Family businesses could suffer without appointing external boards, report finds

Family businesses are rife in Australia, but their future could be grim if they don’t appoint an external board for guidance, a new study shows.

New research into family business governance by Deloitte in the US found that 28% of family businesses do not have a board of directors at all.

Of the businesses with a board, the survey shows that for 42% of respondents, family members comprised at least 75% of the board. Only 39% of boards were controlled by a majority of non-family, non-executive members.

Deloitte Private chief operating officer in Australia, Michael Clarke, told SmartCompany this morning there are numerous parallels from the study to family businesses in Australia. Clarke says a lack of external guidance from a non-family board could be damaging to the future of the family businesses.

“This report is looking at how board oversight really can improve a business and be a strategic asset,” Clarke says.

“Whilst they (family businesses) are driven by their entrepreneurial flair, what they miss out on is that outsider’s perspective.”

Clarke says that family businesses are best placed if they have two layers of governance – the first at a family level that operates within the business, and an external board that reports to the family.

A key matter for the external board to address is the issue of succession planning, Clarke says. The research found 49% of the family businesses only review succession plans when a change in management requires it, and 41% do not have any leadership contingency plans in place.

“What the report said is that nearly half of the respondents only review succession plans when a change in management requires it. That is reactive, not proactive and that potentially leaves those businesses in a difficult situation if there is a succession issue. Or an issue with the management team.

He says that many businesses may have a longer-term succession plan, but have no idea who would take over the leadership if something were to happen unexpectedly in the short term. This topic can be emotional for families, he says, which is why an external perspective can assist.

“Sometimes having external parties on the board helps to bring in some of that governance and robustness to the debating process around these types of issues.”