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Lack of governance ‘stunts growth’ of UK family businesses, according to research

26 February 2015

55 per cent of family businesses say succession is a barrier to future success; 62 per cent would consider selling up owing to difficulties handing on the business to children or relatives; 90 per cent of UK family businesses operate with no formal family governance structures in place, stunting their potential productivity and growth, according to new research published today by Family Business Place and law firm, Charles Russell Speechlys.

While two thirds of family-owned businesses have a board of directors, only 25 per cent have non-family board members and only 20 per cent operate with non-executive directors to provide independent insight and advice according to the research, launched today at Family Business Place’s National Conference in London.

Despite an aversion to giving non family members senior leadership or strategy-setting roles, and a strong desire to keep business ownership within the family, more than half (55 per cent) say succession is a barrier to future success, with almost two thirds (62 per cent) admitting they would be prepared to sell up owing to difficulties handing on the business to children or relatives.
The two trends are linked, according to family business experts at law firm Charles Russell Speechlys, with a lack of formal governance leading to struggles with succession, complacency within the business, family disputes, and even damage to growth.

Sally Ashford, legal director at Charles Russell Speechlys, commented: “It’s no coincidence that family businesses are revealing both a lack of formal governance and concerns or problems with succession – the two often conspire to stunt business growth. As they develop and mature – often across several generations - it’s essential that family businesses put the right professional, management and governance structures in place to ensure they stay on the right track. Without them, complacency, stagnation, and even major family disputes can result."

“Family charters, manifestos, or councils can help get family members behind a shared vision or set of objectives, smooth negotiation and avoid arguments, and keep younger family members engaged by allowing them a voice in the future of the business. In today’s economy, where a job for life has all but vanished, younger generations entering the business will expect to have more variety and say in the development of their careers. Working in the family business can offer all that and more, but career progression needs to be structured carefully and ambitions must be listened to."

“There is a misconception that non-executive directors will be prohibitively expensive, and are only relevant to major corporates or public companies. But they’re a natural fit for family firms, given many don’t want to appoint non-family members to the board. A good non executive director can be incredibly valuable – from stopping a company from getting complacent, to helping to identify and head off potential problems or disputes before they start.”

Anita Brightley-Hodges, managing Director of Family Business Place, said: "Families who run businesses are inherently shy about blowing their own trumpet and recognising they have a brilliant and successful company.

The great thing about bringing in the next generation is they are marketing-savvy; they know how to use new technologies, social media and digital marketing platforms to showcase their ‘family factor’ and reach customers in a different way."

She goes on to say "in order to excite them about their potential career path in the family firm, there needs to be a defined role set out for them, one which they can take hold of and know they can have a real and meaningful impact on the business.

This also means a commitment to setting out a professional leadership plan - perhaps some work shadowing or a board swap in another family business and networking with other next generation entrepreneurs."

Family business reveal their biggest challenges

Other findings in the Family Business Place and Charles Russell Speechlys report include:

  • Family businesses reported a variety of issues when it comes to planning for the future, with concerns centring on intergenerational conflict (24 per cent), succession problems and/or younger family members not wanting to join the business (29 per cent), dividend policies and remuneration of family members (10 per cent) and sibling rivalry (7 per cent).
  • Twenty-seven per cent of respondents cited ‘other’ issues, including long hours, recruitment, and disputes around the overall direction or purpose of the family business (ie growth and innovation versus using the business to support an comfortable lifestyle) as barriers to future success.
  • There is widespread reluctance to broaden share ownership and responsibilities - family members own more than 75 per cent of shares in nearly all family businesses surveyed (87 per cent).
  • Family businesses are largely domestically oriented, with only eight per cent having offices or subsidiaries outside the UK.
  • 64 per cent of family businesses are involved with philanthropy or charitable giving.
  • There is a widespread aversion to relying on banks and debt, with many businesses preferring to self-fund expansion.
  • 90 per cent of those surveyed have spent time working outside the family business, seen as critically important to develop a rounded perspective.
  • Major success factors identified by family business owners include good communication between family members, and between family members and employees; sustaining some work life balance; and not being afraid to promote talented and loyal non-family members within the business.
  • Of the family businesses surveyed, 19 per cent were in the professional services sector, followed by 16 per cent in retail and 14 per cent in manufacturing. Other sectors represented included construction (10 per cent), food and drink (8 per cent, and health and beauty (5 per cent).

Charles Russell Speechlys will be holding a workshop for family businesses at their offices in Guildford on Wednesday 25 March 2015 at 8.00am - 10.30am, with talks from family businesses, NEDs and their legal experts looking at what options are available for family businesses to strengthen their governance and strategic direction. For further information please contact Virginia Cook on virginia.cook@crsblaw.com