Governance : Why is it so hard to define?

 

Amy Schuman
Amy Schuman

This week I’ll be speaking to a group of family business owners in the Milwaukee area, and the topic they chose was “Governance”.  When they requested that topic, first I felt excitement – but it was soon followed by a bit of dread.

I felt excited because governance is such an essential component in family enterprise strength and continuity. I also felt dread because, even after years of helping families reap the benefits of governance structures like Family Councils and Boards of Directors, I still find it difficult to come up with a simple, clear definition of governance.

Like most people, my mind immediately seizes upon Boards of Directors as the prime example of governance. Indeed, a web search on the term ‘governance’ quickly yielded the following:

That relatively simple (!) definition may work for public companies, but, the complexities of family enterprise can require more of a multi-faceted approach to governance.

For example, as families become larger and more complex, they also appreciate the benefits of more formal family governance, most often in the form of a Family Council.

Families that pursue their own foundations and other philanthropic efforts come to appreciate the benefits of strong governance in the form of Foundation Boards.

As families move into the cousin stage – and beyond – they seek governance structures to serve their larger, more dispersed ownership group. Often called Ownership Councils, these bodies provide a structure for balanced participation and oversight on behalf of shareholders.

Families with Family Offices also find significant benefits from the oversight and expertise of an objective governance group of some kind.

Given all this complexity – what’s a good, simple definition of family business governance? To inspire you, I will go out on a limb and offer my own working definition – as follows:

  • Family enterprise governance provides an established set of systems and structures that ensure sound and fair actions and decisions, often by a small number of well-qualified people on behalf of a larger number of stakeholders.

I know this definition has plenty of room for improvement – what’s missing? What’s your current working definition of ‘family enterprise governance’  – and how does it help you get the results you seek?

4 thoughts on “Governance : Why is it so hard to define?”

  1. Amy: The greatest challenge in Romania is the increased bureaucracy, built year after year with new layers. Clean cut business without bureaucracy is find maybe in the Bible. With every problem, there are endless opportunities to grab. The curiosity with bureaucracy is that it creates entire new niches to be discovered. Fo example, a wrong tax decission of the fiscal authority created a demand to conteratack the measure. A bureaucratic wall emerged and ten of thousand of fiscal decissions awaited a tax consultant and a lawyer to defend the client. Every country is a system variation of the US market, with ways of functioning that appear strange to the untrainned eye, but it makes sense when analyzed. Family business systems exist to respond in an unbelievable way with at least one opportunity created by any problem.

  2. Daniel: Thank you for sharing your perspective from Romania! The brevity of your definition is very useful -‘any set of systems and structures that ensure actions/decisions’. Then, surely, you can go ahead and add the specifics that fit each individual situation. Do you think that family enterprises in Romania are facing any special challenges – or opportunities? It would be fascinating to learn more.

  3. Dear Amy,

    I am working today in a market far away – Romania. This market (20 years old) is reentering the family business structure and moving to the second generation.

    To me governance is the frame for any set of systems and structures that ensures actions/decisions. Owners draw a frame and communicates to the Board; the Board builds the frame and communicates to the Company, who establish the system of rules, policies, structures, processes, and relationships. Actions in the form of decisions give direction, control and accountability, which will go forward towards the systems (Family, Family Council, Business Council, Business, etc).

  4. Though it sounds very “academically”, I find the following to be a very useful definition of Governance. Governance is a system of rules, policies, structures, processes, and relationships that assure the direction, control and accountability of the enterprise. For famliy firms I like to add: it is also the values and relationships that assure the unity and the commitment of the owners.

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