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Family Member Roles in the Governance of Their Business

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In a typical non-family business, any involved individual can be an employee, a manager, an owner, a director, or some combination of these roles. In a family-owned business however, matters become more complex as an individual can have multiple roles and responsibilities. These multiple roles are usually associated with different incentives, which increase the challenges that family businesses face as opposed to their non-family counterparts.[1]

1- Owners (Shareholders)

Owners in a family business have several roles and motivations that can sometimes lead to conflicting opinions. For example, a decision to reinvest profits in the company instead of distributing them as dividends can be differently seen by the various owners depending on their other roles in the business. An owner who works in the family business might not object to such a decision since he/she is already receiving a salary from the company. On the other hand, this situation would look different from the perspective of an owner who does not work in the business and relies on dividends as a main source of income. This owner would actually be interested in receiving higher and more frequent dividends.

Matters usually get more complex as the family business grows and its owners hold different roles, with different incentives. Some of the roles that an owner in a family business can have are:

- Owner only.

- Owner/manager.

- Owner/family member.

- Owner/family member/manager.

- Owner/director.

- Owner/family member/director.

- Owner/family member/director/manager.

2- Managers (Senior Management)

Managers in a family business will also have different motivations depending on their other roles within the business. A common issue in this area is the unequal treatment of family and non-family managers. In many family businesses, part or all of the senior management positions are strictly reserved for family members. This could negatively impact the motivation and performance of non-family managers who know for a fact that no matter how hard they work, they will never be part of the senior management of the company. As a consequence, many family businesses find it very hard to attract and retain talented non-family managers. Setting up a clear and fair employment policy (for both family and non-family employees) will make it easier for family businesses to keep their very best employees motivated and interested in the growth of the company. Such policy would align the employees’ incentives to their performance regardless of whether they are part of the family or not.

3- Directors (Board of Directors)

When it comes to board membership, most family businesses reserve this right to members of the family and in a few cases to some well trusted non-family managers. This practice is generally used as a way of keeping the family control over the direction of its business. Indeed, most decisions are usually taken by the family-member directors. In the previous example of dividend distribution, family directors who are also managers in the business would naturally encourage reinvesting profits in the company so as to increase its growth potential. On the contrary, family directors who do not work in the business would rather make the decision of distributing the profits as dividends to family shareholders. These contradicting views can lead to major conflicts in the board and negatively impact its way of functioning.

4- Family Members (the Family and its Institutions)

As previously mentioned, family members can have different responsibilities, rights, and expectations from their business. This situation can sometimes lead to conflicts and issues that might jeopardize the continuity of the family business. One issue that can increase conflicts among family members is the level of access to information about the company and its activities. This can be problematic as the members who work in the business usually have access to such information in a timely manner while those outside of the business can’t access it in the same way.[2] Family businesses should establish the necessary communication channels and institutions to keep all family members informed about the business, strategy, challenges, and the overall direction where the company is heading.

[1] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998).

[2] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998); Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999).

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