly held corporations. Likewise, KPMG Private Enterprise research (PDF 2.73 MB) has found that smaller family businesses were more likely to have shareholder agreements, while larger family businesses (those employing more than 250 people) tended to make use of boards of directors in their governance structures.

Because many family businesses succeed or fail based on the strength of the relationships between family members, it shouldn’t be surprising that the report highlights the beneficial effects of socio-emotional wealth of running a family business, referenced earlier. Family businesses that placed more importance on structural aspects tended to have lower levels of entrepreneurial orientation and performance. As well, family businesses with autocratic leadership and a top-down management style are actually less likely to have a structured business governance and succession plan, perhaps due to the dominant leadership typical in the family’s and business’s lifecycle.

Globally, the report showed that only 50 percent of family business leaders are satisfied with their current governance structure. The remaining half believe that change is needed to achieve greater growth. Family businesses in North America and Europe & Central Asia are the least likely to see the need for change in the way they govern their family businesses. North America, as was mentioned earlier, was also the region where family businesses were most likely to use three or more family governance tools.

The connection between family governance tools, the degree to which family members identify with the business, and family business success and growth cannot be denied. The research clearly shows that using more than one family governance tool is ideal; it also leads to higher levels of entrepreneurial orientation and, ultimately, improved business performance.

Family governance matters. With the right structure and tools in place, it’s a powerful way to strengthen family ties and boost performance. For many family businesses, it appears that the current governance structures simply aren’t adequate and may need closer scrutiny based on what the world has learned in response to COVID-19.

>> Download the STEP Project Global Consortium 2019 Global Family Business Survey (PDF 19.8MB).

Interested in learning more about how KPMG Private Enterprise can help you identify and develop the family or corporate governance structures that are right for your business family? Contact your KPMG Private Enterprise adviser or find a KPMG Private Enterprise Family Business adviser.