In the corporate world, where competition is based on profit generation, poor governance remains a thorn in the sustainability of family-owned businesses. According to McKinsey data, nearly two-thirds of major businesses are family-owned, contributing between 50% and 70% of global employment. However, poor governance, which primarily stems from ineffective policies and family wrangles, often overrides major decisions, posing a significant threat to the existence and expansion of these forms of business.
What does Family-Owned Business Entail?
In the view of Warren Buffett, a family-owned business is one that can preserve long-term growth, sustainability, culture, and values in the face of transition or acquisition. This view means that this form of business must protect the founders’ legacies, even if it is acquired by other investors.
However, the central question that arises from this contemplation is why these businesses are not preserving the legacies of the founders. The answer is one ‘poor governance.’
Poor Governance as the Central Impediment to the Growth of Family-Owned Businesses
Poor governance has been cited by many entrepreneurs as a key factor in the failure of family-owned businesses. Poor governance is evident not only in the firing of employees but also in the failure to meet expected goals. Consider Eaton, once Canada’s giant store chain, which collapsed due to poor governance. Members of the family become more conservative and resist change when it is needed.
Why Poor Governance is the Real Cause of the Collapse of Family-Owned Business
Poor governance is a significant factor contributing to the decline of family-owned businesses. This mainly arises from incidents of resource misappropriation, which in turn causes businesses to incur losses. Apart from indecisive actions, poor governance also subjects businesses to conflict over who should take over after the departure of the owner or founder.
The statistics indicate that in some cases, only 30% of businesses owned by families are passed down to the second generation, while only 12% reach the third generation, and just 3% reach the fourth generation. This is a clear demonstration of how poor governance is a disease that must be healed to protect the family-owned businesses.
Poor governance also renders the business vulnerable to a lack of a clear strategy. In the evolving business landscape, a business without a clear strategy may lead employees to work against the set objectives. This means that any governance initiatives the business may adopt might not materialize due to a lack of interest from the subsidiaries or stakeholders.
What Needs To Be Done to Ensure the Success of Family-Owned Businesses?
With the evolution in the business landscape, businesses need to adapt quickly and establish structures that enhance formal governance. This is necessary to facilitate an effective transition if required. Succession planning, balancing family dynamics, and fostering accountability and transparency are also necessary to prevent cases of mismanagement.
A Call into Action
Poor governance is a serial killer of progress in family-owned businesses. However, with a clear path defined with formal structures that instill formal governance, family-owned businesses have an opportunity to learn from past failures and chart a proper way towards prosperity. There is nothing more important than protecting the legacies of the business founders. This can be achieved by adopting effective measures, such as those outlined to protect family-owned businesses, as they are the backbone of many economies.
