July/August 2013 Openers
A Deloitte study identifies 'gaps' in U.S. family firms' governance practices.
An online survey of U.S. family businesses commissioned by Deloitte Growth Enterprise Services found that many of these firms “have gaps in governance, board operations and succession planning,” according to the survey report.
The study, conducted in March and April 2013, found that more than a quarter (28%) of respondents’ companies lacked a formal board of directors. Of those that had boards, only 39% were controlled by a majority of independent directors. In 60% of the companies, family members held 51% to 100% of the board seats.
Most companies with independent directors found these outside board members to be effective. Among respondents with independent board members, 66% said the outside directors influence the content of the board agenda at least somewhat.
Room for improvement
More than 200 owners, C-level executives and managers of family companies with annual revenues from $50 million to more than $1 billion completed the anonymous survey. About 70% of the respondents’ companies generated revenues of $100 million or more, and 25% had revenues of $500 million and up. Ninety percent of respondents’ companies were privately owned; 10% were public. In all of the companies, one or more members of the founding family owned the majority of shares.
The founder was involved in management in 30% of the companies; 36% were in the second generation of management. The remainder were in the third generation or older.
Tom McGee, national managing partner of Deloitte Growth Enterprise Services, says that while he expected the study to reveal diversity in governance practices, “There is more opportunity for improvement than I would have expected, given the conversation about corporate governance in the last decade or so.” McGee adds that family business owners have expressed interest in learning about other family firms’ governance structures as a benchmark for assessing their own practices. “I think there’s a desire to address this in a holistic way,” he says.
In 81% of the companies polled by Deloitte, the family was involved in nominating and electing directors; in 61%, the family nominated and elected all of the company’s board members. Most companies (62%) had six board members or fewer.
“What’s more important than the number of directors,” McGee notes, “is the diversity of their experience, and the relevance of that experience to your strategy.” For example, a company that aims to expand globally should consider adding a director who has led a company into international markets, he says. Similarly, a family firm seeking access to capital should find prospective directors experienced in establishing lender relationships, and a company with technology needs should pursue a board member skilled in that area. In addition, McGee says, it’s advisable to recruit outside directors with family business experience. “If you could [add to] your board folks that you trust and folks with experience from outside the family,” he says, “that has a huge upside from a strategic standpoint and a corporate governance standpoint.”
About one-fifth (19%) of respondents said they had a board of advisers instead of a fiduciary board. About a quarter (23%) said they had an advisory board in addition to a board of directors.
One problem area uncovered by the Deloitte study was low board turnover. A sizable majority (82%) of respondents’ boards had no term limits; an even higher number (89%) had no age limits. Given these findings, it’s not surprising that 78% of respondents reported their boards have 0 to 5% turnover in any given year.
Most respondents are failing to assess whether their long-tenured board members are adding value. Two-thirds of those surveyed said they did not conduct formal director evaluations.
A consequence of low board turnover is a dearth of opportunities for women to serve on these boards. Two-thirds of the Deloitte survey respondents said women constituted less than 30% of their board membership, and 28% had no female board members at all. Among companies with revenues of $200 million to $500 million, nearly half (48%) had no female board members.
Only 25% of the companies in the study said they provide ongoing board education. Especially in light of the low turnover on these boards, family business leaders should consider the advantages of developing director education sessions on topics such as company policies, issues facing the industry, regulatory issues, risk, ethics and crisis management.
One-third of those surveyed said they don’t offer any compensation to board members. Although most directors say they don’t consider remuneration as one of the main factors when deciding to join the board, companies that offer no compensation at all are likely forgoing the opportunity to recruit the most effective independent directors.
Deloitte’s findings suggest that family business leaders may not be taking full advantage of their boards. Less than half (46%) said their board was heavily involved in advising on strategy; 36% said their board was somewhat involved. Thirteen percent described their board as being marginally involved, and 5% said directors were not involved in providing strategic planning advice.
Less than half (46%) of the respondents said the chairman and CEO posts were held by different people in their companies. Only about a third (32%) held an executive session for board members (without the CEO or other company managers present).
At companies whose CEO is the founder or a family member, 67% of respondents said that person described to the board his or her personal goals and a vision for the transfer of ownership and management.
Half the respondents said their entire board was involved in CEO succession planning. Yet only 27% said their full board reviewed the succession plan annually, and 13% said their board looked at the transition plan less than once a year. Nearly half (49%) reported that the board reviewed the succession plan only when circumstances have changed, and 23% said their directors never examined the succession plan. In 11% of the companies—probably those in which a leadership change is imminent—the board reviewed the succession plan more than once a year.
In some companies, non-executive family members also reviewed the succession plan. Forty-one percent of respondents said non-executive family members were involved in the succession planning process, and 58% said non-executive family members were aware of their company’s succession plans.
Less than two-thirds of the survey respondents (59%) said they had contingency plans covering the business leader’s death or disability. Among respondents whose companies generated revenues of $500 million or more, however, the number was 72%.
Judging from the survey results, McGee says, “It seems that there isn’t the kind of planning that you would hope, particularly in family businesses in their first or second generation.” In the founder generation, he notes, “The drive and energy of the founder are focused on growing the business, [but] beginning to think about what’s going to happen when you pass from one generation to the next is important. It’s really about legacy as much as about the success of the business.”
Fostering family harmony
A family council—a governance structure for the family—can help a family business to separate the realms of the family and the company, as well as to maintain harmony within the family. Yet only 25% of the Deloitte survey respondents said they had a family council or a similar structure.
Of the survey participants who had a family council, 61% said it met more than once a year. More than a third (37%) said they had annual family council meetings, and 2% said they convened family council meetings less than once a year.
About a third (32%) of the respondents said they had a family constitution that sets out family members’ roles and responsibilities.
Most likely, the companies in Deloitte’s sample have not begun to institute a family council or develop a family constitution because most (66%) are in the first and second generation of family ownership, when family branches have not yet become a factor and there tend to be few family owners who are not involved in management of the business.
“As businesses mature, and as they transfer from one generation to another, these issues become more important,” McGee says. In later-generation companies, he notes, “it’s likely that you’re going to have more shareholders. You need to have some infrastructure in place to manage these constituencies.”
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