– by Badri El Meouchi (Corporate Governance Consultant)
In part I of this article (https://goo.gl/rdUc9o), we set off this series of articles by looking at the particularities of Family Owned Enterprises (FOEs), and how effective governance systems can lead to sustainable growth for corporations and the families which manage and/or govern them. Indeed, we cited studies which demonstrate that FOEs outperform non-FOEs across several countries, and the article concluded by identifying key strengths and weaknesses which are particularly relevant to FOEs as they embark on the journey of improving their corporate governance. In this article, we will go into the details of these strengths and weaknesses, so as to begin addressing how FOEs can be proactive in managing their growth, by identifying the governance challenges they face and putting in place a system of Corporate Governance which reflects their strategic objectives and enables them to capitalize on their strengths while mitigating their inherent weaknesses.
Sir Adrian Cadbury, who is widely regarded as the godfather of Corporate Governance, describes the key FOE strengths as follows: Commitment, Knowledge Continuity, Reliability and Pride.  This section provides more detail on how these can become key strengths that FOEs should build on and maintain:
The family, as the business owner, shows the highest dedication in seeing its business grow, prosper, and get passed on to the next generations. As a result, many family members identify with the company and are usually willing to work harder and reinvest part of their profits into the business to allow it to grow in the long term.
Families in business make it a priority to pass their accumulated knowledge, experience, and skills to the next generations. Many family members get immersed into their family business from a very young age. This increases their level of commitment and provides them with the necessary tools to run their family business.
Because family businesses have their name and
reputation associated with their products and/or services, they strive to
increase the quality of their output and to maintain a good relationship with
their partners (customers, suppliers, employees, community, etc.).
While it is often easier for FOEs to identify and capitalize on their strengths, FOEs should also actively consider the key weaknesses they are experiencing and identify systems, policies and procedures which limit the negative impact of such weaknesses. Indeed, studies have repeatedly shown that more than 90 % of FOEs do not survive beyond the 3rd generation precisely because they do not address such weaknesses appropriately:
Family businesses are usually more complex in terms of governance than their counterparts due to the addition of a new variable: the family. Adding the family emotions and issues to the business increases the complexity of issues that these businesses have to deal with. Unlike in other types of businesses, family members play different roles within their business, which can sometimes lead to a non-alignment of incentives among all family members. Indeed, family dynamics are often responsible for the failure of a company, particularly after the first generation when there is an increasing number of shareholders who are not aligned. Unfortunately, these situations often lead to not only the company collapsing, but also to a divided family that is de-facto at war with itself.
Because most families run their businesses themselves (at least during the first and second generations), there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.
Many family businesses do not pay sufficient attention to key strategic areas such as: CEO and other key management positions, succession planning, family member employment in the company, and attracting and retaining skilled outside managers. Delaying or ignoring such important strategic decisions could lead to business failure in any family business.
In our next article, we will look at the different
issues which shareholders face depending on the ownership stage of the company
– for example, during the founder’s generation, or during the second or third
generation. More importantly, we will see how these shareholder issues become
more numerous and complex as the company and the family grow, and how corporate
governance plays a key role in protecting shareholders’ rights.
 Sir Adrian Cadbury, Family Firms and Their Governance: Creating Tomorrow’s Company from Today’s (Egon Zehnder International, 2000); John Ward, “The Family Business Advantage: Un conventional Strategy”, Families in Business, 2002.
 Fred Neubauer and Alden G.Lank , The Family Business: it’s Governance for Sustainability (Routledge New York, 1998).
 IFC Family Business Governance Handbook, 2011: http://www.ifc.org/wps/wcm/connect/6a9001004f9f5979933cff0098cb14b9/FamilyBusinessGovernance_Handbook_English.pdf?MOD=AJPERES