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Supervisory board members at family businesses need to be extra alert

Category:
Family business challenges

Date:
23 January 2020

The steady growth in the number of larger family businesses appointing a supervisory board is viewed as a positive trend by Professor Roberto Flören, a lecturer in Family Businesses & Business Succession at Nyenrode Business University – with the caveat that the specific dynamic inherent to family businesses makes special demands on supervisory board members. “A clear-headed and impartial view from the supervisory board can be a very valuable thing.”

Contrary to what some might believe, family businesses do not differ fundamentally from their non-family counterparts: like any other business, they need to compete in the market, attract funds from banks or investors, and engage in innovation in order to remain viable. Yet research shows that family businesses do vary from other types of companies in a number of ways. For starters, they generally perform better financially and tend to have a different type of governance structure than other businesses. “A recent study conducted by Thomson Reuters and Credit Suisse shows that, since 2006, investments in European family businesses have on average been nearly 5% more profitable on an annual basis than investments in non-family businesses,” Roberto Flören says. “Family businesses with revenues of up to 300 million euros tend to do especially well, on average.”

As regards alternative governance structures, Flören cites an earlier survey from 2013, which revealed that many family businesses deliberately do not appoint a supervisory board because they simply have no use for outsiders looking over their shoulders. Flören: “If you look at, say, companies that employ at least 200 people, 60% of non-family businesses have a supervisory board, compared to only 20% of family businesses. I would add that the same study revealed that the vast majority of family businesses with mature corporate governance structures were very satisfied with that set-up.”

Stepping up their game
As Flören explains, there are several signs indicating that more larger family businesses in the Netherlands have appointed a supervisory board in recent years (to the extent that they weren’t already required to do so by law as dual-board companies). He has also found that existing and new supervisory boards are stepping up their game, based on information gathered from the Nyenrode Supervisory Board Cycle (he lectures at Nyenrode Business University four times a year) and the Nyenrode Community of Supervisory Board Members. Flören: “At a Community meeting this year, I addressed seven issues of which supervisory board members at family businesses should be keenly aware. These are issues that specifically affect family businesses and which might be somewhat off the radar for ‘regular’ supervisory board members.”

The first of these issues is the question of whether the company is not overly dependent on the founder and their drive for innovation. “Especially with first-generation family businesses, it’s often the founder who has developed the company into what it is today and who therefore tends to hold great sway over the other members of management,” Flören says. “However, it’s important that the management is able to operate independently from the founder and does not rely to any significant extent on their input. This is certainly true when it comes to innovation: if the founder is the driving force in this regard, you’re extra vulnerable as a company once that founder is no longer in the picture for whatever reason. A competent supervisory board member would make sure to bring this topic up within the company.”

Dilution of family capital
Although family businesses were regarded in the labour market for a long time as dull and outdated and suitable mainly for those who choose security over ambition, it is clear that this image is no longer accurate. “Young people today recognise the strength of family businesses more so than in the past, but research has shown that not all family businesses exploit this positive image when recruiting new staff. This is one area where the supervisory board’s input would be welcome and needed, because if the link between the family and the business is credible and relatable, this could also work out well from a marketing perspective.”

One topic which is trickier from a technical point of view – as well as having a much more far-reaching impact – is that of the transfer of ownership to the next generations. Flören: “There are several potential arrangements you might make, including even distribution of the shares among all the members of the family, or only among those members employed in the business. It wouldn’t be the first time someone made a decision for emotional reasons which leads to unwanted dilution of the family capital. A clear-headed and impartial view from the supervisory board can be very valuable in these cases. I always tell people to not just look at the next generation but also at the generation that comes after that.”

Having a supervisory board in place can certainly help deal with one issue virtually all family businesses struggle with at some point: how do you handle family shareholders who are not employed in the company? “And especially: how do you keep them involved in the business?”, Flören says. “You can avoid a lot of problems by setting policies that cover all the bases; it’s up to the supervisory board members to encourage and monitor these practices. This is all the more relevant if the company lacks the funds to buy out family shareholders or if dividends are down due to major and essential investments.”

Family capital tied into business
Business succession is another hot issue within family businesses, one that benefits from the more impartial position of a supervisory board or advisory board. Flören strongly supports the idea of creating a family charter in these cases. “If I were appointed to the supervisory board of a family business and there was no solid family charter there, that would be the first thing I’d get sorted out,” Flören says. “After all, you can’t really take on any serious governance role if you’re not sure what the family wants.”

The sixth issue is the drive for innovation among family businesses. Flören: “It’s perfectly simple: innovation is essential and requires capital, but quite a few family businesses have all their family capital tied up in the company. Research has taught us that family businesses where less than 75% of the family capital is tied up in the company have more scope for innovation and are therefore more innovative. If this is not the case, it could turn into a financial complication of which supervisory board members need to be aware. I would advise them not to put all their eggs in one basket.”

The last issue of which supervisory board members in family businesses need to be aware is that it is their responsibility to “lead them out of their cloistered world and open them up to new possibilities,” as Flören describes it. “External members of the supervisory board or advisory board are in a better position than anyone to help the family business look for new channels of innovation. This should be a permanent priority, in the interest of the company.”

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