The commentary below emphasizes the practicalities of disruption and dynamic durability and how advisors to family enterprises might apply the report’s learnings in their practices.
Disruption Conjures Up an Image of Crisis and Disaster
The report references the caliber of disruptions that family enterprises are facing, including mounting geopolitical tensions, environmental degradation, demographic changes, ground-breaking technologies, and of course the COVID-19 pandemic. The pressure to pre-empt such disruptions is huge, and an effective, durable governance system is critical.
However, the dictionary definition also describes disruption as a disturbance or interruption. In essence, disruption is any change that impacts the existing family enterprise system. As we all know, change is constant, therefore disruption must be considered a permanent condition that needs to be proactively managed. Managing change necessitates managing the conflict that change inevitably creates.
Thinking of the family and ownership circles primarily, these are some common “disruptions” that might occur:
- Marriages and births adding new members to the family.
- Family members entering or leaving relationships.
- Next-generation family members or spouses becoming employees, shareholders, and/or directors.
- Senior family members aging and retiring.
- Death and disability changing the family and business structure.
- Shareholders exiting ownership to pursue a different path.
- A liquidity event that requires greater emphasis on wealth management.
- Diversification and investment in new ventures.
How Family Enterprise Governance Might Evolve
Creating dynamic durability in family enterprise governance means finding a balance between what must remain constant and what must change. In other words, an effective governance system must be agile enough to weather change.
Mary Duke phrased it perfectly: “The durable and the dynamic must be in a balance. A governance system that can endure is flexible enough to accommodate the changes coming down the road, yet rigorous enough to have the effects we want in governance to carry forward legacy and values and continue a family’s trajectory. If it is too flexible, it falls apart. But if it is not flexible, it breaks apart. You have to find that even balance” (p. 9).
If the fundamental premise of dynamic durability is to “keep the governance system open, vibrant, organized, and adaptable” (p. 71), advisors need to help families anticipate the evolution of the family and the enterprise, and ensure they put mechanisms in place to regularly evaluate the current governance system so as to determine what might need to change in order for the system to remain effective. So, dynamic durability is finding a balance between structure and flexibility.
- Guiding principles at the top of the cone are considered the most durable as they typically relate to the fundamental question of why the family and the business exist. These are represented by the family enterprise vision, mission and values.
- Next are the structures that serve to uphold the guiding principles. Governance structures are constant yet need to grow and evolve over generations. There are two categories of structures:
- Anchoring structures, such as a board of directors and a family council, should be stable and robust.
- Supporting structures, such as advisory boards and committees, should remain adaptable and should serve as needed by the family enterprise system.
- Policies and Practices need to stay fluid to accommodate succession, align with shifting expectations, and cater to evolving contingencies.
Sidebar
Kevin Au, The Chinese University of Hong Kong
Marta Widz, Wealth Management Institute, Singapore
Marshall Jen, The Chinese University of Hong Kong
This research report, sponsored by the FFI 2086 Society, addresses how entrepreneurial families nurture a durable governance system in the ongoing waves of external and internal disruptions.
An Assessment Tool for Families and Their Advisors
To evolve and remain effective, family enterprise governance must incorporate feedback and reflection. The report introduces the G-SMART model (p. 17), which offers advisors a framework for guiding family enterprises through a review of their current governance system and identification of any development necessary for attaining or maintaining dynamic durability.
The “G” stands for “governance” and the model depicts five “SMART” building blocks:
- Space: both a forum where stakeholders can exchange and collaborate and the psychological space where members are free to share their thoughts without fear of repercussion (p. 17)
- Multi-Role Participation: recognition that family members may play many roles and clarity around what authority, responsibility, and accountability comes with each role (p. 19)
- Alignment: equilibrium among stakeholders with a balance of collective interests and individual benefits as well as a flow between the elements of the Durability Cone (p. 20)
- Regeneration: the capability to build or refine principles, structures, policies, and practices within the governance system (p. 22)
- Tackling Legitimacy: managing transparency accountability and diversity in the governance system to ensure it is always relevant and appropriate (p. 23)
References
Cheng, J., Au, K., Widz, M., & Jen, M. (2021). The Governance Marathon: Dynamic durability in entrepreneurial families amid disruptions. Research report commissioned by 2086 Society and the Family Firm Institute. Available at: https://digital.ffi.org/pdf/ffi_the_governance_marathon_report.pdf
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