Family businesses, especially the ones run by the founder, are different from the ones run by managers. Issues such as the role of the extended family in the business, access to financing for growth projects and lastly succession planning require a different approach that balances the emotional attachment to the business with the requirements of a professional management.
Where family businesses should be more like manager-run businesses is when it comes to corporate governance to ensure that family issues are separated from corporate matters. While the family may have a substantial part of its wealth tied up in the business and depend on it for income it may not necessarily have the talent to manage the business, especially in later generations. Governance should include truly independent qualified board members as well as professional management – be it with family members or outsiders. I would like to illustrate my comments with a couple of situations I have encountered during my career in Spain and Latin America that have actually not adhered to these principles.
The first case involved a listed industrial company still effectively controlled by the founding family. Business strategy required either further growth or entering ventures with other businesses, with the consequence of partial or substantial loss of control. As the family controlled the board (consisting mostly of family members and board members close to family interests) it lacked the will to decide what was best for the business. As the business eventually ran into difficulties and required additional financing, the only solution was to find a new controlling shareholder. The family not only lost control but also suffered substantial losses in their family wealth. A more independent board would have been able to take critical decisions early on, while maintaining the value of the family’s investment.
Another case I encountered is a consumer business in Mexico that is owned and also managed in third generation by 3 brothers. Their business is strongly dependent on exports to the USA, for which they had worked with a distribution partner in the US on a contractual basis. Eventually the US partner found a better suited, new Mexican supplier, with which they established a joint-venture to bring the partnership to a longer-term basis. The family business was caught completely off-guard as the 3 brothers are all in their 80’s set in their established ways and have not been able to find a new distribution channel in the US in time. Professional management, put in place early on, would have been able to focus on the key US market, which had grown much faster than the domestic market over the last decade, to make decisions in a timely fashion.
