Family businesses must improve management structures to handle downturn

Australia’s family businesses are weathering the downturn, but their insular management structures and procedures could by restricting their profitability and growth.

Australia’s family businesses are weathering the downturn, but their insular management structures and procedures could by restricting their profitability and growth.

The fourth annual Family Business Survey, launched this morning by KPMG, Family Business Australia and Deakin University, found that growing profitability remains the biggest concern for 61% of respondents, although economic stability is not far behind (48%).

Dominic Pelligana, a partner in KMPG’s middle market advisory practice, says his family business clients are performing reasonably well, although some companies in areas such as retail are suffering.

One advantage family businesses have is that they generally have less debt than non-family businesses, which means increasing interest rates have not hurt as much. “They are also more inclined to reinvest the profits back in the business which is a great help.”

But Pelligana is concerned that these advatanges might be cancelled out by the “alarming” revelation in the family business survey, which highlights a poor governance culture at many family companies.

The survey shows just 37% of the respondents have company boards and those that do are typically very insular. The average board is comprised of four members, 75% of which work in the business. Eighty-two per cent of chairpersons are family members and 55% of these chairpersons are also the chief executive of the company.

The survey also found that 75% of the boards surveyed are not formally assessed in any way and just 9% of family businesses conduct performance reviews of family members.

Report author Linda Glassop, senior lecturer at Deakin’s school of management and marketing, says family business boards should consider splitting the role of chairperson and chief executive and adding board members from outside the business to help improve the accountability of management and improve the business’s risk management.

“Most family businesses are operating around broad, unwritten family goals under leadership from the first generation founder. This is not always the most profitable way of operating and can lead to problems down the track around leadership succession.”

Pelligana says family businesses who want to improve their governance procedures need to start by sitting down and working out a five-year plan. “A lot of these business leaders are strong personalities and strong entrepreneurs and their planning is done on the move. So step one is; what is the plan and what skills do I need around the table?”

This might lead a family business to appoint a board of advisers, rather than a formal board of directors. This board might include some family members and senior management, the company’s accountant and lawyer and some outside experts in particular areas the company struggles with.

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