December 18, 2018
Survival of family businesses has always been a cause for concern for family business experts. Considerable efforts and resources have over time been invested in the development of solutions and framework that will boost the survival rates of family businesses. Despite the significant contribution of family businesses, about 70 percent of family businesses in more advanced economies either fail at an early phase or are not transitioned into a second generation with the situation in emerging markets even more disturbing. A major reason for this is the absence of sound business governance framework.
The owners of family businesses in developing countries rely on their personal knowledge and experiences in running the family business, and investment decisions are carried out without recourse to professionals in those fields. In instances where there is the semblance of governing body, it is comprised of family members and close relatives who do not necessarily possess the technical ability to make informed decisions or formulate the right strategies to position the family business for excellence.
In the corporate world, the board of directors (BOD) of companies, usually a group of professionals who have excelled in their various fields and can bring a reasonable degree of relevant experience to the business, are responsible for developing business strategies that will ensure sustainability and growth of such business. While there may not be an adequate economic justification for a full BOD for a family business, especially at the early phase, an Advisory Board should as a matter of importance be adopted by to complement the efforts of the promoters of the family business. An Advisory Board serves to guide the business decisions of the owners of family businesses and is a common practice for family business owners to have Advisory Boards.
An Advisory Board helps family businesses with more in-depth analysis and evaluation of business progress while also providing guidance on potential investment opportunities. The stark difference in the success rates of family businesses in developed economies and emerging markets can be directly traced to the presence or otherwise of the family governance framework, Advisory Board being a major component of such framework.
In this series, we will be discussing the role of an advisory board in a family business and in the governance of the family business, and how family businesses can go about forming an Advisory Board.
An Advisory Board is a group of experts in various fields with the responsibility of providing guidance and professional advice to owners of family businesses in relation to the family businesses. They are usually not engaged on a permanent basis but are consulted as the need arises. In other instances, the Advisory Board could have a defined meeting period, such as bi-annual or every quarter, where the performance of the family business for that period will be discussed. Recommendations will also be made to the managers of the family business on how to improve existing practices within the business.