CHAPTER 8

The Future of Governance

The future of corporate governance is an increasing level of transparency. Since the dot-com bust of the 1980s and 1990s, the financial scandals of WorldCom, Tyco, and Enron and the advent of the Sarbox financial accountability legislation, there has been an increased emphasis on more transparency. Transparency regarding finances and accounting has been the focus, but also, an increased emphasis on being as transparent as can be on many other issues affecting the organization. For example, because of human rights issues abroad, many companies have reported steps they have taken to make sure their suppliers are treating employees safely without abuse. The advent of numerous social media platforms has created a need for significant transparency. Businesses cannot conceal their actions in secret (Institute of Directors in Southern Africa 2016).

Many companies now report on their sustainability regarding their purchasing. This is done to show consumers and other stakeholders they are not harming the environment or taking advantage of suppliers in developing countries. A 156-year-old family firm Bacardi Limited now publishes their environmental sustainability report. The report was based on stakeholder input, and shows corporate progress on areas such as reduction in greenhouse gas emissions, water usage, waste, packaging, and their commitment to buying from sustainable supplier partners (Bacardi Limited 2018).

The State of California created legislation in 2012 requiring companies doing businesses in California to disclose the social responsibility of their suppliers (JD Supra 2011; see Chick-fil-A statement of transparency in Appendix B).

Concern for Stakeholders

The reason for the rise in transparency is an increased concern for stakeholders. This concern is twofold; regulating bodies are increasing demands that all stakeholders be treated fairly, as well as increased knowledge and activism on the part of many consumers. For example, consumers want complete information regarding where their fish was caught. Was it caught using sustainable fishing practices? Consumers are asking where their products were made or assembled and what the human rights records are of members in a company’s supply chain.

SC Johnson, now in its fifth generation of family management, publishes a list of the ingredients used in its products. It started in 2009 and now includes information in 34 languages, in 52 countries, covering 5,300 products (SC Johnson.com n.d.-b). Consumers demanded information regarding their exposure to chemicals and the company responded with transparency.

Corporate Social Responsibility

The above-mentioned issues can be combined into a demand for increased corporate responsibility. Many companies now have an office of corporate social responsibility (CSR) and are tasked with making sure the company acts in a responsible manner in all endeavors. Many publish a statement on their website concerning their CSR standards and what steps they are taking to be a responsible corporate citizen. This is being driven in large part by an increasingly vocal and active consumer base (Niehm, Swinney, and Miller 2008).

Asian Family Businesses

Most of the economic growth for the rest of the century will be from counties like China and India among several others. In those countries, there is a proliferation of family-owned firms (Susanto and Susanto 2013). Often, successful families have several businesses in multiple industries. These families often dominate their economies, have a long-term orientation, outcompete their rivals, and will likely be responsible for the majority of the world’s economic growth for several decades (Björnberg, Elstrodt, and Pandit 2015; McKinsey Global Institute 2014, 2015; Tsao et al. 2018; Wang 2010).

Women in Family Business

In the last few decades, there has been a large increase in the number of women being involved in their own family business. In a 2007 survey by MassMutual Financial Group, 24 percent of surveyed family firms in 2007 had a woman CEO, up from only 10 percent in 2002. Thirty-four percent of CEOs surveyed said the company’s next CEO might be a woman. According to the study, these are substantial businesses, having $26.9 million in average annual revenues, with some reporting $1 billion in sales. Moreover, the report stated that women-owned businesses were more likely to focus on succession planning, to have a 40-percent lower rate of family-member attrition, to be more fiscally conservative, and to carry less debt than male-owned businesses. In 1994, according to another survey, 2 percent of CEOs in family businesses were women. In 2005, 9.5 percent of family business heads were women (MassMutual 2007).

In a 2015 study by the consulting firm Ernst & Young consisting of 525 of the World’s largest and oldest family-owned firms, 70 percent of surveyed respondents stated they were considering a woman for their next CEO, and 30 percent said they were strongly considering a woman for the position. Fifty-five percent reported at least one woman on the board, and 16 percent of board members were women. In a positive development, 22 percent of firms stated 22 percent of their top management is comprised of women, compared with only 12.9 percent average of all firms in general (EY 2015).

Working with Nonfamily Management

An area of improvement for family firms is better utilization of nonfamily management. This is a requirement if the business is to grow to scale and become as successful as it could be. The governance mechanisms of the company should consider how they treat nonfamily members, including compensation, promotions, communication, and levels of trust. Decision-making authority should be clearly spelled out. Often family firms ignore the decision-making hierarchy, which frustrates nonfamily management as well as outsiders (Kets de Vries 1993). Personnel decisions are often made from the point of view of the family values and personality issues, instead of standard performance criteria (Welsch 1996). To keep nonfamily employees and managers motivated and committed to the organization, they need to be treated well. Employees want to know how they will be evaluated, compensated, and promoted. They often wonder if there is a career path for them at a family firm. Proper governance procedures can help increase the professionalism of the family firm and make communication and decision making clearer for all.

Future Research

Much of the governance literature and family business governance research has been on U.S.-based firms. Because the growth of the global economy is tilting toward Asia, more research should be conducted on governance in the Chinese and Indian family businesses. Asian countries have a more collective culture rather than the individualistic cultures seen in the West. How does that affect governance?

Considering the rise of women in family business, more should be learned regarding differences they may have in choosing governance tools. Are they more open to governance mechanisms? Regarding the stakeholder and SEW approaches, and the vital relational aspects of family members, more research should be undertaken to understand at a deeper level on the varying motivations and ideals of individual family members. Are they humanistic? Materialistic? Individualistic? Religious? (Dyck and Schroeder 2005).

Nonfamily employees and managers are key to the successful operation of family firms. More research needs to be done regarding how the company can best encourage them and take advantage of their skills and experience. A family constitution, family council, and shareholder meetings may decide how family members are promoted and to whom they should report. Nonfamily management needs to see a career path at the firm. If they suspect rampant nepotism, they will leave.

The entire domain of family business suffers from a lack of an agreed-upon definition of what constitutes a family business. There is certainly a vast difference between a small completely owned family business versus a very large public family-controlled business listed on the S&P 500. At a minimum, the researcher conducting a study should clarify their specific definition of family business. The specific generation in control should be listed and discussed because this has been shown to influence governance structures and performance.

The evidence has been inconclusive regarding the performance of family-owned and family-controlled businesses and how they compare with their nonfamily counterparts. The difference may lie in the conflicting definitions of what is a family firm. More research needs to be performed in this vitally important area. If the superior financial performance of family firms is found to be true, it could change many people’s views of family businesses. The most important result may be a change in governmental policies to support and encourage family firms. Family businesses, based on the size of their contribution to the economies around the world should be supported and encouraged.

For Further Thought and Discussion