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Spring 2013

May Current Thinking Column

Tuesday, May 31, 2016

THE HOLY TRINITY OF CORPORATE GOVERNANCE: 

Direction, Representation, and Accountability

by Burak Kocer, PhD


This past April, I spent three creative days in our Aspen Family Business Group 2016 Spring Salon with Joe Paul, Leslie Dashew, Bill Roberts and Donnel Nunes. These annual meetings provide a great opportunity to catch up and contribute to each other’s work by learning from each others’ experiences and perspectives. This year, we also hosted Dr. Manulani Aluli-Meyer of University of Hawaii, with her brilliant wisdom introducing to us the concept of “epistemology” and how we can apply it in our work.

For my part, I have greatly benefited from the Spring Salon, in terms of clarifying my mind and focusing on my role more effectively as a family business advisor. This column is one of the most immediate outcomes of our Spring Salon on my behalf. Since I wrote my October column on “The Art and Science of Governance,” I have been working on developing a more organized and clear model. Well, one does not need to look far for inspiration to further develop this model with these wonderful people around me. Hence, this small piece is devoted to the leading experts of the Aspen Family, Donnel, and Dr. Meyer.

Decision-Making Power

Defining how decisions are made and controlled is central to our work with families. This involves designing mutual roles of three main governance bodies in family businesses: the family council, the board of directors, and the executive team. Of course, from a legal point of view, this list should have started with the shareholders’ meeting, but for the purpose of this paper, I will not do so for the following reason:

As Joe contends, “Power in a family business is often independent of ownership or management position.” And this is exactly where we want to influence for a quality decision-making function.

The role of governing bodies is to create a healthy environment for quality discussion and ultimately form a common decision in favor of the company’s interest, not that of an individual shareholder. On the other hand, save for exceptions, a shareholders’ meeting is where individuals come with premade decisions. They either approve or disapprove an agenda item based on the position they took before they even entered the meeting. In these meetings, it is legitimate for each shareholder to protect his/her own interest and, in general, it is a process of “legalizing” the decisions that were made before.

In a family council, we prioritize creating open channels for communication among the shareholders, and between shareholders and other members of the family, ultimately developing a culture of collective decision-making. Hence, this is one of the platforms where a family can achieve “collective transformation through individual excellence” in Dr. Meyer’s words.

In fact, the three governance bodies represent stages of a process, in which multiple interests of different stakeholders are transformed into a single direction.

From Multiple Interests to a Single Voice

It is quite fair for shareholders to have different strategic preferences, risk appetites, or management styles. But these are all discussions at the ownership level and must be melted into a single voice that will set the direction for the business. Keeping this plurality at the executive level will turn into incompatible managerial actions that could potentially lead to a business disaster.

The board of directors is where different alternatives are evaluated and the direction is set.  The head of execution holds the steer as the captain to lead the business in the manner designated by the board. Depending on the complexity of the business, the appropriate mechanism may change, but the need is same: You need to develop a process for evaluation of different alternatives in a way that all shareholders feel legitimized and heard, with a single voice to guide the entire organization accordingly.

This chart depicts the strategic flow of the governance body from multiple interests to a single voice. 

Once you start designing the three main governance bodies—the family council, the board of directors, and the executive team—you will face the following questions:


  1. Who should be involved?
  2. What is the ideal size?
  3. What are the respective authorities?

The Holy Trinity

There is an unlimited number of answers to those questions. Choosing the right combination is the art of governance, which should be decided in relation to the specific needs of the family and the business. However, we also have a formula for this process, which I call the holy trinity of corporate governance:

  1. Direction
  2. Representation
  3. Accountability

Whatever governance model you create, it should satisfy these three needs. You have to make sure that governance bodies:

  1. provide a clear direction to the organization,
  2. allow for representation of stakeholders and
  3. hold those who are authorized to act on behalf of the others accountable

At this point, I would like to recall the second axiom in Joe Paul's book, The Emotional Ledger, "It is not a question of whether a family business is governed or not. A more salient question is what is the business and the family being governed by." The right answer to this question lies in the way a family business approaches the aforementioned three needs. 

Direction

“If there is no goal to achieve, there is no progress to be secured.”

When the company is not operating in line with the predefined and approved objectives, the performance of executive managers will be questionable. In a family business, the cost of this suspicion is usually higher. It is good practice to have a system in place that allows for setting the objectives accurately. To do so is inevitable to define, which requires a combination of skills and experience to ensure the quality of decision-making.  This analysis will help families focus on the qualifications instead of individuals and differentiates between ownership and management roles, which come with different rights and responsibilities.

Representation

“Rewards of inclusiveness outweigh perceived risks.”

Families need a shared vision, which is carried out to the future owners of the business throughout the years. This requires gradually involving family members who do not work in the business with the governance system. Representation also allows family members to be confident that they are able to exercise their legitimate rights on the business despite limited involvement in operations, while differentiating between ownership and management.

Accountability

“If both questions and answers come from the same person, you cannot be sure about the accuracy of either one.”

The depth of separation will depend on the complexity of the business, but any organization requires some sort of border between execution and control. This also allows for a division of work between the decision makers in terms of their time horizon. The focus of those who undertake the daily operations is on the specific work they do, while those who exercise the control function must apply a broader perspective to ensure long-term stability.

Matching the Holy Trinity with Governance Bodies

This Governance Priorities Matrix can be used as a guideline when seeking the right answers for designing governance bodies.

At the family council, the primary concern is representation, followed by direction. First, anyone with legitimate interest in the business must be present. Only with their involvement can the direction for the business be mutually agreed upon and accepted.

In the board of directors, the primary concern is giving a clear direction to the executive team and accountability for the formulation and execution of this direction. Representation is of least concern, as we cannot give up the qualifications we need to set an accurate direction for the sake of an individual member’s needs. This is where different interests are melted into a single voice, requiring a combination of diverse skills. A good practice is to define the required qualifications and let people nominate the appropriate candidates according to their right of representation.

At the executive level, representation is not one of the needs to be satisfied at all. In fact, the entire chain of governance is built upon this objective: To ensure that the business is run by competent hands. These competent hands will be accountable to the board for results, and must cooperate with them in setting the direction and providing feedback.

When evaluating the governance bodies, you may want to check The Governance Priorities Matrix to understand the potential consequences of your existing composition. 

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