The cheat's guide to governance

Constitutions can be difficult and time consuming – that's probably why four out of five family businesses don't have one. A code of conduct can be a simpler way of going about it.

Every family business needs a code of conduct to manage conflict.

In theory, the ideal approach is to set up a constitution (The constitution solution to governance clutter, May 1). However, that’s easier said than done. The problem with constitutions is they’re time-consuming and everyone has to be consulted. They are not enforceable in law but they can get very legalistic.

This might explain why a KPMG – Family Business Australia survey has found that four out of five family businesses have no constitution. It has ever been thus – these findings are consistent with similar surveys in 2005, 2006 and 2007. For most family businesses, it’s too much work and runs the risk of bogging everyone down in process, bureaucracy and legalisms.

A code of conduct, on the other hand, requires less work. Without making it look like a constitution, it’s designed to put substance, formality and backbone, some would call it discipline, into the dealings of both the family and the business. Done well, it details the way things should be done.

The code has its limitations. It’s there to manage conflicts, not issues of governance or succession, even if it might help family business members process those problems.  

But a code can be important because family businesses are especially vulnerable to conflict on three battlefronts:  family dynamics, business issues and ownership. 

As I’ve pointed out before, family businesses can create their own unique kinds of conflicts that you just don’t find in other businesses (Beware the ticking conflict time bomb, May 28). Sparks can fly over parental issues, divorce, succession tensions, father-son conflicts, mother-daughter issues, sibling rivalry and the role of in-laws. The list goes on.

A code of conduct, like any best practice, should be seen as a tool, not a set of rules. The only way it can work is if each family selects practices that suit their particular milieu and business. 

It’s a document that sets out guidelines for how issues are to be resolved and managed backed by the framework of family values. It becomes particularly important for businesses that have several generations in play. It creates a communication framework. 

It should also seek to prevent conflicts by outlining issues that are most susceptible to conflict and stop them from gumming up the machinery of the business. The code can cover any number of areas and like each family business, every code is different and unique to that business.

However, there would be some common area that codes would probably address. These would include communication, being civil and not tolerating threatening, shouting or bullying, professionalism and showing respect and support for each other’s personal and business needs. It could also cover meeting procedures, conflict management, conflicts of interest, teamwork and sharing of information openly and honestly.

A family council could put the code of conduct together, consulting all members of the family. The council would first need to identify the core of shared beliefs that have shaped the family business. These might be informally recognised within the organisation or they might be codified in the form of an organisational values statement. This is the foundation out of which the code of conduct will grow. It needs to be put in language that everyone can understand. It has to be concise. It can use acceptable and unacceptable examples of behaviour to illustrate the point.

Business coach John Broons, who specialises in family businesses, says putting together a code of conduct could be as easy as the family sitting down and discussing family values, rules of behaviour and communication.

“Why does it need to be so difficult?’’ he says. “Why does it need to be framed in such language that makes it hard.”

And, he says, it’s a given that each code of conduct will be unique to that business. That means it has to be reviewed at least every two years as the business grows.

“Every family is different and every business is different so a code of conduct is just a set of words that will be descriptor for whatever document they are creating and they can change it whenever they want,’’ he says.

“You look at a million dollar family business where mum and dad and the two kids are working on it. You probably only need an A4 sheet of paper but as the thing gets to be a $5 million business they have 10 employees and there are conversations about how you staff it and how do we get cousin Joe into the business, it will need a little more structure to it.”

“As the business grows, so will the document as the issues change. As the economy changes, the dynamics change. These things are just a set of rules and rules can change if you choose to change them.

“It’s got to be written up so that the family says every two years there is the opportunity to do a full review of the  document. These are living documents, something that’s supposed to be not so hard and fast so that when the next generation takes over, they can mould it to their values.”

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