Title

Guidelines for Family Business Boards of Directors

Department

Management & Entrepreneurship

Document Type

Article

Publication Date

6-2006

Abstract

Governance reform of publicly held corporations is an important topic these days, but a critical subtext has been missing from this often searing debate. Namely, what is the significance of these governance reforms, de jure and de facto, for the publicly held corporation's distant, smaller, but economically robust brethren—namely, the closely held, family-owned business? Should these family-owned entities be held to the same governance guidelines and standards that apply to those firms making up the ranks of the Fortune 500, for example? To put it another way, does one size fit all? We caution that many of the most popularized corporate governance practices may be detrimental to family businesses. Many of these recommendations may harm family unity or might be too complex for private firms, and many are applicable only to very large, public companies with dispersed ownership. Popular corporate governance practices are focused toward a market model of corporate governance, found prevalently in the United States and United Kingdom, which involves companies with a widely dispersed shareholder base and a majority of independent, outside board members. In contrast, the typical family-owned business exhibits characteristics of the control model of corporate governance, found prevalently in continental Europe, Latin America, and Asia, which involves companies with a concentrated shareholder base and family member “insiders” active in management and the board. As a result of these differences, many of the new laws and recommendations may actually be harmful to family-owned businesses.