Do boards have a role in family business

Prof. Waswa Balunywa, Ms. Brenda Wejuli and Ms. Diana Ntamu

Makerere University Business School, Kampala, Uganda

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IntroductionPurposeTheoretical backgroundLiteratureMethodsFindings and DiscussionsConclusionsRecommendations

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Family Businesses(FBs) constitute over 90% of businesses worldwide ( Lachlan,2011).

About 33% of FBs are successful in the 1st generation, while 10-15% make it to the 2nd generation(Ward, 1987)

FBs are where management and ownership is in the hands of the family

This raises governance issues especially at the Board level.


Create the most new jobs in an economy

Source of livelihood for many families

Contribute to GDP and economic growth(IFERA, 2003)

Businesses are able to be transferred to several generations


Boards are one of the most important governance mechanisms through which FBs can safeguard shareholders and public wealth ( Cruz et al, 2010, Luio & Chung, 2005)

Board of Directors Roles are primarily three: Strategic Service Control(Ahmadu, 2011)


Boards play an important role in strategy and control of business.

In family business boards are managed by family members

Independent board members play an important role

In FBs the independent Board members appear not to have a role.


Most FBs emphasize the idea of family influence through ownership and management( Chua et al, 1999)

In FBs Board governance entails avoiding conflicts between family members’ family and the business roles while preserving unity among the family members(Lane et al, 2006)


Family business boards are typically dominated by family directors( Voordeckers et al, 2007; Westhead et al, 2002).

Few family businesses employ non-executive directors

FBs may rely on outside members for required functional skills and independence of mind( Milliken, 1999, Roberts et al, 2005) to perform board control task.


Overall Objective To establish the role and contribution of Board of Directors in the Family Businesses Specific:To establish whether Boards exist in Family BusinessTo establish composition of board members in Family BusinessTo establish the role of Boards in Family BusinessTo establish whether FBs have outside directors


Agency Theory( Jensen&Meckling, 1976) Most dominant theoretical paradigm for studies of Corporate Governance(Aguilera, Gospel and Jackson, 2008)Jensen defines agency relationship as a form of contract between owners(principal) and managers(Agents) The need to adopt the right CG mechanism is driven by the agency problem that makes it difficult to bear the cost of monitoring managers04/11/23 Makerere University Business School 10

The central idea behind the principal-agent relationship is that the principal is too busy to do a given job and so he hires an agent( Acting for)- not enough time to do everything(Mitrick, 1984)

It also means that the principal cannot monitor the agent perfectly

he doesnot have expertise or access to specialized knowledge


These create agency problems of:

Information and Knowledge asymmetries( not knowing much about the person and whet he/she does at a particular timeOpportunism(pursuing self interest with guile(Williamson, 1975)Collective action problems


Agency theory dictates that the principal will try to bridge the information asymmetry by installing information systems and other monitoring mechanisms like BODs ( Fama & Jensen, 1983)

Agency theory helps the BODs in finding solutions to a narrower problem of CG


Graig, 2012 Views managers as stewards of particular

interest groups and gain higher utility from collective behaviour than from individualistic behaviour and self-serving behaviour as presumed by agency theory(Klein, 2006)

Stewards will protect and maximize shareholders’ wealth through performance(Davis, 1994)


It argues that insider-dominated Boards contribute a depth of knowledge, expertise and commitment to the firm which facilitates an active strategy role(Qing YANG, 2008)

It stresses the realization of people’s self worth; managers value that being involved in the company’s strategic decision-making and hope gets the Boards’ respect

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Studied 10 Ugandan FBs Qualitative research designTo collect Data We used in-depth individual interviewsSelection of 10 Family Businesses Business for 15 years and above Family owns and controls 50%Interviews were recorded and

transcribed, analysed using content analysis


Boards in FBs often have few directors with one or two family members on the board in addition to founder(Ward & handy, 1988)

Where there is an outside director on the board, it is often a person with a close connection to the CEO, a banker or a friend.

Founder often exercises power over the board through


Boards in FBs are pictured as rubber-stamp boards that only meet formally, approve what the owner-manager has already decided to do (Mace, 1971).

BODs will appoint independent directors based on Experience and Trust-

Knowledge of the business- they are able to understand the role and contribution of outside boards in FBs Context


Do Boards exist in Family Businesses? Over 80% of the family firms

interviewed had boards, however only 3 out of the ten family business had functional Boards


In one of the FBs the Board mainly focused on monitoring activities, while the strategic issues seemed to be more prevalent in two of the FBs.

In 2 FBs the Boards were very active in the areas of strategy, service and control.


All the 10 Family business boards interviewed had family members dominating the Boards, these were children of the founders, and working in the business.

only 3 out of 10, had outside directors and others were non-family members but also working in the Family business

In many cases board members are hand picked by management


Family business boards are typically dominated by family directors( Voordeckers et al, 2007; Westhead et al, 2002).


8 out of the 10 FBs did not have outside directors although one of them was considering the possibility of having one.

Most Boards were dominated by family directors (see Voordeckers et al, 2007)

The number of family members on the boards had increased over the generations


One with independent directors did not make up majority of the Board

One FB had an independent director as a requirement from the Bank

Those with outside directors


With regard to family governance, it was noted that informal meetings increased in importance from the second generation. This were held usually at breakfast or Dinner

Formal meetings took place once or twice a quarter


Families are better monitors of managers than other types of shareholders(Setia-Atmaja, 2012).

Owners of FBs are reluctant to appoint independent directors because they do not want to lose control and Trust(Amran &Ahmad, 2012)


FBs face a unique Agency Cost.They usually struggle with adverse selection because of nepotism and sometimes selection on less-capable agents. Because some family members are compensated quite well, regardless of merit, and their job tenures are relatively secured, principals may lack important incentives to constrain agent behaviour.


Education

Do boards have a role in family business