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© 2012, Pablo Hafner
E-book ISBN: 978-3-033-03434-1
The partial or total reproduction of this publication is strictly forbidden. It may not be stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanic, photocopying, recording or otherwise, without prior written permission of the copyright owners
Hafner & Partners GmbHSchwerzistrasse 68807 FreienbachSwitzerland
Globally, family firms account for almost 90% of the international
business sector. Hence, the governance of these companies
becomes extremely important when the consequences of non-
functional governance are taken into consideration. It is not
uncommon in family-owned businesses to find that once the firm
has started a sideways trend or downturn, the company’s leaders
become overwhelmed and take actions that may not be in the best
interest of the firm, either on a long-term or short-term basis. In
some cases, negative business trends drive these leaders to
implement contradictory governance strategies as a way of
denying the real problems, which inadvertently delays solutions.
Painful strategic renewal measures follow.
In the current immensely challenging economic environment,
board members must be fully committed to and engaged in their
firm’s long-term strategy as well as to short-term adaptations to
strong shifts in the environment. Boards of directors that manage
to avoid negative situations are able to appoint key people at all
levels in the firm. These boards of directors are well diversified,
directed by a charismatic and highly principled leader, and seek to
maintain and regenerate key human resources within the firm. The
chairperson, who may or may not be a family member, is the
ultimate actor in charge of making the business function properly
and is also responsible for aligning the interests of all the parties
involved in the family firm. Only companies with a strong
1
Foreword
chairperson and functional board of directors are capable of
perpetuating the firm by adapting to strong shifts in the economic
environment.
This booklet addresses the need for an analysis framework that
describes the effectiveness of successful boards. The resulting tool,
TheWiseBoard©, targets four “pillars” that support an
entrepreneurial family firm: a) shareholders’ strategy, b) board
structure and board internal dynamics, c) strategic alignment
amongst all parties involved in the governance system and d)
generalities, which are the roles and responsibilities of the
governance system that affect the overall management of the
family firm. If these four pillars are functioning properly, they
constantly interact to guarantee efficient internal dynamics within
the board of directors of (in our case) family firms.
This booklet and its accompanying tool, TheWiseBoard©, are
designed to help maintain the strength of healthy family-owned
businesses and bolster and improve struggling family-owned
businesses so that they may institute effective changes and
become successful once again.
Pablo Hafner, April 2012
2
Foreword
Foreword
Introduction
Governance System
What is TheWiseBoard?
Need of an Assessment Tool
Success Cases
Conclusions
Research Methodology
About the Author
1
7
11
29
35
45
53
57
59
5
Contents
12345
A key factor of success that is needed to
achieve sustainable performance in a shaky
financial climate, such as the one we now
face, is an effective corporate governance
system that is reflected in a dynamic board
of directors.
Family firms represent over 90% of the world’s economy. Studies
of family firms highlight a number of specific features and
challenges that family firms face in turbulent times: competition is
tough, business cycles are short, and the need of a clear vision
becomes crucial. Consequently, most family firms must eventually
make organizational changes and develop an entrepreneurial
mindset that allows them to identify and take advantage of any
economic opportunities that may come along. A key factor of
success that is needed to achieve sustainable performance in a
shaky financial climate, such as the one we now face, is an
effective corporate governance system that is reflected in a
dynamic board of directors, as illustrated in Figure 1.
Figure 1. Pillars of an efficient governance system in family firms
7
Introduction
The pillars of an effective corporate governance system are:
A. The Entrepreneurial Family
In order to achieve continued growth and longevity, family firms
must pass on to the next generations the entrepreneurial mindset
and capabilities that enable such firms to create new streams of
wealth across generations. This primary pillar is supported by the
other four ones.
B. Shareholders’ Strategy
Shareholders must be responsible not only for defining the path
they desire for the company, but also for the designation of the
board president, who is the cornerstone of the entire governance
system. The shareholder strategy includes a succession plan as
part of the overall business plan for the firm.
C. Board Structure and Board Internal Dynamics
Effective corporate governance of an entrepreneurial family firm
implies not only the skills of the board members (experience,
expertise and reputation) but also their relational abilities (network
of ties to other firms and stakeholders) and the ability to work with
each other as a cohesive, yet diversified, body.
8
Introduction
D. Strategic Alignment
The board of directors must be clearly aligned with the family’s
interests, and all the other key actors in the firm (senior
management and workforce) should follow the board’s directives.
Independent board members should be appointed to facilitate
strategic decision-making within the board of directors and serve
as facilitators of communication among family members. The lack
of independent directors within a firm that is experiencing tense
family dynamics could lead to operational paralysis.
E. Generalities of the Governance System
The basic, fundamental roles and responsibilities of any board of
directors include their provision of counsel and advice for long-
term success, control of effective allocation of capital and other
governance actions that work to achieve the well-being of the
family firm.
The following sections explain the components of an efficient
family governance system.
9
Introduction
10
Regular assessment of the effectiveness of
the corporate governance system is
important to detect fault lines in the
s t r a t e g i c a l i g n m e n t a m o n g s t t h e
shareholders of the firm, its board of
d i rec tors , sen ior management and
workforce.
The term governance system describes all of the institutions and
mechanisms by which firms are governed. The purpose of
corporate governance is to induce, oblige and motivate senior
management to keep the commitments (i.e. budget fulfillment,
revenue growth, effective strategies against competition, etc.) that
they make to shareholders. As a consequence, the family
governance system must safeguard the integrity of these
commitments that are made by managers to family owners.
The main institution of a company’s governance is the board of
directors. Its composition, diversity and internal mechanisms
determine its functionality and its effectiveness. Oftentimes the
internal dynamics of the board of directors is assumed to be
working perfectly well until external shocks affect the performance
of the firm. Then, a change in direction is warranted and enacted
through strategic renewal processes. Under duress, the faults that
are present in a board of directors rise to the surface, with the
possible consequences of strategic paralysis and organizational
crisis. Therefore, regular assessment of the effectiveness of the
corporate governance system is important to detect fault lines in
the strategic alignment amongst the shareholders of the firm, its
board of directors, senior management and workforce.
As mentioned earlier, a functional board of directors gives careful
consideration to the four important pillars that support the
11
Governance System1
entrepreneurial family business and make the board operational: a)
shareholder strategy, b) board structure and internal dynamics, c)
alignment amongst all parties involved in the governance system,
and d) generalities of the governance system that incorporate the
responsibilities of the board. These four pillars are vital for the
governance system to function properly, and their separate
contributions to the system are interrelated.
A. Shareholders’ Strategy
The owning family must have its strategy clearly defined in terms
of estate and in terms of the economic and non-economic
objectives the family has for the firm. Estate planning involves the
future holdings of the shares as distributed amongst the members
of the family (regardless of whether the family wants to preserve
the shares in family hands or not). This family strategy, agreed
upon by all members of the shareholding family, should have
economic and non-economic objectives for the business. The
economic objectives are usually quite clear: returns of investment,
market share, profits, dividends, etc. However, the non-economic
objectives are more difficult to define and achieve, and they
represent the link between the company and the community in
which it operates. Basically, the concept is this: “If our company
grows, the community will grow with us to share our success”, thereby making the company instrumental in increasing the
standard of living within the community in which it operates. Thus,
12
Governance System
the family business can guarantee its place in the market over time
due to the win-win effect that it creates. Successful family
businesses, i.e., those that remain in family hands for generations,
are the companies that have well-defined non-economic objectives
that are incorporated into the family strategy. Examples of non-
economic objectives are listed under “Corporate Social
Responsibility” in Wikipedia and include conditions of employment,
minimum conditions to be met by suppliers, corporate
transparency, respect for the environment, etc. The proper
definition and implementation of non-economic goals are vital to
the survival of the company.
As one of the ultimate objectives of any family firm’s ownership is
to pass the firm onto the next family generation, the shareholder
strategy also must include a succession plan. Succession,
irrespective of its nature, always represents a turning point in the
evolution of any company. Succession usually is seen almost
exclusively as family succession, but any type of succession, if not
addressed properly and at the right time, can be a traumatic
experience for the business. A generational change process usually
takes an average of four years (and a maximum of seven years). A
smooth transition is achieved only when all parties agree with the
succession process. In the case of succession within the owing
family, it is essential to train the successor(s) in corporate and
family issues and also have the approval of instrumental non-
13
Governance System
family members. Although the successor inherits shares in the
company, the leadership role itself cannot be inherited; it must be
earned. This concept may be taken for granted, but nonetheless is
often neglected in family-owned businesses. Many family business
owners appoint a relative as a successor without taking into
account any negative effects that may accompany such action. The
possible lack of acceptance of the successor by colleagues or even
customers and suppliers can cause the decline of the business over
time. Although unfortunately it is not common practice to do so,
the process of succession should involve all parties within the
company who are susceptible to generational changes. Questions
to ask include: What will happen to the company when board
members leave or retire and successors are required? How will the
succession affect particular teams within the company? What will
be the reaction of an extremely loyal customer base if the owner
retires or sells company?
In order to help anticipate the answers to these questions and
others, the owning family must have a shared vision about the
business that should be reflected in a realistic family strategy.
Thus, both family board members and the family council should
agree on the family’s values and vision for the company, and they
must transmit to the company a strategy that is in keeping with
these values and vision. A family constitution should be the
14
Governance System
instrument by which a family governs and performs its duties as
the owner(s) of the company.
B. Board Structure and Board Internal Dynamics
Ideally, the board of directors of a family-owned business should
be independent from the company management and from the
ownership (although owners should be represented on the board)
in order to stay objective and neutral. This independence allows
for objective opinions and helps to guide and assist senior
management, if necessary. Also, the structure of the board of
directors should not be more complex than the structure of the
firm’s management. That is, the size and composition of the board
should be in keeping with the size and composition of the firm’s
management. Furthermore, the board’s functions and interests
must be aligned with those of the company. That is, if the
company has a financial manager, the board should have a
financial expert, and if the company has a commercial manager,
the board should have an expert on trade issues, new markets,
etc.
In order for the board of directors to function effectively, specific
tasks must be assigned to each member of the board. This notion
brings about the board’s committees, formed according to the
needs and complexity of the company, which may include audit,
nomination and remuneration committees.
15
Governance System
The skill sets of the board members should be diverse, and board
member profiles should include:
The “networker”, who has major corporate and political
contacts.
The “creative director”, who provides creative ideas, new
business, new markets, etc.
The “organizer”, who organizes the ideas and proposals of other
directors and makes them workable.
The “enforcer”, who looks for ways to implement the ideas
generated by the board.
The “mediator”, who looks for consensus among his/her peers.
It may not be necessary to have a board member for each profile.
Diversity and efficiency also can be achieved if a board member
exhibits traits of more than one of these profiles or when a board
member complements the profiles of the other directors. That is to
say, fewer than five board members may incorporate all five skill
sets noted in these profiles.
Given that the “board” here refers to that of a family business, it
must have active family representation. Furthermore, in order to
meet the diversity criterion, the board of directors, in addition to
having family representation, must have external presence in
terms of both independent and executive members. It is
16
Governance System
recommended that independent external board members
constitute the majority of the board.
The board of directors should meet on a regular basis and have a
well-defined agenda for each meeting. The meetings should take
place four to six times per year and should include an entire day
once a year that is designated for discussing the long-term
strategy of the firm. The annual meeting should take place off
premises in order to distance the executive board members from
the day-to-day operations of the business. Because boards of
directors are strategic in nature, the meeting agendas should
contain only strategic issues and look to the future, not to the
past. Items on the agenda should be varied, but objective.
Important family issues should not be discussed during board
meetings, but rather at family council meetings. Independent
directors, given their objectivity and neutrality, must ensure the
objectivity of board meetings, thus leaving family issues outside of
board activity. In addition, although the board of directors must be
keenly aware of the firm’s financial status at all times, it should not
assume responsibility for scrutinizing the company’s past financial
statements. This activity, i.e., analyzing past results, should be
addressed at shareholders' meetings. However, the firm’s budget,
and how to meet that budget as it represents the future
development of the firm, must be addressed by the board of
17
Governance System
directors so it can advise the firm’s management about the best
way to accomplish the business goals.
Boards of directors should be responsible for translating the
strategy of the family into a viable business strategy. Once that
step is completed, the board of directors should be able to guide
the top management in the implementation of the business
strategy, and also should lead and support senior management to
facilitate the achievement of this strategy. To perform these tasks
successfully, the directors must receive information for board
meetings well in advance (between one week to ten days ahead)
to prepare for the meetings effectively.
During each meeting, discussions must be properly documented
with detailed minutes. Similarly, all board meetings must begin
with the approval of the minutes of the previous meeting. Again,
the agenda shall be agreed upon by the board members and must
focus on the most important strategic issues to ensure the success
of the company.
Boards of directors have three internal parameters to consider:
Cognitive (the various views, opinions, and knowledge made
available to the board by its members).
18
Governance System
Affective (disputes, frictions and misunderstandings amongst
board members that may take rational communication to an
undesirable level).
Executive (the amount of time and effort expended by the
members of the board in the achievement of their tasks).
A proper balance of these three parameters makes the board of
directors operative and effective. For example, a highly diversified
board will generate numerous different points of view regarding
the management of the business and the direction to follow.
Excessive points of view may generate misunderstandings and
friction that can lead to undesirable debate and emotion. The
board would then cease to perform its functions of effective
control, guidance and support. On the other hand, a board with
moderate diversity, but one that provides an appreciable amount of
knowledge (though it might need to be improved), will be able to
maintain a rational tone of communication. If the first two
parameters (cognitive and affective) are managed appropriately,
then the third parameter (executive) will be well-balanced also.
It is clear that the role of the chairperson of the board of directors
is vital in the implementation of all the points above. The chair also
should evaluate board members regularly, once a year at least,
and should take corrective action in the event of poor
performance. Finally, the board of directors, applying the
19
Governance System
appropriate tools, also must evaluate its own members regularly
(once a year). The contribution of the board members to the board
meetings should be examined carefully. As their contribution
should be primarily strategic, the board members must take into
account their long-term contribution to the company to ensure the
viability of the business, despite any family, market, economic,
social or political instabilities.
C. Alignment Amongst all the Parties1 Involved in
the Governance System
As the owning family is responsible for defining its family strategy
– that is, the strategy that the family wants for its business that
the board of directors, in turn, is responsible for translating into a
viable business strategy – this strategy should be in line with the
objectives of the shareholders. Such an alignment ensures that
both the shareholders (business family) and the board of directors
work towards the same purpose and objectives. In other words,
because the board of directors translates the family objectives into
business objectives, the board ensures that the family business as
a whole works to meet the wishes of its shareholders. The board
members, because they play such a critical role in the functioning
of the company, should be financially compensated according to
company performance (fixed plus variable compensation).
20
1 Shareholders, board of directors, senior management and workforce
Governance System
Once the business strategy is set, the function of the senior
management is to execute it according to the criteria set by the
board of directors. At the same time, the board must control, guide
and assist senior management in achieving those objectives.
As two complementary bodies, the board of directors and senior
management must work together, because they need each other
to function properly. In short, the board translates the wishes of
the family into a realistic and viable family strategy, and senior
management is responsible for executing it; thus, it is essential
that the board and senior management are completely aligned
with the wishes of the family.
As with board members, senior management executives, who
serve as the executive arm of the board of directors, also should
be compensated financially for their work (preferably according to
whether objectives have been met) and must at all times follow
the objectives set by the board of directors. The remuneration of
senior executives should be set, regardless of their status as family
or non-family board members.
Furthermore, the continuing professional development of members
of the board of directors and senior management is vital for
keeping the family values alive within the company, and thereby
ensuring alignment of the firm’s objectives amongst these actors.
21
Governance System
Therefore, family values, inheritance and succession policies,
employment in the company, compensation, corporate social
responsibility, etc., are factors to consider in the design and
implementation of the business strategy.
Finally, in addition to consideration of generational changes within
the family, provision should be made for generational changes
within the board and senior management. These changes should
be anticipated to the same extent as they are for generational
family changes. Furthermore, because the next generation of
owners may have a different vision for the business, they are
responsible for re-aligning the board of directors and the senior
management according to their new vision.
Several reasons can be given for a company to survive over time;
one of them is the degree of employee involvement in the
corporate strategy. The big challenge here is the ability of the
business family, the board of directors and senior management to
involve all the employees in overall decision-making and to involve
them in the family vision by extending some family gatherings to
include employees (even those who hold lower decision-making
power). In this way, the family’s values, vision, long-term ideas,
succession plans, etc. are spread throughout the organization and
are instilled in the workforce. Once these values are internalized by
the employees, and indeed in board members and senior
22
Governance System
management as well, company members will gain a sense of
loyalty and will feel, to some extent at least, part of the family’s
achievements. Involving employees and engendering their loyalty
is critical to ensuring the sustainability of the company over time
and is integral to the concept of strategic alignment.
As a result of involving the employees in the company’s ideology,
the owning family must also take corrective actions if they see that
members of the workforce do not conduct business activities in
accordance with the family values, which were defined initially by
the shareholders. Communication, both internal and external, is
essential to achieving this level of homogeneity and shared family
vision within the various levels of decision-making in the family
business. Families have different ways to align these interests: i.e.
naming senior managers and/or workforce representatives to
membership on the board, inviting them selectively for
presentations at board meetings, giving them shares of the
company, getting together the owning family with the workforce in
the form of retreats, company meetings with suppliers, etc, in
order to raise awareness of the family values in the workforce.
In short, the alignment of all parties involved in the governance
system, i.e., the family shareholders, board of directors, senior
management and workforce, is essential to the overall
effectiveness of the family firm.
23
Governance System
D. Generalities2
One of the main characteristics of a family business is that the
owner family is especially interested in preserving the family
wealth, i.e., keeping the business in the family’s hands. Thus, the
family’s investments generally are oriented towards long-term
investments, referred to as patient capital, and represent one of
the greatest assets of family businesses. Patient capital, along with
the non-economic objectives of the owners, allows family
businesses to survive economic downturns as well as family, social,
economic and political crises. Thus, a long-term strategy, proper
representation of family values and vision, the preservation and/or
increase of the company’s social value within the community, and
the proper preservation of family assets over time are key tasks of
the board of directors of a family business.
Furthermore, the board of directors should be prepared to react to
a possible takeover bid by an aggressive investor and be prepared
also to counter the undesirable effects caused by any ensuing
economic instability. The strategy followed by the board of
directors must take into account such incidents, or at least the
possibility that such incidents may occur. The board must report
regularly to the shareholders any and all risks to which the
company might be exposed. To be prepared for such events, the
24
2 Additional factors that affect the effectiveness of the governance system of family firms.
Governance System
company should be duly audited (both internally and externally),
bearing in mind the size and complexity of the business. Through
the audit process, the owners can become aware of the actual
circumstances of the company at all times and can be assured of
the accuracy and objectivity of the information.
Moreover, the board of directors must provide a neutral objective
point of view that is without emotional influence. If this objectivity
is considered to be the most basic and fundamental contribution of
the board of directors to the company, then the board’s structure
and internal dynamics must be comparable to the best examples
available in the market. There is no single system of governance
designed for a particular family firm. As the company reflects the
values and vision of the family, and as the company is a unique
and unrepeatable entity, then too is the board of directors of the
family business unique to the company and should be constructed
according to the needs of the family.
For the board of directors to contribute a neutral point of view that
is objective and void of emotion and one that allows it to control,
guide and assist the operational management of the company, it
must be open to external and independent viewpoints. These
independent views are achieved by:
25
Governance System
Including independent directors,
Engaging in open communication with all stakeholders of the
company,
Facilitating the voting power of the independent directors,
Providing company information to major stakeholders to
facilitate their contribution of knowledge in the guidance of the
company, and
Publishing the code of conduct for the business.
In short, these so-called generalities incorporate various roles and
responsibilities of the board of directors, such as providing counsel,
making investment decisions, reacting to market forces, remaining
objective, and ensuring the overall effective management of the
family business.
Once the governance system of the firm is put in place and works
properly, all of the board members can perform their duties and
responsibilities according to the shareholders’ values, mission and
vision, and can work together as a solid team. However, the
functioning of the governance system can lose effectiveness over
time due to a gradual or sudden degradation of its internal
dynamics. Therefore, the board of directors should be evaluated
periodically in order to curb any deviation that may occur. It is
advisable to evaluate the board dynamics every year or, at the
26
Governance System
maximum, every three years, and to take any necessary corrective
actions in order to maintain effectiveness.
The next section explains ways to evaluate the effectiveness of a
corporate governance system.
27
Governance System
28
The assessment tool, TheWiseBoard©,
gleans survey responses from various actors
associated with the firm and then uses these
responses to assess the board of directors.
TheWiseBoard© then establishes criteria for
specific improvements to be implemented in
an action plan.
TheWiseBoard© is an internet-based assessment tool that
examines the dynamics of the corporate governance system of
non-listed family firms. This tool (explained in detail in Section 4)
gleans survey responses from various actors associated with the
firm and then uses these responses to assess the board of
directors. TheWiseBoard© then establishes criteria for specific
improvements to be implemented in an action plan; see Figure 2.
Figure 2. TheWiseBoard© process
Assessment of the Governance System
Within TheWiseBoard©, special emphasis is given to dynamic
analysis factors that lead to and guide appropriate interactions and
negotiations amongst the board members (directors) and that
identify ways that these board members achieve the following:
consensus in the decision-making process, strategic alignment
amongst the most relevant actors, and a socially responsible
corporate governance system.
29
What is TheWiseBoard?2
In order to apply this assessment tool (a “check box” (√) type of
survey form) and set out an action plan for improvements to the
governance system, the necessary first step is to analyze the firm
by asking its family shareholders to ascertain the assessment
criteria. Once these criteria have been determined, the
shareholders are asked to specify (via the check box survey in
TheWiseBoard©) the “level of need” for each criterion in order of
importance from not important to very important. These responses
evaluate how necessary the respondent believes that each criterion
should be to the effective governance of the firm. Next, they are
asked to evaluate the “current performance” level in terms of their
degree of satisfaction, from not satisfied to very satisfied, for each
of the same criteria. This second tier of responses evaluates the
degree to which the respondent is satisfied that each of the
performance criteria is being met. These two levels of survey
responses, i.e., “level of need” and “current performance”, thereby
provide the data for a gap analysis.
The process of identifying and clarifying the shareholders’ ideas is
of utmost importance in the development of the entire governance
system. Shareholders should be responsible not only for defining
the path they desire for the company, but also for the designation
of the board president, who is the cornerstone of the entire
governance system.
30
What is TheWiseBoard?
Once the survey has been carried out with all of the available
respondents for a given firm, the results are then analyzed in order
to determine areas of improvement. This analysis begins by
defining the gap between the perceived desired level of need and
the current level of performance. Accordingly, a detailed action
plan is developed based on the analysis of the responses.
Action Plan
Once the board has been assessed via TheWiseBoard© survey, an
action plan is determined and can be implemented. The action
plan considers various ways to reduce the gaps that exist between
the perceived level of need and the current performance for each
criterion assessed, as identified by the respondents. The action
plan serves as a “tailor-made suit” for each company, and reflects
the temporary situation in which each company currently finds
itself. Because the action plan addresses a dynamic situation, it
must likewise address all the dynamic components of the corporate
governance system and must provide detailed instruction as to
ways to improve those dynamic components. Therefore, the action
plan must:
Help shareholders clearly define their economic goals (i.e.,
market position, revenue, income, etc.) and non-economic goals
(i.e., corporate, social responsible targets, succession plans,
etc.)
31
What is TheWiseBoard?
Help the board translate the shareholders’ goals into a feasible
corporate strategy.
Encourage the widest possible array of opinions and/or points of
view from board members during their meetings, without
negatively affecting the dynamics in the decision-making
process that could arise due to conflicts, disparities and/or
excessive information.
Facilitate the decision-making process of the board members by
optimizing all of the resources of the board and eliminating all
barriers and roadblocks (i.e., resolve any conflicts that may arise
in the decision-making process).
Define a corporate governance structure that is both stable and
dynamic, adopts long-term decisions, and is also versatile when
faced with unexpected corporate issues (i.e., market shake-ups,
takeover offers, etc.).
Structure a board that is sound, cohesive, well-networked and
aware of the global socio-economic environment.
Set out operational guidelines so that the governing body will be
able to prevent and/or reverse an organizational decline.
Create the necessary corporate stability to anticipate
generational changes (of the family, of the board members, or
of the senior management) and adequately plan the succession
of these actors to avoid traumatic generational transitions,
which will serve also to perpetuate the family’s values despite
generational changes.
32
What is TheWiseBoard?
Identify and overcome any possible constraints that exist in the
communication amongst all the actors – owners, board,
members of the senior management and workforce in general –
in order to achieve total strategic alignment.
Promote a “psychological contract” amongst all the actors in
such a way that the continuity of the “corporate identity” is
guaranteed.
33
What is TheWiseBoard?
34
The difference between “level of need” and
“current performance” provides a “gap”,
which thereby provides gap analysis data to
assess and identify definitive improvements
for the firm’s governance and to create a
tailor-made action plan for immediate
implementation.
TheWiseBoard© comprises an internet-based survey to help
assess the dynamics of the board of directors. The survey form,
with check (√) boxes, is composed of four distinct categories that
reflect the four primary pillars (designated as A, B, C, and D,
respectively, in TheWiseBoard© survey) that are associated with
the effective governance of an entrepreneurial family business:
A. Shareholders’ Strategy
B. Board Structure and Board Internal Dynamics
C. Strategic Alignment Amongst All Parties Involved
D. Generalities
Figure 3. Initial screenshot of TheWiseBoard©
35
Need of an Assessment Tool3
The initial screen (see Figure 3) allows the user to read two
TheWiseBoard© success stories (Case Divertech and Case Printax
buttons), try a demo (Try Demo button) and to log in using the
username and password generated by the TheWiseBoard©
administrator. The survey can be completed in English, Spanish or
German.
Once the username and password have been entered, a short
explanation of the contents of the assessment (see Figure 4)
appears on the screen. After reading the explanation, the user
presses the Start button to continue. Each survey has a time limit
(date) that is displayed on the top banner of the screen.
Figure 4. Screen explaining the content of the assessment tool
36
Need of an Assessment Tool
Figure 5 shows part of the survey itself. The screen is divided into
three parts. The top part shows the position of the company for
each of the four pillars (A, B, C, and D) of an effective corporate
governance system that support the entrepreneurial family firm
(see Figure 1). The lower part has two components. The left side
shows the evaluation statement that pertains to the performance
of the board of directors (examples of these evaluation statements
are given at the end of this section) for a particular criterion, and
the right side allows the user to evaluate (click on) the “level of
need” of each criterion; responses may range from not important
to very important. The user also evaluates the “current
performance” of the firm for each of the same criteria; responses
may range from not satisfied to very satisfied. The lowest part of
the screen highlights the particular criterion pillar that is being
evaluated.
The design of the survey allows the user to identify the
characteristics he or she believes is important for good governance
in terms of “level of need”, and to identify his or her degree of
satisfaction in terms of the firm’s “current performance”. The
difference between “level of need” and “current performance”
provides a “gap”, which thereby provides gap analysis data to
assess and identify definitive improvements for the firm’s
governance and to create a tailor-made action plan for immediate
implementation.
37
Need of an Assessment Tool
Figure 5. Survey evaluation form showing the four pillars of an effective
corporate governance system; responses reflect “level of need” and “current
performance”
The user selects amongst the four pillars in terms of level of need
and current performance, as shown in Figure 6, before pressing
the Next button. This selection process allows a gap analysis to be
performed between the level of need and the level of satisfaction
with current performance, as identified by the respondent.
38
Need of an Assessment Tool
Figure 6. How to evaluate a specific criterion
After pressing the Next button, the lettered ball that corresponds
to the letter of the pillar (in this case A for Shareholders’ Strategy)
moves according to the response, as Figure 7 illustrates. If
“current performance” is ranked above “level of need”, then the
criterion is identified as being above the requirement level, in
which case the ball moves to the right of the screen. If “level of
need” is ranked above “current performance”, then the criterion is
rated as under-performing, and the ball moves towards the left. A
criterion whose level of need is ranked below neutral (middle
point) is not included in the evaluation. The final evaluation of
39
Need of an Assessment Tool
each of the four pillars reflects the average of all the criteria
evaluated for that pillar.
TheWiseBoard© assessment process then provides a final report
for each respondent and for the whole firm that highlights the
criteria that reflect unsatisfactory performance, as well as the
potential for improvement (see the circle around ball A).
Figure 7. Results after evaluating a criterion
40
Need of an Assessment Tool
Examples of Evaluation Statements Employed in
the TheWiseBoard© Assessment Tool
The assessment tool consists of 85 standard statements to be
evaluated that can be adapted to a specific company. So, when a
company member logs in, TheWiseBoard© directs the user to a
tailor-made survey for that specific company. The user is invited to
rate each statement according to level of need and current
performance. The following evaluation statements constitute a
reduced sample of the overall survey.
A. Shareholders’ Strategy
The non-economic goals (i.e., corporate, socially responsible
targets, succession plans, etc.) of the shareholders are clearly
defined.
The economic goals (i.e., market position, revenues, income,
etc.) of the shareholders are clearly defined.
The succession plan for board members is clearly defined.
B. Board Structure and Board Internal Dynamics
Directors, who are independent of management and owners,
are appointed to the board.
The board structure follows the company structure.
The board is sufficient in size.
41
Need of an Assessment Tool
C. Alignment Amongst all the Parties Involved in
the Governance System
The strategy defined by the board of directors is in line with the
ownership strategy.
The senior management identifies closely with the company’s
projects.
The senior management holds a realistic perception of the
business and business environment.
D. Generalities
Governance planning according to the business strategy has a
clear time horizon.
The company plan is in accordance with the shareholders’
interests.
The board safeguards the company’s assets
After the assessment results are tabulated, an action plan that
highlights suggested improvements can be discussed with one of
the Hafner & Partners consultants.
Hafner & Partners is an international consultancy firm that works
to establish a personable, professional relationship with its clients
to create a basis of trust so the goals and objectives of the client
and the firm are mutual and shared. Hafner & Partners focuses on
family-owned firms and specializes in facilitating firms to do
42
Need of an Assessment Tool
business in different markets, helping these firms with strategic
renewal and business rejuvenation strategies, implementing CEO
succession, and establishing effective governance structures.
43
Need of an Assessment Tool
44
Several family firms strategically renewed
the i r operat ions by improv ing the
effectiveness of the family governance
system. These examples represent just two
success stories out of many that describe
the type of support that TheWiseBoard©
can provide to family firms.
Divertech and Printax (not the real names of these companies for
confidentiality purposes), as well as several other family firms,
strategically renewed their operations by improving the
effectiveness of the family governance system. These examples
represent just two success stories out of many that describe the
type of support that TheWiseBoard© can provide to family firms.
DivertechEurope, founded in 1883, 2.500 employees, revenues of 630 million EUR
Divertech is a diversified technology group with six well-defined
business units and subsidiaries in 42 countries. Despite the
economic ups and downs over the last few decades, the firm has
weathered management storms and avoided financial ruin, thanks
primarily to the long-term leadership of its chairperson. However,
this is not to say that he did not make mistakes along the way or
that the road was without some rough spots, but overall, his
leadership righted the ship.
In the 2000s, Divertech’s CEO – who, significantly, was not part of
the board of directors – focused on investing in a newly created
division of the firm. The new division had to incorporate major
technological changes and, therefore, required capital-intensive
investments and, in turn, high external financing. Once the firm
was highly leveraged, the CEO proposed that the ownership should
45
Success Cases4
go public in order to raise large amounts of capital independently
from its credit institutions. But the ownership (about 70% of which
was controlled by one family and about 30% by three other
families) rejected the proposal as too risky and contrary to the
conservative wishes of its majority shareholder, the chairperson. It
is worth noting that in this initial phase the board was comprised
of four proprietary directors – the chairmanship was held by the
majority shareholder, plus three independent members.
Despite its relatively strong board of directors, and due mostly to
the CEO’s risky ventures, Divertech began a decline that was
evidenced by an unfavorable industry rating, economic turbulence,
and substantial external indebtedness, which put the company in a
financially tenuous position. The firm began this negative spiral
partly because of misunderstanding between the chairperson and
the CEO. The chairperson had always been committed to strategic
issues and exercised effective control of the operations, especially
the two divisions started by his predecessors as opposed to the
newly created one that required so much investment capital and
attention by the CEO. Once the decline was realized, the
chairperson decided to remove the CEO.
As a result of the downward direction of the firm, the main creditor
subsequently reduced the firm’s credit rating, sought tight control
of the firm’s strategy, and began to monitor the firm’s further
46
Success Cases
development. Once the board of directors had been evaluated, the
chairperson decided to complement the board’s skills with
independent talent that could respond appropriately to the
challenges faced specifically by the newly created division and
would serve also to renew and stabilize the management of the
troubled business units. TheWiseBoard© suggested bringing in
additional external talent as strategic sparring partners and
visionaries at the board level who could also help in mitigating the
upheaval associated with the changeover in leadership and would
support the next generations in addressing decisive company
matters. TheWiseBoard© was critically instrumental in providing
much needed governance support.
The whole process of strategic renewal took almost four years.
Normal market fluctuations took place during that time, so much
effort was needed on the part of all involved for the firm to
recover. One important factor that emerged from the evaluation of
the board of directors was the intense loyalty of the employees to
the chairperson and the strong involvement of the chairperson in
strategic issues. The chairperson was the clear leader and played
that role throughout the history of the firm. He managed the entire
strategic decision-making process efficiently.
Five years after its initial decline, Divertech became healthy again.
It has doubled its order intake and more than doubled its
47
Success Cases
operational cash flow. The strong leadership and determination of
the chairperson led to the company’s recovery while keeping its
operational activity independent from bank financing. Furthermore,
the chairperson’s unique positive attributes, such as his good
business sense, strong commitment to and engagement with the
firm, and strong leadership skills, helped the company to get back
on track. Importantly, Divertech soon will be looking toward the
handover of the firm to the sixth family generation.
PrintaxEurope, founded in 1951, 750 employees, revenues of 230 million EUR
Printax was once the worldwide market leader in printing
machines. During its most successful period, it had 22 branch
offices and 8 production facilities in 27 countries. Its major
competitor during those years lagged far behind it.
In its initial phase, the company’s culture was shaped entirely by
the founder, who was the patriarch of the company, full owner,
chairperson, the board of directors’ delegate, and CEO. He
managed the firm with tight control, imposing his ideas until age
81. Moreover, to secure absolute power, he disinherited his son
and sent him to Brazil to manage the firm’s South American
subsidiary at the age of 32. Loyalty to this authoritarian figure from
everyone in the company was unequivocal, but such loyalty was
48
Success Cases
fueled by his temper and intimidating presence, not necessarily by
leadership skills. The father directed everything with the close help
of his two most loyal collaborators, the CFO and the marketing
director. The board of directors in this initial phase was comprised
only of the father and these two senior employees, who were the
instruments of the chairperson, executing his every wish
throughout the organization, without question and regardless of
whether these decisions were sensible, reasonable or appropriate.
Once the father became ill, he named the marketing director to be
his successor as CEO, but kept the chairmanship for himself
throughout his serious illness until his death. To summarize,
Printax lacked long-term vision, its board of directors lacked
neutrality, and it suffered from the myopic and egocentric control
of its patriarchal owner and founder.
As a consequence of this lack of strategic vision by the owner, the
company entered a five-year period of internal iliquidity, high
indebtedness, and decreasing business volume. Despite this
decline, the father remained a dominating force; the other
members always approved of whatever he suggested with absolute
agreement on all proposed tasks and decisions. There was no
interaction, no brainstorming, no independent ideas, no sparring
partnership – only complete obedience to the chairperson. The
only alternative voice would have been the son, but he had been
disinherited and expatriated and was not even part of the board of
49
Success Cases
directors. The new CEO (former marketing director) and CFO
mirrored the father’s egocentric managerial style, treating their
subordinates in exactly the same way the chairperson had done in
terms of domination and intimidation. This behavior, together with
significant mismanagement on their part, brought the firm close to
collapse. The firm’s organizational decline was marked by lack of
credibility with its creditors, an increase in secrecy amongst the
executives, board members, and family members, a decrease in
the firm’s innovativeness, and lack of long-term strategic planning.
As a result of this spiraling decline, the major creditor performed
an assessment of the firm’s owners and board of directors. As a
consequence of this analysis, the bank reduced the company’s
credit line by 45% and announced a thorough restructuring
process. The bank implemented the following directives: remove
the founder from the organization, set up new management and a
professional board of directors, improve the financial statements,
provide a two-year cash-flow plan and provide a financial report to
the bank every two months.
The strategic renewal activities suggested, once the board of
directors was analysed by TheWiseBoard©, included appointing
well-known independent directors, unifying the board members to
ensure an efficient strategic decision-making process, increasing
the directors’ participation and commitment to long-term planning,
50
Success Cases
changing the firm’s competitive strategy as seen in the initiation of
several programs to improve productivity, and reorganizing
operations to ensure increased coordination and communication
among business units.
Printax is now fully profitable and back on track.
51
Success Cases
Corporate survival depends on the capacity
to establish socially responsible objectives,
and that such goals should guide
shareholders when it comes to conducting
their business. Performing or not depends
to a large extent on the capacity of the
board of directors to create value for the
entire community.
52
Family-owned businesses have unique characteristics, such as the
intrinsic values of the owner family, which often make these firms
outperform other kinds of businesses. But the very characteristics
that bring success to some family-run firms are also potential
factors that can be detrimental and can lead to financial struggles
or even ruin when family dynamics and emotional ties to the firm
come into play. When family businesses find themselves in trouble
they need to implement an effective governance structure that will
help resolve internal difficulties amongst family members and will
allow the family firm to set a successful long-term, sustainable
course. Proper governance of the family firm becomes crucial to
achieve a cohesive vision among all of the family shareholders and
to control and assist the management in achieving the firm’s long-
term strategic aims. Functional governance is based also on the
diversity of the board of directors in which family members and
independent members coexist and are led by an effective
chairperson.
Fortunately, well-governed family-owned businesses are in an even
better position than their larger publicly traded counterparts to
face an unstable business environment. At the outset of the recent
worldwide financial crisis, most people thought that large public
corporations would be prepared to withstand the blow. But they
were wrong. Rather, it was the very special characteristics of well-
53
Conclusions5
governed family firms that enabled such firms to ride out the
storm. The reasons for their success are three-fold.
First, in contrast to large public corporations, owner families have
non-economic goals in addition to financial objectives. It is
precisely such social, family- and community-oriented goals that
make these firms well prepared to survive long periods of crisis.
The priorities of keeping the firm in family hands, as well as the
strong link with the company’s local community, its social
commitment to that local community, and the high reputation of
the owner family in that community are factors responsible for
keeping these firms alive.
Second, given their strong local ties, family firms not only are
committed to increasing their shareholder value, but even more
importantly, to adding value to the entire community. The growing
tendency to gauge corporate return in terms of short-term
objectives, coupled with a lack of long-term vision, has had terrible
effects on the development of the economy. In contrast, successful
family firms have a corporate governance system whose main
objective is the creation of value for the entire corporate
community, understood as the shareholders, suppliers, customers,
and employees.
54
Conclusions
Third, successful family firms have been able to integrate the
entire organization – shareholders, directors, management and
employees – into their economic and non-economic goals, and
they are particularly interested in keeping the family values alive
for generations. A firm’s overall performance depends to a large
extent on the capacity of the board of directors of these companies
to create value for the entire community.
Observing the best examples, it would seem simple to deduce that
corporate survival depends on the capacity to establish socially
responsible objectives, and that such goals should guide
shareholders when it comes to conducting their business. Being
socially responsible implies not only setting up some non-economic
goals over and above financial goals, but also reflects the manner
in which such goals should be met and the ways that those
responsible for the achievements of the firm should be rewarded.
The unique characteristics of family-owned businesses, coupled
with effective governance and a strategic long-term vision that
incorporates both non-economic (social) responsibility as well as
economic fiscal responsibility, together provide a solid structure
that allows family firms to withstand the forces of a sometimes
volatile economic environment.
55
Conclusions
56
Research methodology is a collective term
for the structured process of conducting
research and is concerned with how the
design is implemented and how the
research is carried out. There are many
different methodologies used in various
types of research and the term is usually
considered to include research design, data
gathering and data analysis.
The findings and conclusions of this book are the result of a
qualitative study of family-owned firms that are based in Europe.
The study took place from 2007 to 2011 and employed semi-
structured interviews with more than 100 key decision-makers at
the board of directors level. In order to avoid drawing erroneous
conclusions due to potential bias, several individuals from each
company were included as respondents. Additionally, the results
were double-checked using secondary sources and checked also
with the respondents themselves to alleviate any misinterpretation
of their responses.
57
ResearchMethodology
Pablo Hafner
Dr. Hafner works directly with boards of directors to improve their
companies’ governance structures. In addition, he provides
ongoing training programs in best practices of governance for
owners, board members, family councils and advisors.
Pablo Hafner also specializes in advising and helping CEOs
implement successful turnaround management solutions. He has
led successful organizational transformations and complex
turnaround management projects in Europe and the Americas.
He is the author of various international publications, and his
articles can be found regularly in the international economic press.
He also has been a contributor to several books in the field of
family firms, corporate restructuring and governance.
Furthermore, he is a sought-after speaker for family-owned firms
in terms of governance and business transformation.
Pablo Hafner founded Hafner & Partners in 2004. He holds a Ph.D.
in Economics from the University of St. Gallen (Switzerland).
59