Dual governance methods, more independent director involvement crucial for family businesses: panel

FAMILY-RUN businesses, which currently make up about 60 per cent of companies listed on the Singapore Exchange (SGX), require better governance and due diligence processes, as well as greater involvement from independent directors, said speakers at a panel discussion organised by the Singapore Institute of Directors (SID).

This, the panellists said, will help these companies attract better external talent and remain competitive in their respective industries.

Marleen Dieleman, co-chair of the SID's family business group and one of the speakers at the Family Business Succession panel on Wednesday (Nov 17), pointed out that it is important for family-run businesses to have 2 types of governance: corporate governance and family governance.

"(I) know of directors who do not want to sit on a family board unless there is proper family governance... There's a part of due diligence that directors can also do in this respect."

Speakers at the panel acknowledged that there is significant demand for directors who are familiar with the unique challenges that family businesses face.

One of the common problems for family-run companies is transparency, which plays a role in multiple decisions and topics that will surface in board meetings. One of these topics is the remuneration and salaries of directors.

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Ho Kwon Ping, founder and executive chairman of Banyan Tree Holdings, and Laguna Resorts and Hotels, said most family businesses today recognise that remuneration for management and members at the corporate level must be "totally transparent and based on merit". But there are still gaps.

He cited the example of a family member who has contributed a lot and deserves more from the pool of dividends that goes to the family. "Many companies and family (management) structures don't recognise the differential rewards even within the family itself," he noted.

Panellists were also quick to stress the importance of independent directors in family-run corporations. Dieleman observed that independent directors can play a constructive role if they "enjoy the trust of the family".

Ho, for one, makes it "very clear" to incoming independent directors at his companies that there is a "big difference between salary ownership and family management".

Shareholder issues will be taken care of by majority shareholders, but he also has to ensure that his family members, whether or not they are members of management in the company, have to be responsible owners and shareholders. Both of these are separate things, he cautioned.

On that same note, Wong Su-Yen, chairman of the SID, said that it is important for management figures in a family-run business to distinguish between "the shareholder hat or the management hat" and "shareholder issues versus management issues".

This then sets a strong foundation for mutual respect between shareholders, management and the board, specifically for independent directors.

Although family businesses are able to pass on the baton across different generations, it will always be important for them to be able to attract good talent from outside the family circle.

The key to doing this, said Wong, is to ensure transparency around people management rewards, including for family members. Companies should also have a strong remuneration committee with independent directors, and have professional human resource systems and practices.

In terms of succession, Ho said there is a big difference between "catastrophic succession and planned long succession".

The former implies that it is the senior person's responsibility to name a person that will take over his role. The latter means companies have a relatively small pool of people for the position, and continually "build up bench strength" over time.

He said: "The whole succession issue is not me showing up one day and asking the board to make my son the CEO. That's not how it should work... The board with its nominations committee should be continually discussing top management."