Problems with the governance of family-owned businesses, including the typical lack of a board of directors or succession plan, pose a risk to their long-term success, according to a new survey by Deloitte.
The report found that 28 percent of the respondents from family-owned businesses indicated that they do not have a board of directors. In addition, a significant majority say their boards have no term (82 percent) or age (89 percent) limits on membership, and one-third do not evaluate or provide any compensation to board members.
“Family-owned businesses are a huge component of the U.S. economy, and their attention to good governance practices can have an impact on success and failure,” said Deloitte Growth Enterprise Services national managing partner Tom McGee in a statement. “Tapping into the insights and experiences of an engaged, diverse, and independent board can yield significant operational advantages in the long run. Given that these companies are considered engines of job creation, a sharper focus on governance is important to their longevity, and to the success of our economy as a whole.”
In terms of board composition, of the family businesses that have a formal board, only 39 percent are controlled by a majority of non-family, non-executive members. Two-thirds of boards have fewer than 30 percent female membership and 28 percent have no female board members. Among companies with revenues of $200 million to $500 million, that figure rises to 48 percent.
Deloitte surveyed 222 owners and executives of mostly midsize, family-owned businesses. Approximately 70 percent of the respondents belonged to companies with revenues of $100 million or more, and 25 percent to companies with revenues of $500 million or more.
“It is not enough to simply have a board,” said McGee. “Members of the board must reflect the changing demographics of the world we live in. They should be expected to bring rich and varied expertise and backgrounds to the role, and also be held accountable for their success in guiding the company's growth and future.”
Succession planning is one of the main problem areas when it comes to governance of family businesses. Nearly half (49 percent) of the survey respondents said they only review succession plans when a change in management requires it. Similarly, 41 percent do not have leadership contingency plans. Moreover, 42 percent of non-executive family members are unfamiliar with succession plans.
“Many family-owned businesses struggle to maintain their family-owned status past the second generation,” said McGee. “And while succession planning can be an uncomfortable topic for owners, especially founders, it is critical to the success of an enterprise. By creating a stronger governance and succession strategy, a family-owned business is much more likely to preserve the founder's long-term vision for generations to come.”
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