Corporate governance in family firms

By their nature as family-owned, some family businesses think they can be more familiar and informal in their approach, and less commercial and regimented. This confusion can lead their operations to move in one direction and business formalities in the other.

As a result, their corporate governance structures – shareholder and board meetings, for instance – become mere box-checking bureaucratic formalities that never fulfill their true purpose.

Containment mechanisms

To be sure, neither companies nor families can be governed by rules, documents and legal frameworks alone, which never supplant people’s free will and values.

Nonetheless, these serve as excellent guardrails to separate the spheres of family and firm, and reframe situations where emotions run high. In a context of distrust and unease, they help restore safety and stability to the owner-family.

Family businesses comprise three fundamental areas: family members as individuals, the family as a whole with its interpersonal relationships, and the company, where decisions are made based on power dynamics.

Family relationships are threatened when members act in misalignment with the company’s learned values, sometimes leading to actions contradictory to its corporate values or code of ethics.

The rigor of mercantile systems

In these situations, the rigor of mercantile systems and their corporate governance structures can be extremely useful in restoring balance, reducing family friction and ensuring the firm’s proper functioning and performance.

Well-organized and rigorous decision-making bodies like shareholder and board meetings – always conducted with a set agenda and recorded in meeting minutes – offer the ideal framework to analyze, debate and make solid decisions. Just because a firm is family-owned doesn’t mean it shouldn’t take full advantage of the potential of the mercantile system.

Family businesses also need family prevention bodies like the family council, key to managing their relational, emotional and formative dimensions. In other words, the commercial (containment mechanisms) and the family (prevention mechanisms) complement each other. Each adds value to the family business as a whole, and one should never undermine the other.

Trust and business formality

Affection is at the heart of families, while organizations are governed by meritocracy. Trust is not at odds with rigor and business formality. On the contrary, both enhance and enrich each other. Decision-making processes in particular must take place in an adequate forum, with the requisite information and compliance with the firm’s defined rules and criteria.

On the other hand, proper compliance via containment mechanisms also dispels the temptation of transferring conflicts to the legal arena, a decision that clearly puts both the company and the family at risk.

Distinguishing the noun and adjective

Overall, the owner-family should bring stability to the company. Respect for the rules and appropriate use of decision-making systems, as defined by the ownership and governance structures, bolsters the company’s long-term sustainability.

In the realm of family business, let’s always remember that “business” is the noun and “family” is the adjective – the latter adds nuance to the former, but never modifies its essence.

In this regard, the more we respect and integrate robust mercantile and corporate practices, the stronger the company will be – and the less risk of overstepping boundaries.


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