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Chapter 9 Family-Business Governance
Learning Objectives
1. To discuss the role of several governing bodies that research and practice suggest
help keep family businesses healthy.
2. To review the requirements and practices of effective boards.
Chapter 9 Essence
As discussed in Chapters 3 and 4, ownership structure and different classes of stock
(e.g., voting and nonvoting) are essential to effectively governing the corporation across
generations of owners. Boards of directors/advisory boards, family councils, family
foundation for effectively governing the interaction between ownership, management,
and the family.
The difference between a board of directors and an advisory board is important and is
thoroughly discussed in Chapter 10 of Family Business, 3e. This is particularly true in the
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A family council is a governing body whose primary function is to address family
matters: the education of family members, information and communication on estate and
A family assembly creates additional participation opportunities for family members,
especially in larger multigenerational business-owning families. Family assembly
meetings are usually limited to one a year.
Discussion Questions
1. Why are boards with independent outsiders deemed so important to family–
business competitiveness and continuity?
Outsiders with a commitment to the company can add perspective, problem-solving
2. What contributions can a board make to a family-owned business?
A board can help by:
Reviewing the financial status of the firm.
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3. What steps can a family-business CEO take to make the board most effective?
Recruitment and selection of board members, especially the selection of the first
independent outsider, is critical.
The preparation of a board book to provide new board members with an
orientation on the company and its owners is very helpful in ramping up the
4. What should the criteria for board member selection be?
Integrity.
current situation is at the heart of board leadership. Acting as a corporate
conscience on ethical behavior, while recognizing multiple stakeholder interests is
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5. What do effective board members do?
They ask challenging questions that open up the business to an outside
perspective and help it adapt to changes sooner; given the high rate of change in
6. What impact has Sarbanes-Oxley had in the corporate governance of family
companies?
As a result of a growing incidence of corporate fraud detected, on July 30, 2002, the
U.S. Congress passed and President George W. Bush signed into law the Sarbanes
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To the extent that Sarbanes Oxley does not directly apply to family-owned and
privately held companies, the assumption has been that it is of no consequence to
these companies or their boards. Nevertheless, there is growing anecdotal evidence
that banks and private equity firms, for instance, are in some cases expecting of their
clients the same level of transparency and compliance mandated by Sarbanes Oxley.
(In the absence of formal compliance, a functioning audit committee of the board, or
evidence of best practices in internal controls, a bank client may be forced to assume
higher lending rates and fees on their corporate borrowing.) Finally, because state law
7. What are some other suggestions for initiating a board and increasing the odds
of having it be effective?
One suggestion is networking through trusted professionals, industry groups, local
universities, and community organizations for candidates. Also, consider
relationships established with business people in other situations as sources.
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8. What is the role of a family-business consultant, distinct from that of a board
member, in promoting better governance of the family-business relation?
Many smaller family-owned businesses that do not have a board of directors with
outsiders and have not convened an advisory board claim that individual advisors
attorneys, accountants, financial planners, business consultants, psychologists bring
Discussion Questions for the Chapter Resource: Sample Family
Constitution
1. What does this family constitution state is the desired relationship between
the Kropps Family and Kropps Companies management?
commitment to the continuity of the business.
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2. What benefits might nonfamily management derive from this family
constitution?
Nonfamily managers can expect more fair and equitable treatment affecting
compensation, career advancement, and opportunities for influencing the direction of
3. What are some of the implications of this family constitution for family
shareholders of Kropps Companies?
There is a clear statement of intent to keep Kropps a family-owned and family-run
business. The constitution commits the family to the continuity of the business while
4. What bodies or institutions does this family constitution rely on for
effectively governing the relationship between owner-managers, family
shareholders not active in management, and nonfamily managers at Kropps?
–
generation committee, the top management team, and the family assembly are the
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Relevant Case Resources
The Binghams and the Louisville Courier-Journal Companies case is a dramatic
example of the absence of effective governance and its potentially devastating
consequences. The Fasteners for Retail: A Question of Succession, The Vega Food