{"id":1472,"date":"2024-11-20T02:05:48","date_gmt":"2024-11-20T01:05:48","guid":{"rendered":"https:\/\/blog.iese.edu\/family-business\/?p=1472"},"modified":"2025-02-10T16:18:55","modified_gmt":"2025-02-10T15:18:55","slug":"corporate-governance-the-role-of-board-members-and-compensation-models-7-key-findings","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/family-business\/2024\/corporate-governance-the-role-of-board-members-and-compensation-models-7-key-findings\/","title":{"rendered":"Corporate governance in family firms: 7 key concepts"},"content":{"rendered":"

The convergence of personal relationships and business objectives in family firms often gives rise to unique challenges and added complexities<\/strong> in their management and sustainability. In this context, solid corporate governance systems are critical to ensuring their long-term success.<\/p>\n

On November 7, IESE\u2019s Madrid campus brought together renowned experts to analyze corporate governance as a catalyst for longevity, prosperity and cohesion <\/strong>in family businesses, while also exploring the most salient findings of the newly released study by Transearch Spain<\/a>.<\/p>\n

In this article, I\u2019ll share seven roundtable insights on corporate governance<\/strong> in family firms, from the importance of fully understanding the company\u2019s values and family ecosystem to guidelines for compensating board members.<\/p>\n

\n

1. The importance of advanced corporate governance practices<\/strong><\/span><\/h2>\n

Corporate governance in family firms is more than a mere control mechanism\u2014it ensures that family and business interests can co-exist in a balanced way<\/strong>.<\/p>\n

Andr\u00e9s Sendagorta, president of SENER Group<\/a>, noted that family firms that implement advanced governance practices are in the minority, but those that do are better equipped to make strategic decisions, resolve conflicts <\/strong>and promote their long-term viability<\/strong>.<\/p>\n

To be effective, board members in family firms must espouse a two-pronged approach<\/strong>: in addition to promoting the company’s profitability and corporate growth, they must also understand its requirements for promoting family unity and long-term sustainability<\/strong>.<\/p>\n

A well-structured board of directors ensures the company doesn\u2019t rely solely on family relationships to ensure its continuity<\/strong>. Instead, it is based on clear and consensual policies that minimize risks and boost the firm\u2019s resilience to crises.<\/p>\n

2. Unique challenges for executive boards in family firms <\/strong><\/span><\/h2>\n

Unlike in listed firms, independent directors in family-owned businesses often feel a strong sense of connection and loyalty<\/strong> that extends beyond economic interests. These ties, while sometimes an advantage, can also present challenges that require a tailored approach<\/strong>, says Alejandro Gortari, managing partner of Transearch Spain<\/a>.<\/p>\n

In this context, he stressed the need for a rigorous selection process<\/strong> that considers candidates\u2019 professional expertise and ability to maintain independence in alignment with the family culture.<\/p>\n

3. Board remuneration and evaluation<\/span> <\/strong><\/h2>\n

Among its findings, the study found that board-member remuneration in non-listed family firms generally follows a fixed formula<\/strong>, with no variation for meeting count.<\/p>\n

Specifically, 70%<\/strong> of family businesses opt for fixed annual compensation schemes<\/strong>, 13% solely cover attendance fees<\/strong> and 11% combine fixed compensation and per diems<\/strong>. Less common (3%) are compensation models based on the number of hours spent or an EBITDA percentage.<\/p>\n

These results also suggest that compensation in family-owned companies is generally lower<\/strong>, although the per-meeting average follows a similar trend<\/strong> to that of listed companies.<\/p>\n

It should also be noted that financial compensation isn\u2019t the only relevant factor for board members in family firms: institutional recognition, <\/strong>their ability to shape its strategic direction <\/strong>and their impact in driving the sustainability<\/strong> of socially driven family firms also play a role their participation.<\/p>\n

4. Value-based remuneration<\/span> <\/strong><\/h2>\n

Family-owned companies must offer competitive compensation<\/strong> in order to attract and retain the best talent for their boards. Remuneration should be attractive enough for board members to contribute their knowledge and experience without compromising their independence<\/strong>.<\/p>\n

Beyond short-term financial metrics, compensation should also reflect the strategic value that board members bring to the organization<\/strong>. A compensation scheme based on members\u2019 individual contributions, time and dedication is key to fostering business stability and growth.<\/p>\n

5. Board committees: specialized oversight for stronger governance<\/span> <\/strong><\/h2>\n

The presence of audit, appointments, compensation and other committees<\/strong> can strengthen corporate governance in family firms by providing specialized oversight in these critical areas.<\/p>\n

Despite their importance, only 50% of family businesses have at least one committee<\/strong> according to the Transearch study<\/a>, compared to the required standard for listed companies.<\/p>\n

For owners and managers of family businesses, the creation of board committees will bolster their governance by providing an extra layer of transparency and objectivity in decision making<\/strong>.<\/p>\n

Board committees will adapt their focus depending on the company\u2019s most pressing issues, thus encouraging deeper exploration<\/strong> in areas of strategic interest.<\/p>\n

In addition, the participation of independent directors<\/strong> is especially valuable since they offer an unbiased perspective<\/strong> that complements the internal view of the family members.<\/p>\n

6. Regular board evaluations: enhancing continuous improvement<\/span> <\/strong><\/h2>\n

Board evaluation is an area where family businesses have significant room for improvement<\/strong>. Based on the study, only 37% of family businesses conduct regular board evaluations<\/strong>, compared to 98% of listed companies.<\/p>\n

This lack of evaluations undermines the board\u2019s ability to adapt to market changes and address business challenges<\/strong>. By periodically assessing board performance, companies are better equipped to detect areas for growth and optimize board dynamics<\/strong>, ensuring that members\u2019 expectations and objectives align with the firm\u2019s overall strategy.<\/p>\n

Family-owned companies with regular evaluation systems also benefit from greater clarity in roles and responsibilities<\/strong>, enhancing the board\u2019s transparency, dynamics and performance.<\/p>\n

7. Corporate governance as a driver of sustainability and family cohesion<\/strong><\/span><\/h2>\n

Corporate governance in family firms is crucial for promoting both financial sustainability and family harmony<\/strong>.<\/p>\n

Clear-cut governance structures minimizes the possibility of conflict and fosters an environment of trust, respect and collaboration<\/strong>, the bedrock of smooth generational transitions.<\/p>\n

During the roundtable, Sendagorta also highlighted the importance of investing in the family<\/strong>, and defining and respecting the responsibilities of each generation<\/strong>, which becomes increasingly relevant as family businesses transition from the first to the second or third generation.<\/p>\n

Homepage image: Michael Fousert<\/a> on <\/em>Unsplash<\/em><\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

The convergence of personal relationships and business objectives in family firms often gives rise to unique challenges and added complexities in their management and sustainability. In this context, solid corporate governance systems are critical to ensuring their long-term success. On November 7, IESE\u2019s Madrid campus brought together renowned experts to analyze corporate governance as a […]<\/p>\n","protected":false},"author":954,"featured_media":1473,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[352,981],"tags":[117496,432,117523],"class_list":["post-1472","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-leadership","tag-board-of-directors","tag-compensation","tag-corporate-governance","megacategoria-mc-family-business"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/posts\/1472","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/users\/954"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/comments?post=1472"}],"version-history":[{"count":11,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/posts\/1472\/revisions"}],"predecessor-version":[{"id":1508,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/posts\/1472\/revisions\/1508"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/media\/1473"}],"wp:attachment":[{"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/media?parent=1472"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/categories?post=1472"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.iese.edu\/family-business\/wp-json\/wp\/v2\/tags?post=1472"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}