Natural Governance and Why It Matters
Successful family enterprises must be well governed, or they would not be successful in the first place.
This is a plausible assumption, which is opposed to alternatives like, a family enterprise that lacks formal structures, such as a board of directors or a family council, is a void in which governance does not exist.
Where there is a lack of formal governance, decisions are still made to satisfy all the stakeholders in the family enterprise. If pressed to describe how this governance works these stakeholders would say something like, ‘this is how we do things around here.’ They would want to reassure outsiders that the absence of formal governance should not be mistaken for a lack of order. Each stakeholder knows what is expected of them and what they can expect of others and all behave in a manner that upholds their system of natural governance.
I use the phrase, natural governance, to emphasise that it is not entirely a result of deliberate human design or decision making. Some parts may have been created consciously, like the regulations forming a company, but a large part of how a family enterprise is governed evolves spontaneously. It is the result of innumerable interactions and experiences that generate practices that become customary, and known as, ‘how we do things around here.’
Natural governance evolves because the natural state to which an enterprising family aspires is a balance of interests that enables the enterprise, the current owners and the wider family to get on with life. The way a family enterprise achieves this balance of interests is unique to them, and you could say it is their version of normal. This will include norms for behaviour that the main stakeholders accept, such as the way they conduct their relationships and accept how decisions are made in the family enterprise.
For example:
The founder of a family enterprise is often a living, breathing governance system who makes the major decisions affecting the enterprise and the family.
In the next generation, the family might want to appoint one of the siblings to take over from the founder so that this system of governance continues. This is a version of primogeniture.
Or, they might adapt their governance so that each sibling takes charge of part of the family enterprise, of what could be called a silo. For example, separate siblings could oversee production, sales, and finance or they might run different geographical territories.
These forms of natural governance are common-place and successful. They are however, often criticised by those who feel that normal governance should comply with the standards recommended for certain types of business in various statutes, codes and guidelines. It is assumed that if the family enterprise was more compliant with these standards – or in other words made more normal when measured this way – overall governance of the family enterprise would improve. Really?
Telling a group of siblings who want to run their business in silos that they ought to hold more regular board meetings because this is normal is practically useless. The family run the business in silos because they prefer to avoid the pressure of collaborating too closely and having to spend time together in meetings.
If the siblings can run the enterprise successfully by operating in silos and family life is better as a result, what is wrong with the natural governance that represents this family’s version of normal? My answer to that question would be, ‘there is nothing wrong with it, and good on them.’
Natural governance is inherent in successful family enterprises. I think families and advisers would benefit from understanding natural governance and discussing whether it can continue helping a family and their enterprise to be successful as ownership and leadership passes down the generations.
Instead of rushing to change governance in a family enterprise, a family might find that the way to continue being successful is to keep doing what you’re doing.