Family Companies and Corporate Governance
As corporate governance principles have a direct impact on the ability of all companies to sustain their activities in a stable manner, these principles have also gained importance for companies not traded on the stock exchange. Even if family companies show a rapid performance increase during their starting years because of their specific advantages, there is need for developing certain regulations to ensure sustainability of performance when the company grows and relationships become more complex. In other words, entrepreneurs need to "manage growth” in order to continue their success.
For instance, the more a business develops and grows and the more investments are made in various fields, the more financial officers feel the need for working with professional managers. Thus, the roles of the shareholder who takes the risks and the professional manager making decisions in return for wages become apparent. Consequently, a distinction between ownership and management appears. When this distinction arises, the need for applying corporate governance principles becomes more evident. It should be borne in mind that a successful entrepreneur may not possess all the critical resources and personal qualities required for managing growth.
A second important element concerning family companies is the way the family itself grows irrespective of the company's growth process. Even if the family company, by demonstrating a satisfactory performance meeting the financial expectations of the entrepreneur, shows constant growth, it may not meet the financial expectations of the family as it grows into the second and third generations. Therefore, the financial expectations of the family members with regard to the company must be clarified and accordingly a performance level must be specified.
An expanding family may bring along new groups of shareholders, such as shareholders employed in the company, non-shareholding persons employed in the company, and non-shareholders that are not employed in the company. These groups and/or individuals may have interests differing from the interests of the family. When differing interests of these shareholder groups are not managed well, family conflicts regarding the business can threaten the company's continuity. Corporate governance aims to establish mechanisms for discussing and balancing varying expectations of family members, thereby preventing the company from coming to a dead end due to internal disputes.
Another issue that brings corporate governance principles into prominence is capital. When the family's capital falls short, the company becomes compelled to be in communication with a wide variety of persons ranging from corporate investors and financial institutions to individual investors. As a consequence of forming partnerships resulting from such circumstances, the mutual responsibilities of the parties towards each other make corporate governance inevitable. After all, one of the primary purposes of corporate governance is the protection and development of the title holder's rights resulting from the equity partnership.
Corporate governance is also important for the regulation of the relationship between the family and the company, which is the primary condition for sustainability. Corporate governance regulations developed for family-owned companies enable:
- transparency of performance of professional executives
- appropriate compensation schemes on the basis of performance and fair market conditions
- prevention of the family members' blocking the career development channels of others
- family members and professionals being subject to the same performance system
- identification of decision making powers and areas of responsibility, thereby allowing the company to gain talented executives
These applications intend to make proper assessments of persons with regard to their usefulness to the company and to prevent any possibility of losing valuable professional executives. Additionally, the family member shareholders, who are the most important group of stakeholders but do not participate in the company's management, are given the opportunity to question the company's performance and to have a say in important policy-making decisions such as dividend distribution, succession related matters, delegation of powers and authorities, decisions regarding joint expenses and undertaking debt. Moreover, possible harmful conflicts of interest may be prevented by setting rules for transparency and employment of family members.
