While I recognize that planning, structures and tax solutions indeed have importance for succession outcomes I believe that, in themselves, they are not sufficient, and surely not the place from where to start. The more I, in my professional roles as researcher and advisor, encounter and work with succession, the more convinced I am that what is first and foremost needed for a successful unfolding of a succession process are neither experts, nor best practice, but the ability of self-reflection.  (Read more from Annika Hall and add comments.)

While family businesses have conceivably been around ever since human beings started living in communities and began benefiting from gains of specialization and trading, the attention on family business governance as a formal topic is only about 25 years old.  Prior to the formal recognition of family businesses as a distinct organizational form, governance has been thought of as an issue that is of importance primarily for non-family businesses, especially those where there is a separation of ownership from the management - for example, widely-held companies such as IBM, or Google.  Blindly copying corporate governance prescriptions from non-family businesses, however, can actually do a lot of harm to family businesses.  There are specific ways in which governance in family businesses is, and needs to be, different from governance of non-family businesses, for it to have a positive effect in family businesses.  In this article, I define the key objective of family business governance.  I then offer a few prescriptions to improve governance in family businesses.

So, what is the objective of family business governance?  The key objective of family business governance is to help the family and the family leader find, create, develop, extract, and enshrine the "family magic" in the business.  What is "family magic"?  It consists of all the sources within the family that provide the business with a competitive advantage over a non-family business.  (Read more from Sanjay Goel and add comments.)

Every once in a while industries become disrupted. Newcomers from outside the industry begin to commercialize products that are based on a novel technology, have fundamentally different product features or are built on a distinct business model. Established companies typically have problems with adopting such new technologies. As a consequence, they often lose market shares when the innovation becomes mainstream. Look back on Kodak's prior dominance in the photography market, for instance. Or the prosperity of the book and music retailer Borders before online shopping began to prevail. There are indeed numerous examples of fallen giants.

To help firms overcome those challenges, Harvard professor Clayton Christensen wrote the bestselling books "The innovator's dilemma" and "The innovator's solution". Yet one might ask: How valuable are those insights for family firms? Are challenges for family firms the same as for non-family firms? And can the advice given in the books be transferred to the family business context?

The family innovator's dilemma

Family influence makes the situation even worse and brings about new challenges for established firms. First, many family firm owners and managers are reluctant to involve outsiders in their strategic decision making. As radically new technologies often emerge outside the industry's boundaries, family firms run the risk of overseeing or misinterpreting environmental changes.  (Read more from Nadine Kammerlander and add comments.)

Due to divergent desires and changing personal situations of family members, such points of convergence and pressure can be found in families-in-business and can cause inevitable fault lines.  Unlike geological faults, however, active steps can be taken in a family business to prevent the fault lines from causing earthquakes.

What are some common "fault lines" in a family business?

Let's say that some members of the family own shares but do not work in the business. They often prefer that profits be distributed as dividends. Other family members who do work in the business often prefer that profits be reinvested in the business.  There is no "right" or "wrong" -- but there are certainly conflicting opinions! A similar conflict can arise when some shareholders want to sell their shares back to the business, but the other owners do not want to purchase the shares, or do not want to meet the price demands of the seller (or the seller does not feel that "book value" accurately represents the value of the shares, or the seller does not agree to a 30% discount for lack of marketability). Some family members in these situations, beyond simply having a difference of opinion, eventually come to see their fellow family members as greedy or manipulative. No amount of listing "pros and cons," and no amount of active listening can solve these conflicts. Unless proactive steps are taken, these inevitable "fault lines" are likely to become earthquakes and will shake the family business to its core.  (Read more from Donald Levitt and add comments.)