Values to achieve value for family-owned businesses

In this article, Chris Hodge - Special Advisor on corporate governance, analyzes the key takeaways from the recent EBRD and Nestor Advisors conference on the corporate governance of family-owned businesses. Participants shared many fascinating insights into the challenges faced by family-owned businesses and how to address them. For family-owned businesses to succeed in generating sustainable long-term value they need to put the interests of the business ahead of those of the owners and embody the principles of agility, openness and fairness in the way they operate.


Last month, I had the privilege of moderating a conference on the corporate governance of family-owned businesses in Central and South-eastern Europe that was joi{d ntly hosted by the European Bank of Reconstruction and Development (EBRD) and Nestor Advisors – A Morrow Sodali Company.

The EBRD has made significant investments in the region, and we at Nestor Advisors have supported its efforts to strengthen local infrastructure, for example by helping regulators and stock exchanges in a number of countries in the region to update their corporate governance codes and by providing training to supervisors and companies alike. We have also worked with many family-owned businesses to help them deal with the issues of governance.

With around 70 delegates and presenters and panelists from across the region and beyond, we heard many fascinating insights into the challenges faced by family-owned businesses and how some forward-looking businesses are addressing them. While businesses within the region are at different stages of development, many of the challenges are common to all.

One challenge that will be faced by all family-owned businesses at some point is managing the potential conflict between the interests of the business and the interests of the family. In the early stages of the business’s life these interests are likely to be the same, or at least closely aligned, but as it develops and grows so the scope for misalignment increases.

The presenters and panelists were clear that the interests of the business must come first, but implementing that principle is not always straightforward. Different family members and generations may have differing views on what the best interests of the business are and there may be some resistance to change, for example to opening up the business to bring in external investment or non-family board members or senior managers.

Of course, it is also the case that family members may have differing views about what is in the best interests of the family, for example between those family members that are directly involved in the business and those that are not. A family council or similar mechanism may be needed to resolve those differences.

On a similar theme, there was an interesting discussion about values versus value. It is important for businesses to have a sense of purpose and a set of values that guide their actions and decisions – this is something that is traditionally seen as a strength of many family-owned businesses compared to businesses with other ownership structures.

However, it is not unknown for “upholding our values” to turn into “defending the status quo”, particularly among the older generations of the family, and sometimes this can be to the detriment of the business’s ability to generate value.

Maintaining the values and adding value should not be seen as alternative approaches to running the business. Ultimately, any family-owned business – and indeed any business – needs to do both if it is to succeed.

Resolving this tension will be particularly important in addressing the sustainability and ESG challenges that all businesses now face. In some regards, family-owned businesses should be well placed to do so as they typically have a longer-term perspective than many other types of business; but if they are risk-averse or resistant to change they may fail to grasp the opportunities.

So what values should underpin the governance and enable the leadership of family businesses to achieve sustainable value creation? Our speakers had some insightful suggestions.

The first, to which I have just alluded, is agility. The world in which family-owned businesses operate is changing rapidly and they need to be able to adapt if they are to survive and thrive. This is a lesson that businesses have had to learn over the last few years in dealing with the pandemic, supply chain issues and difficult economic conditions on top of competition from disruptive new technologies and business models. The pace of change seems unlikely to slow down in the foreseeable future.

For this reason, the speakers encouraged family-owned businesses to pay more attention to strategy than perhaps might have been the case previously. The strategy needs to be regularly reviewed and refreshed and not seen as a once in a generation activity. Involving key family members as well as the board in strategy development was recommended to ensure interests were aligned and buy-in secured.

The second value emphasized by many speakers was openness, a term that in the context of family-owned businesses has a number of interlinked components: being transparent about how the business is managed, being receptive to new ideas and constructive challenge, and being willing to open up the business and invite outsiders in.

Together with succession planning, the decision on whether and when to bring in outsiders is one of the most difficult ones that many family-owned businesses will have to take due to its potential to create tensions within the family. It is a decision that needs to be taken carefully but one that will have to be addressed at some point, either when the business reaches a certain stage in its development and growth or when the time comes to transition between generations.

One of the speakers at the conference described how they had overseen the transition of a business from being a family-managed company to a family-governed company, which included appointing non-family professionals to executive positions. Change of this sort obviously has an even greater potential to create tension within the family than is the case when just bringing in one or more outside directors or shareholders.

According to the speaker, the key to the successful transition in this case was the third value that was advocated for all family-owned businesses – fairness. Fairness between members of the family, including those not directly involved in the running of the business, and between family members and non-family employees, board members and investors. The business needs to be seen to be a meritocracy and one that makes decisions based on objective criteria if it is to attract the talent and investment that it needs to flourish.

Summing up, what we heard was that for family-owned businesses to succeed in generating sustainable long-term value they need to put the interests of the business ahead of those of the owners and embody the principles of agility, openness and fairness in the way they operate. Wise words, and ones that all companies should aim to live by whoever their owners are.

Of course, translating good intentions into good practice is not always straightforward and it is important to put in place governance frameworks, policies and processes that will help to embed and support the values of the business. At Nestor Advisors, we have considerable experience in supporting family-owned businesses in the development of their governance institutions and policies to facilitate alignment between family dynamics and company objectives. If these services might be of interest to you, please contact us at info@nestoradvisors.com.

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