Ask the Expert: Dr. Elizabeth Rankin
In terms of business structure and governance, how do family-owned businesses differ from businesses with other ownership types?
The governance structure of family-owned businesses is usually more complex than that of non-family-owned businesses because of the relationships among the family members involved. All family businesses are not structured or governed the same way. Some choose to operate with a somewhat informal governance structure while others operate under a more formal structure. Both can be effective, and family dynamics usually determine the effectiveness of either.
The most important component of the governance structure is to effectively separate family matters from business matters. family businesses with more informal governance structures must take extra steps to ensure that the goals of the company and the family are being met, assuming the family members agree on the company’s direction and the process for getting there. Generally, as family-owned businesses grow, a more formal governance structure is needed.
More formally structured family businesses often work with a board of directors to deal with the business policies and decisions of the company as well as a family council that handles familial issues. The board of directors may have external members to dampen and help negotiate the conflicts among family members. Both the board and the family council should work closely together and communicate openly with each other to ensure harmony. For the long-term success of the family business, one crucial component of the governance structure is a clear, agreed-upon plan for succession.
Dr. Elizabeth Rankin is a Professor of Economics at Centenary College.