Is it vital to implement governance in family business?

-Taken from the book,The 5Gs of Family Business by Walter Vieira and Mita Dixit

The word governance comes from the Latin verb 'gubernare', to steer, or to direct. Governance is the framework of policies, rules and practices which the board of directors ensures, leading to accountability, fairness and transparency in a company’s relationship with its all stakeholders (financiers, customers, management, employees, government and the community).

The aim of governance is to define and develop a course of operations, a path for the good of the organization, the stakeholders and the promoters. In family businesses, governance has two overlapping components—corporate and family.

Corporate Governance
Corporate governance is a concept that has been in existence for a long time. Chanakya’s Arthashastra, an ancient Indian political treatise on statecraft, economic policy and military strategy, is considered the oldest document on governance. In a broad context, it is about maintaining the overall framework of governance, rather than on specific interventions in people’s lives. The treatise repeatedly states that self-restraint is the single-most-important attribute in a king. In other words, the Kautilya ideal is a ‘strong’ but ‘limited’ state.

Today, for ambitious business families, the strategic roadmap is to go on a public listing route. It gives finance required for growth and diversification and also helps in reducing the overall cost of capital and interest costs on existing debt. We may say, almost since the first company listed on the first public market, capitalist business owners have pursued to raise money without sacrificing control.

Professional management of the business takes place through the board of directors, elected by the shareholders or appointed by other board members. They represent the shareholders. Many a time, majority shareholding is with promoters and their family members, and therefore the board has most positions represented by family members.

The dichotomy is that when promoters and their families have a strong foundation of values and ethics, they consider themselves as the trustees of the business. Over a period, family businesses become institutions of stature. On the other hand, weaker values and compromised ethics lead to scams, corruption and loss of enterprise value.

Family Governance
With the business life cycle, the family’s life cycle also changes. The family’s orientation towards business, either family-first or business-first, plays an important role in the long-term strategies and continuity. It is necessary that the families follow a few principles such as fairness, inclusiveness and responsible ownership for healthy sustenance.

Family governance is about managing the family, and following policies and norms so that the family’s values are preserved, principles are followed and harmony is maintained, especially when the family transition happens from siblings state to cousins consortium.

As Suresh Kotak, the 84-year-old ‘cotton man of India’ and one of the oldest family in cotton trading, says, ‘the family business is a good place to learn, but it can get very rigorous. Ours was definitely not a papa ka business’. His son Uday has charted out a new career path in the finance industry and is a prominent Indian banker who has headed the Uday Kotak Committee on Corporate Governance.

Family governance can be implemented as a tool, as a mechanism with a structure, processes, policies, norms and guidelines. The purpose is to facilitate interaction among family members and provide a platform for constructive discussion and problem-solving. The family’s relationship with the business needs to be defined. It increases transparency and accountability by inculcating professional attitude and approach in owner-promoters, the board of directors and other decisionmakers. Family governance is the way of living rather than just adhering to documents and policies.