Lessons from the pirates: Governance

August 15, 2018

By Danielle Walsh

Photos © www.bigstockphoto.com[1]
Photos © www.bigstockphoto.com

In Captain John Phillips’ pirates’ code of conduct, one important rule related to governance:

1. Ye Captain shall have full command during the time of engagement, and shall have authority at all other times to conduct the ship accordingly. He who disobeys him may be punished unless the majority vote against the punishment.

There was a clear governance structure aboard the ship. The captain had full control over the vessel and all others had to obey. Interestingly enough, however, the ship was run with a certain amount of democracy—punishments for disobedience could be avoided with a majority vote.

Holding regular management meetings keeps both family and nonfamily managers involved in decisions related to the business.[2]
Holding regular management meetings keeps both family and nonfamily managers involved in decisions related to the business.

In a family business, governance is often less clear and more complex. Being the leader of the family business rarely means all other family members obey and follow orders. Further, while the captain only had to govern the pirates, a member of a family in business has to govern the entire family, the ownership group, and the business as a whole (including employees and managers). This means governance in a family business is likely to be more cumbersome than that onboard Philips’ ship, the Revenge.

Each element—the family, the business, and the ownership group—needs to be governed in a different way. The objective and frequency of meetings, decision-making mechanics, and topics to be discussed vary greatly for each. This needs to be reflected in the family business rules.

Governance of the family: Family council

The purpose of a family council is to provide a communication forum allowing the whole family (including direct and indirect as well as active and non-active family members) to learn more about the business. It should also give them an opportunity to express their views on family issues that impact the business, as well as business issues that impact the family. Family councils are typically comprised of the broader family, which can include spouses, in-laws, children, grandparents, and grandchildren.

Given the potential size and composition of the family council, these meetings are typically held annually or every couple of years unless the business is in succession/transfer mode, in which case they may be required more frequently. Family council meetings are most effective when they focus on keeping family members informed of the ‘big-picture’ issues. They are not intended to be used as a decision-making forum for day-to-day business issues or for succession issues, but should inform, educate, and obtain feedback from the broader family on specific issues of interest to all family members. These might include employment and management opportunities available in the family business or an overview of the strategic plan for the next five years.

Typically, a chair of the family council is elected at the first meeting. This individual can be active or non-active in the business and is in charge of:

In larger families, a committee may be required. Many families in business also choose to include the chair of the family council on the board of directors (BOD). This way, he or she has a forum in which to discuss the budget and any issues to be brought forward, and can gain a better understanding of the business. This also creates a formal link between the family council, which governs the family, and the BOD, which governs the ownership of the family business.

Governance of the ownership group: Board of directors or board of advisors?

Families in businesses that are incorporated are legally required to have a BOD. However, this is often just one person (the current owner) or a small number of people (current owners). Much research stipulates for a BOD to be effective, it should include individuals from outside the organization[3] as well as outside the family—in other words neutral third parties with a required skill set. What this skill set is depends on what the business and leaders are lacking, but typically, the third party is a legal, accounting/financial, or other industry expert.

Employment and management opportunities available in the family business are one of the topics that could be discussed at family council meetings.[4]
Employment and management opportunities available in the family business are one of the topics that could be discussed at family council meetings.

In my experience, most owners of small- to medium-sized businesses are uncomfortable with the idea of bringing outsiders in, not to mention afraid of losing control of the business and the family. In these cases, the ideal solution is to create a board of advisors (BOA). The BOA would have the same goals as the BOD (e.g. general oversight, review of financial status, and development of long-term strategy), but would not have the legal liability that comes with being a member of the BOD. The BOA essentially allows the family business to benefit from trusted outside expertise without risking independence and autonomy. (Click here[5] for a case study example.)

Whichever structure is used, the important thing is to ensure all members clearly understand the purpose of the board, how decisions will be made (majority or unanimous), and what is expected of each individual before, during, and after each meeting.

Governance of the business: Management meetings

The governance of the business is done through management meetings. In many situations, the managers are also the owners of the family business, meaning the BOD and the management team may have some overlap. In some cases, these are all the same individuals and therefore, both governance structures are combined into one.

However, when there are different players involved in the management team, it is important to keep it separate from the BOD and to ensure the purpose of each is clear. Maintaining proper management meetings amongst all managers is key to the overall success of the business, but it also plays a crucial role in retaining top nonfamily managers. Far too often, nonfamily managers feel all important management decisions are made at the dinner table and they therefore don’t get the opportunity to participate.

A family business’s board of directors (BOD) is often small, but including individuals from outside the family can increase its effectiveness.[6]
A family business’s board of directors (BOD) is often small, but including individuals from outside the family can increase its effectiveness.

By holding formal weekly or bi-weekly management meetings, one can ensure the nonfamily managers are kept in the loop and are empowered by participating in decision-making. The family business rule relating to governance of the business should outline the frequency of management meetings, who will chair them, and the expected behaviours of family managers involved.

All hands on deck

The pirates only had one rule related to governance. However, it was clear and concise, and it ensured all pirates had the same expectation as to how the ship would be led. A family in business will need more than one rule to cover all three aspects of its operations (family, ownership, and business), but the key to success is to ensure all family members, owners, and managers have a clear understanding of each structure, its objective, the decision-making mechanism, and appropriate topics of discussion.

The pirates were able to govern the Caribbean waters for decades with a set of 10 rules. With its own comprehensive set of rules, a family in business can successfully govern the business and the family for generations! The trick is to take it one rule at a time.

Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate the rough waters of management and ownership succession. She is a certified public accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh is also president of the Ottawa chapter of the Family Enterprise Exchange. She developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via e-mail at danielle@walshfbas.com.

Endnotes:
  1. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2018/08/bigstock-Businessman-with-tricorn-and-b-225576154.jpg
  2. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2018/08/bigstock-Group-of-cheerful-business-peo-182171311.jpg
  3. include individuals from outside the organization: https://hbswk.hbs.edu/item/organizing-the-family-run-business
  4. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2018/08/bigstock-Young-shop-assistant-with-beau-228735721.jpg
  5. here: https://digital.ffi.org/editions/governance-family-or-business-first/
  6. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2018/08/bigstock-Five-Businesspeople-At-Boardro-4132768.jpg

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