FamBiz: Management vs. Governance
In a family business, there can often be confusion around the questions surrounding the management of the business, and the separate, but equally important area of its governance.
I see it in many places with family clients and this post will hopefully help clarify the differences.
Management = Day-to-Day
Management of the business starts with all of the day-to-day actions and decisions that it takes to keep the business running.
It’s about what you can see happening in many areas, and it usually involves all of the activities that are done by the vast majority of the employees.
The management of any business is all about the short-term execution of the company doing what the company has decided its business is.
So in case you didn’t notice, the key word in the last sentence is “decided”. I purposely said that “the company decided”, but in reality it isn’t decided by “the company”.
There are people who “govern” the company and what it does, and then the managers of the company implement those decisions via their management functions.
But then that just begs the next question, which is, who gets to decide? And then there’s another level of that, which I‘ve already addressed here: “Who gets to decide who gets to decide?”
Corporations Are Easier
In contrast to a family business, if we look at a big corporation, things are pretty clear. The shareholders elect the board of directors, who decide who the management will be.
There are plenty of layers and checks and balances and there are formal structures and procedures in place to guide all of these decisions.
In a family business, well, usually, not so much.
I used the word “formal” intentionally just there, because it reminds me of the expression I like to keep in mind:
“Formality is your Friend”
I need to thank Ruth Steverlynck, one of the instructors in the Family Enterprise Advisor Program, for that expression. I’ve used it a lot and will continue to do so.
Family businesses often resist formality because they don’t want it to slow them down. Sometimes it’s simply the founder who has a preference for flying by the seat of his pants.
Governance sounds Formal
Regular readers will be familiar with my personal struggles with the word “governance”, and the fact that I have a sort of “love-hate” relationship with it.
It sounds almost TOO formal, to the point where it can actually scare people off.
I try to soften it by repeating that you don’t necessarily have to be overly formal, and that any governance you choose to put in place is best done incrementally.
I read a lot of stuff from the academic field of family business and I see people using the term “Family Constitution” a lot lately. A family constitution CAN be a great thing for a family to have.
BUT, and it’s a huge but, that shouldn’t be the place that you start the governance process.
In fact, I personally would probably never even mention the term “constitution” during my first year of working with a family.
Sometimes company management acts as if they are also in charge of governance, because, well, frankly, they can.
But a family business is a complex system, involving not only the business, but also the family, and the ownership.
These interdependent systems are where some formality and definition of roles and responsibilities comes in.
In fact, the part about figuring out, deciding, and writing down who decides which questions is what governance is all about.
Clarity goes a Long Way
There can be lots of ambiguous situations in a family business, and when things aren’t clear, people step on each other’s toes a lot, which can create conflict.
It’s important to clarify which groups of people will be responsible for which decisions.
But sometimes that’s really hard to do.
It really needs to be “hashed out” as a group. Some “horse trading” and compromises may end up needing to happen too.
“Don’t Try This at Home”
What can happen is that families will try to work these things out by themselves and end up making things worse.
An independent person, who has no stake in the systems, can go a long way to making these discussions more productive, and more civil! It’s worth trying.