How does Corporate Governance fit into a Family Business?
1. What is Governance?
It is widely written that the concept of governance evolved around 3,500 year ago from the ancient greek word “Kubernetes” which means the person giving steerage or direction to a ship.
Corporate governance came into focus in the 1990’s in the UK initially with the Cadbury Code which was aimed at listed companies and looked at standards of corporate behaviour and ethics. This was then developed through the subsequent years with the UK Corporate Governance Code finally coming into effect in June 2010. In Ireland the Companies Act 2014 lists out the general duties of a Director.
There have been many examples in the past 25 years of significantly high profile major failures of corporate governance which have brought the subject further into the spotlight. Lord Cadbury is quoted as saying “Corporate Governance is the system by which companies are directed and controlled” and in 1992 Peter Drucker observed “In every single business failure of a large company in the past few decades the board was the last to realise that things were going wrong”
2. Family Governance vs. Corporate Governance
It is important in a family business that there is clarity between corporate governance and family governance. This would be particularly true where the family business is multi generational and some shareholders may be working in the business and others may not.
It is important that each family member who has a shareholding feels that they have a voice and this voice is being heard in relation to the business. Two of the key ways of dealing with family concerns are:
- The Family Council
- The Family Charter
1. The Family Council is a group of family members who would meet to discuss family issues separate to the business. These meetings would focus on any family issues that may arise and ensuring these issues do not impact on the business.
2. The Family Charter effectively sets out the families position and a number of issues in relation to the business including how the family and the business interacts, the vision for the business and any policies in relation to the family members relationship with the business. The Family Charter will also set out the number of family members who will be board directors of the company and agrees a procedure for family members to become directors of the company.
Benefits of the Family Charter are that all the key issues are set out clearly for all members to understand and all members can have an input into the family charter. We will revisit Family Council and Family Charter in more detail in a later blog.
3. Who can be on the Board of Directors?
Typically the board of directors would consist of family members as agreed by the family charter, senior management, (typically the MD and FD) (who may also be family members) and where appropriate independent non executive directors.
The articles of association or constitution may give guidance as to the number of members on the board of directors. If not it is generally accepted that the board should be big enough to be effective, however, not so big that it cannot function.
It is generally accepted as best practice for the role of chairman and managing director to be separate. However at times in smaller companies, this may not be possible and the board may have to take steps to ensure it can function effectively. Under the Companies Act 2014 there is no difference between the statutory duties of an executive and non-executive director.
A non-executive director is typically a director who has been appointed to the board and who is registered as a director with the company’s registration office, however, is not involved in an executive position within the company and performs this role on a part-time basis.
4. The Key Role of the Board of Directors.
Typically the board of directors will focus on four key areas:
- Establish the vision, mission and values of the company.
- Sets the strategy and structure for the company.
- Delegate authority to management and evaluate and monitor the performance of senior management.
- Exercise accountability to shareholders and be responsible to the relevant stake holders.
5. General Duties of a Director under the Companies Act 2014.
In general a director must:
- Act in good faith in what the director considers being in the best interest on the company.
- Act honestly and responsibly in relation to the conduct and the affairs of the company.
- Act in accordance with the company’s constitution and exercise his or her powers only for the purpose allowed by law.
- Not use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless this is expressly permitted by the constitution or approved by resolution of the members in general.
- Not agree to restrict the director’s power to exercise an independent judgement unless this is expressly permitted by the company’s constitution or the director believes in good faith that it is in the interests of the company to fetter his or her discretion or the director’s agreement to so restrict is approved by the company in general meeting.
- Avoid any conflict between the director’s duties to the company and his or her other (including personal) interests, unless the director is released from this duty in accordance with the constitution or by a resolution of the members.
- Exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director and the knowledge and experiences which the director has.
- In addition to the general duty owed to employees, have regard to the interests of its members.
There continues to be increased focus on corporate governance and this trend is expected to increase. From a family business point of view, it is proven to be effective and productive to separate the governance of the family from the governance of the company and to setup a board of directors who drive the direction and performance of the company.