Good Corporate Governance in Family Business

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Good Corporate Governance
in Family Business
– Governance of Ownership, Business and Family
        >For               the reader                                                                                                                                  >ta B L e                 oF Contents

    Good corporate governance strengthens and clari-          the needs of both the owners and the company.             1. Family firms: Leaders at the core of the economy __________________ 4
2   fies the activities of the family firm while improving
    its competitiveness. Proper functioning and transpar-
                                                              The special characteristics of micro-companies
                                                              have been excluded from this recommendation.                                                                                                                          3
    ency of the roles and responsibilities of all organs      Publicly quoted family firms should follow the            2. Good governance and ownership
    in the firm are in the interest of the owners, other      corporate governance codes for enlisted compa-
    stakeholders and the whole company.                       nies in Finland specified by the Securities Market           2.1 Annual meeting of shareholders _____________________________ 7
                                                              Association. These codes guide publicly quoted               2.2 The Board ______________________________________________ 7
    Family firms are characterised by nurturing, active       companies to govern business in a legitimate and
    ownership as well as specific family capital: patient     transparent manner. Even the largest unlisted                2.3 Rewarding the Board ______________________________________ 8
    financial, extensive social and tacit human capital. In   family firms follow in many ways the codes for               2.4 Supervisory board of Family Firms ___________________________ 9
    family firms, owners are committed to the continu-        publicly quoted companies. For unlisted com-
    ity and long-term development of the firm. Taking         panies, the Central Chamber of Commerce has                  2.5 Auditing ________________________________________________ 9
    advantage of these characteristics can provide the        published a toolkit for developing their corporate           2.6 Communications ________________________________________ 10
    family firm with substantial added value. It is par-      governance.
    ticularly essential in family firms that the roles and
    responsibilities of the distinct owners, operative        The success of family firms is dependent on their         3. Good governance and business
    executives and the family are clear and that they         owners. Owners who are unanimous about the
    are jointly defined and approved.                         direction and means for developing their firm, and           3.1 Managing Director _______________________________________ 11
                                                              who select the best representatives from among               3.2 Rewarding the executives _________________________________ 11
    Family firms also utilize the organs of corporate         themselves and external professionals to the firm’s
    governance in a specific manner. In family firms,         administration, are able to run profitable and suc-          3.3 Family members in operational activities ______________________ 12
    jointly agreed corporate governance practices             cessful family business. Controversies, uncertain-
    primarily act as concrete tools for developing and        ties, and diverse expectations among the owners
    controlling business activities. For instance, the        will dissociate and weaken the business, family and       4. Good governance and the family
    owners are aware of their various ownership roles         ownership. Good corporate governance offers a                4.1 Council of Owners ______________________________________ 13
    and influence; the board of directors and the man-        clear, concrete tool to commit all stakeholders of
    aging director have their own clearly defined roles       the firm and to ensure their responsibilty in their          4.2 Family Council __________________________________________ 14
    and responsibilities, as do the the Council of Own-       own activities. Majority owners who are capable              4.3 Raising of next generation _________________________________ 15
    ers. The clearly defined corporate governance of          and active are undisputed resources for fam-
    family firms also creates added value to those ac-        ily firms, though supportive and reliable minority           4.4 Expenses of family governance _____________________________ 16
    tivities with external stakeholders, for instance, in     owners are also crucial for the existence and con-
    financial and investment processes.                       tinuity of family firms.
                                                                                                                        5. Bedrocks of good governance in family firms ____________________ 17
    It has been the aim of this committee to prepare          Espoo 14 May 2009
    independent recommendations that would as-
    sist family firms in actively developing their own
    well-functioning corporate governance. This rec-
    ommendation utilise the unique characteristics of
    family firms in the best possible way to benefit          Liisa Leino

    The Board of the Finnish Family Firms Association set a committee to prepare recommendations on Good
    governance for the Association on 13.8.2008. The committee was comprised of the Chairman, Ms. Liisa Leino
    (Leinovalu Oy, Chairman of Board); Secretary Ms. Minna Tunkkari-Eskelinen, PhD Economics; and the following
    Members: Ms. Satu Helkama (Helkama Bica Oy, Member of Board), Professor Seppo Ikäheimo (Helsinki School of
    Economics), Mr. Peter Seligson (Ahlstrom Oyj, Chairman of Board), Mr. Torkel Tallqvist (Hartwall Capital Oy, Mem-
    ber of Board), Mr. Max Oker-Blom, PhD Economics, Licentiate in Law (Oy Karl Fazer Ab). As representatives of the
    Association, Ms. Krista Elo-Pärssinen, PhD Economics, and Mr. Anders Blom, Managing Director, also participated
    as expert members in the committee work.

    The working of the committee was active and comprehensive. The committee had altogether ten meetings. In
    order to utilise the extensive expertise of the committee, individual members of the committee developed rec-
    ommendations within their own field of expertise.The work was compiled and integrated by the Secretary of the       on the cover: Mr. Kari Jussi aho, Ms. annakaija Lappalainen, Mr. antti aho, Mr. Juhani aho, Mr. Ville aho
    Committee and the Expert member of the Association Krista Elo-Pärssinen.                                            and Ms. Miia Porkkala from aho Group oy, who were awarded the 2008 Family Firm Prize.
        > Fa M i LyF i r M s : L e a d e r s at
             the Core oF the eConoMy

    THE IMPORTAnCE OF FAMILy FIRMS                         prosperity became nationally important, capital                                                                       Family firm culture is usually strongly based on

4   The European Union has emphasised in its rec-
    ommendation on business policy given to the
    member states this summer the importance of
                                                           remained internationally scarce. The transition to
                                                           becoming part of the European internal market
                                                           area and the competition in the free economy
                                                                                                                          A family firm is defined as follows2):

                                                                                                                           1. The majority of voting power share
                                                                                                                                                                                 caring about all stakeholders and other members in
                                                                                                                                                                                 the community. Family firms take responsibility for
                                                                                                                                                                                 their employees, customers and sub-contractors.
    the continuity of family firms for the growth and      have raised debate in every country concern-                       belongs to a natural person, his                   In many family firms, the turnover of personnel is
    competitiveness of Europe. The family firms form       ing the ownership of companies and the role of                     spouse or other family members.                    low, and contracts with employees may continue
    the backbone of the European economy.                  daughter companies in the economy. Most im-                     2. The ownership of votes may be                      from one generation to another.
                                                           portantly, the question of ownership is all about                  indirect or direct.
    According to different estimates, family firms ac-     authority and the ability to control business affairs.          3. At least one member of the family, or              In smaller family firms, there are less-formal or-
    count for 80–86% of the total amount of com-                                                                              his legal representative, is in charge             ganisation structures and processes, which enable
    panies in Finland. Family firms employ over half       The normative framework of corporate govern-                                                                          the use of more flexible methods of management
                                                                                                                              of the company management or
    the private sector’s manpower, and 75% of the          ance culture has been based on non-family firm                                                                        and leadership, thus improving the efficiency of
    employees in small and medium size companies           values. Over the last century, joint stock company                                                                    decision-making. Moreover, in family firms, it is
                                                                                                                           4. Listed companies fulfil the definition             usually easier to define the locus of authority,
    work for family firms. The family firm produces        legislation was formed based on the values of
    40% of the company turnover and nearly half of         global, enlisted companies and the corporation                     of a family firm if 25% of the voting              which in turn may accelerate decision-making.
    gross national product of Finland. This share is al-   (states, municipalities, cooperatives, foundations)                power shares belong to a person or
    most the same as in all other western countries.       which lacks a major owner.                                         his family member. Indirect voting                 The shares of family firms are usually illiquid. They
    Although the majority of the family firms are small                                                                       power in a listed company must                     are transferred usually from one generation to
    or medium sized, one-fifth of the TOP 500 com-         Family firms do their business in the same global                  belong to the family.                              the another as an inheritance, donation, or trade.
    panies are family firms.                               markets as any other company. Some of these                                                                           Some of the family firms are listed in a stock ex-
                                                           family firms are listed. In order to maintain listing                                                                 change, which improves the liquidity of shares and
    Over 30 family firms are listed in the Helsinki        status in the stock exchange as a mean of financ-        According to this definition, the family participates        enables new capital. Listed family firms combine
    Stock Exchange1). Family firms create stability, are   ing their growth without losing the authority of         in the activities of the company via both owner-             the best sides of the family and listed companies.
    competitive, follow market trends, and renew           the family on the firm, it is important for the fam-     ship (majority voting power) and management.                 Ten of the best family firms in Europe combine
    themselves, as well as create additional value and     ily firm to ensure the option of dual-class shares                                                                    the strength of the family and the discipline of
    create new entrepreneurship.                           with different voting power in the company law.          Commitment is usually strong in family firms.                listed companies.
                                                                                                                    Ownership of a family firm is often considered
    Family firms have great importance for local and       Listed family firms facing the dilution of the fam-      to be a gift from the previous generations or as a           The special characteristics of family firms – conti-
    regional economies and bring stability and per-        ily’s ownership need the know-how and norms              loan from successive generations. The aim of the             nuity, personal ownership, as well as tight interac-
    manence to their regions. The owners’ regional         to maintain and strengthen its authority without         family firm is to transfer the company to the next           tion between family and business – influence the
    commitment is strong and therefore the domicile        breaching the rights of minority owners. Reaching        generation in better condition than it was when              strategic choices and governance of the firm. In
    of the firm often remains the same. The family         this balance is one of the aims of good govern-          received from the preceding generation. A long-              addition to the governance of family firms, atten-
    firm has a unique position in the local community,     ance in family firms.                                    term strategy is appreciated more in family firms            tion must be paid to the governance of owners
    which is both personal and commercial. They act                                                                 than the figures in interim reports. This way of             and families as well. These elements have differ-
    usually as engines for regional economic develop-      SPECIAL CHARACTERISTICS OF FAMILy FIRMS                  thinking greatly influences business outcomes.The            ent roles and importance, varying in accordance
    ment, since they have a positive attitude towards      There is a distinct difference between family            family’s long-term, active commitment to the busi-           with the size, age and developmental stage of the
    growth, and their own growth is usually more           firms and other companies: family firms attempt          ness increases the performance of the company.               company. In first-generation family firms, business
    profitable than that of other companies.The own-       to transfer the company from one generation to                                                                        activities and ownership are personalised in the
    ers of family firms as persons are committed to        the next. Consequently, the family firm faces risks      In family firms, the capital structure in the balance        founder or founders of the company. In the second
    the development and continuity of their firms.         and business challenges differently than do other        sheet is usually strong. The reasons for this might          or following generations of the family firm, when
                                                           companies. A family business combines family,            be the need to get prepared for the future inde-             the number of owners is increasing and business
    FInnISH OwnERSHIP AnD FAMILy FIRMS                     business and ownership. Conventionally, although         pendently from investors, as well as to guarantee            is growing, the arrangements of governance have
    The Finnish nation did not gain prosperity until       these areas are perceived to be separate, in family      the continuity of the business.                              already become more complex and challenging.
    the end of the Second world war. Although this         firms they are strongly interrelated.

    1) Part of nasdaq OMX                                                                                           2) This definition is approved by the Committee of Finnish Ownership (SOnK) and European Groups of Family Enterprises
                                                                                                                    (GEEF). The report on family firms conducted for the European Commission recommends the use of this definition for
                                                                                                                    general purposes.
                                                                                                                                                   >Good     GoVernanCe
                                                                                                                                                        and ownershiP

           DIFFEREnT ROLES In FAMILy F IRM                                      Family members, who have no role as owner or

6                                                                                                                                                                                                                                                             7
           GOvERnA nCE                                                          manager are typically spouses (in-laws) and rep-
           Family firms are characterised by different                          resentatives of next generation. Family is a source
           roles related to business, ownership and family.                     of continuity, values and commitment.
           (Figure 1)3).
                                                                                Each agent in the family business may assume a va-
           Owner, active in governance has three simultane-                     riety of roles (for example, owner-manager-family
           ous roles: as family member, as owner and as                         member) or may have only one role (for example
           manager. This kind of owner is a member of the                       owner).The alignment of these roles poses challeng-
           board or the management.                                             es, since they have different goals and expectations.              BUSInESS
                                                                                As a family member, each person wants to maintain
           Owner, non-active in governance is a family member                   good family relationships; however, as the manager
           and owner. This kind of person represents long-                      of a company, her/his own professional develop-
           term ownership.                                                      ment should be considered, in addition to company
                                                                                performance. As an owner, she/he expects the suc-
           Non-owning, active in governance family member                       cess of the company and return on capital.
           has two roles: as owner and as manager. This per-
           son is typically a spouse (in-law) or representative                 These recommendations of good corporate                                                                                                              FAMILy
           of next generation, who does not have the own-                       governance in family business are illustrated with
           ership yet, but is actively participating in business.               three circles – ownership, business and family.
                                                                                we hope that this illustration improves the un-
           Non-family member, active in governance can be a                     derstanding of the different roles of each agent
           member of the board or management.                                   within family firms, as well as how they are ex-
                                                                                pected to behave in these roles, how these roles               2.1 Ann UAL MEETI nG OF                               2.2 THE BOARD
           Non-family member, owner is usually a capital-                       are interrelated and how they materialize within               SHAREHOLDERS                                          The board is elected by the annual meeting. In fam-
           investor or a managing director, who owns shares                     governing bodies of the company. In addition, the              The annual meeting of shareholders is the high-       ily firms, the role of the active majority shareholder
           of the family firm. non-family members bring                         goal of these recommendations is to help family                est-decision-making body in limited liability com-    in forming the board is decisive. widely distributed
           capital and know-how to family firms.                                firms develop their corporate governance prac-                 panies. At the annual meeting, individual share-      and investor-driven ownership transfers the board
                                                                                tises and thereby improve their competitiveness.               holders may use her/his official right to speak and   nomination suggestions to the current board of di-
                                                                                                                                               question, as well as decision-making authority, on    rectors which is familiar with the present situation
                                                                                                                                               matters related to the company, as defined in the     of the company and knows best the capabilities
                                                                                                                                               company act or amended in company by-laws. In         needed for the firm. Listed companies often use
                                                                                                                                               family firms, the majority owner may try to in-       nomination committees for this purpose. In the
                             ROLES RELATED TO GOvERn An CE OF THE FAMILy FIRM
                                                                                                                                               fluence decisions without official authority to do    largest family firms, it might be one of the duties
                                                                                                                                               so. The owner should be cautious in her/his ac-       of the owners’ council to propose member candi-
                                                          Owner active in governance                                                           tions and speech, since they are usually carefully    dates for the board of directors.
                                                                                                                                               followed and often acted upon accordingly– re-
    Capital-investor, external                                                                                       Owner not participating   gardless of whether this was about a joint action     Presentation of the candidates for the board of
    managing director shareholder                                                                                    in governance             policy to be taken by all shareholders or merely a    directors follows company-specific conventions
                                                                                                                                               whim given by an individual owner.                    and well-functioning practices. This presentation
                                                                                                             OwnERSHIP                                                                               might be done at the annual meeting or in ad-
                                                                                                                                               The board of directors prepares the annual meet-      vance together with the annual meeting invitation.
                                                                                                                                               ing in accordance with the company act and com-
                                                                                                                                               pany by-laws. The matters decided at the annual       The size of the board of directors should not be
          External executives,                                                                            FAMILy
                                                                                                                                               meeting are accordingly defined. At annual meet-      too large. Only a board of directors in which all
          external member of board
                                                                                                               Family, next generation,        ings, shareholders decide on matters such as the      the members are highly professional and have
                                                                                                               spouses                         composition of the board of directors and the         genuine authority to influence decisions can op-
                                                                                                                                               disposal of distributable funds. These decisions      erate efficiently and provide added value to the
                                                               non-owning family member                                                        are, however, extremely important in terms of         company. The size of the company, extent of ac-
                                                               in operative management                                                         the company’s success. The decisions should take      tivities and current situation define the number of
                                                                                                                                               into account the values and dividend policy of the    members, though in most cases the number can
                                                                                                                                               family firm as well as the company act.               optimally range between three to six members.
           3) Based on Tagiuri, R., & Davis, J. 1996. Bivalent attributes of the family firm. Family Business Review, 9(2): 199-208.
    In the selection of board members, family firms             from the board room, it may also be useful to             tives. Defining success is dependent on the values     to include it as a supervisory board with certain

8   should also focus on constructing a suitable board
    structure to meet current challenges. Capable
    and professional shareholders on the board bring
                                                                construct a separate discussion forum, for in-
                                                                stance, a Council of Owners. (chapter 4.1.)
                                                                                                                          and aims of the company. In share-based systems,
                                                                                                                          ownership restrictions may encourage their use
                                                                                                                          for board compensation. The profit-based system
                                                                                                                                                                                 tasks and selection procedures. In this manner, the
                                                                                                                                                                                 supervisory board may combine its role as defined
                                                                                                                                                                                 in the company act with the unofficial but highly
    a strong competitive advantage for the company.             Evaluating the work of family firm boards can pro-        might be linked, for instance, to the development      important needs of family firms. Although the su-
    Particularly, when a company is growing, it is also         vide a strong basis for the development of board          of turnover, operating profit margin, operating        pervisory board is not mentioned in the corporate
    important to select independent members to                  activities. An annually conducted evaluation gives        profit or return on capital. The use of other varia-   governance codes of listed companies in Finland, it
    the board who will bring external expertise and             good information on whether the board is efficient        ble incentives might be challenging for family firms   is still recognised by the company act as an official
    diversity to the board. It is useful to select at least     and dynamic as a whole, and how each member               if a company is not publicly quoted or is not plan-    organ.The existence of the supervisory board in the
    two independent members to the board, since                 contributes to the board work. This evaluation up-        ning to be listed in the near future.                  company is defined in the company by-laws. The
    they will gain support from one another while               dates the skills of the board and identifies the needs                                                           role of the supervisory board involves supervising
    working in the board with multiple shareholders.            of the company: Does the board contain enough             Particularly, in family firms, it is good to confirm   corporate governance activities by the managing
                                                                and the right type of capabilities? The evaluation also   that the success of a company is measured over         director and the board of directors. In addition to
    In order to enhance the efficiency of the board,            provides required information concerning the ad-          the long term while board is evaluated and com-        this role, the supervisory board may be stipulated by
    medium and large companies often rely on com-               equate and timely rotation of board members. The          pensated. In order to confirm this, it may be useful   the company by-laws to include selecting the board
    mittees for tasks such as auditing and compensation.        use of experienced, older owners as mentors and           to apply a bonus bank system for annual bonuses.       members. Otherwise, the supervisory board may
    Committee members are selected from the board,              experts increases chances to diversify and strength-      Bonus banks lower the interest in manipulating an-     be given tasks which only belong to the authority of
    and the committees prepare and present matters              en the capabilities of the company.                       nual profit either by influencing accounting num-      the board, or tasks which are not legislated to any
    to the board for decision making.These committees                                                                     bers or through the timing of business activities.     other organ of the limited company.
    do not have decision-making authority, but the deci-        2.3 REwARDInG THE BOARD
    sions are made collectively within the board.               The aim of rewarding is to motivate the board             The members of the board may differ in their re-       The supervisory board must be very well-led, and
                                                                members and enable recruitment and retain the             wards. As a rule, the compensation of the chairman     its tasks and responsibilities well-defined to all
    In family firms, the role of an owner who acts as           best board members. It is wise to emphasise clearly       of board is usually higher than that of other board    agents within the company. The members of the
    the chairman of board is emphasised.The chairman            to the owners the rewards of the board members            member, due to the more extensive nature of his        supervisory board should not become involved
    ensures that the board works efficiently and actively,      and how they are defined, as well as, all their finan-    duties.The external board members who are inde-        with the operative activities nor the responsibility
    and utilises the expertise of all board members.            cial connections to the company. The annual meet-         pendent of ownership do lack the incentives related    areas of the board of directors.
    Efficient board work can be guaranteed by using             ing decides on the rewards provided to the board.         to ownership. Therefore, it is highly important to
    the written annual protocol of the board. In those                                                                    find a motivating reward system for such members.      2.5 AUDITInG
    cases when the managing director is from the out-           It is useful to pay compensation to the board                                                                    The annual meeting of shareholders selects an
    side of the family, it is usually in the best interest of   members that is both competitive and motivates            The planning, implementing and evaluating the re-      auditor. In a public limited company, at least one
    the owners that at least the chairman of board is           them. Even if the membership in the board is a            ward system of the board members and manage-           of the auditors selected by the annual meeting
    chosen from amongst family owners, as this guaran-          position of trust from the owner’s side, the com-         ment team should be kept separate. However, the        must be approved by the Finnish Institute of Au-
    tees close, responsible ownership of the family firm        pensation nevertheless indicates how much the             performance measures for the rewards could be the      thorised Public Accountants.
    while assuring the control of the owners concern-           work of the board is appreciated and what is ex-          same both for board members and management.
    ing the long-term development of the firm.                  pected from this work. Thus, paying only a mini-                                                                 In family firms, the auditor may in addition to the
                                                                mum compensation may lower the quality of the             2.4 SUPERvISORy B OARD OF                              auditing act as a general advisor at least in the
    In smaller family firms, the majority owners act            board work. Many of the board members who are             FAMILy FIRMS                                           early stage of business activities. while focusing
    both as a managing director and chairman of the             experienced and appreciated do most likely have           In addition to official organs recognised by the       on research and development, production, sales,
    board. As a company grows and the number of                 membership on more than one board, in which               company act, i.e., the annual meeting and the          and marketing, an entrepreneur and family firm
    owners increases, it is beneficial to select two            case there is competition for their use of time.          board of directors, there might be other unof-         may have less time to devote to clarifying a com-
    different persons to these positions. In this way,          Through appropriate rewards, the company can              ficial organs in the family firms, such as a Council   plex legislation environment. Traditionally, auditors
    more know-how is gained to the board, and the               increase the board members’ interest in commit-           of Owners or a Family Council. These councils          have had an important role in this respect.
    managing director would not also need to act as             ting more time and effort to this specific company.       aim to express the will of the shareholders, for
    his own superior on the board. Jointly agreed and                                                                     instance, regarding the future of the company          In family firms, it is highly important to pay attention
    written roles increase the transparency required            It is useful to pay a meeting allowance, though this      and the disposal of distributable funds, as well as    to the role of the auditor, who has been selected by
    by owners and stakeholders.                                 may not guarantee anything other than active at-          to enhance cohesion among shareholders. The            the shareholders and who is an adviser to the man-
                                                                tendance at the meetings. In addition to a meeting        aforementioned will is legitimized through the an-     agement team. In order to avoid conflicting situa-
    In companies with plenty of professional and ca-            allowance, it is wise to pay rewards that motivate        nual meeting and the board of directors.               tions, especially in smaller family firms (the auditor is
    pable shareholders for board work, it is useful             the member to consider the success of the firm                                                                   auditing his own advice), the executives of the com-
    to have clear, transparent guidelines on how the            in her/his decision-making. Board members may             The Council of Owners, which is more precisely de-     pany should aim for a situation in which the auditor
    board memberships are distributed and rotated               be paid based on company performance either               scribed in chapter 4.1., can be given a more formal,   and the advisor are different persons. Although this
    among these owners. For shareholders excluded               in the form of share-based or profit-based incen-         permanent role by amending the company by-laws         arrangement might be more expensive, especially at
                                                                                                                              >Good     GoVernanCe
                                                                                                                                   and Business

     the beginning, it will better serve the interest of the   information distributed publicly should be at a rea-

10                                                                                                                                                                                                                                     11
     company and its shareholder over the long run. In         sonable level, and the distribution of other infor-
     this manner, both the auditing and, for instance, tax     mation is decided by the owner and the company.
     consulting, are more objective and frequently more        Each party (operative management, the board and
     professional, since both of these fields of expertise     the owners) must be aware and understand how
     nowadays require special skills.                          they may and are allowed to use the information
                                                               they have. For instance, matters dealt with by the
     Larger family firms may have an auditing commit-          board are confidential by nature, and are not for
     tee. Auditing committees are needed especially            those outside the board. Moreover, information
     when the business activities are so extensive that        concerning clients, which are often asked for at an-           BUSInESS
     they require the preparation of business reporting        nual meetings by the owners, should also remain
     and auditing in a smaller group than a board.There        confidential, belonging only to the operative man-
     should be at least three members in the auditing          agement and the members of the board. In smaller
     committee, who should all be experienced either           companies, communications are handled without
     in accounting, book-keeping or auditing.                  any unnecessary formalities – a normal within fami-
                                                               ly communication is usually enough. In middle-sized
     The board should define the tasks of the auditing         companies, it is useful to have general guidelines
     committee based on the needs of the family firm.          concerning communications procedures. Listed                                                                                                     FAMILy
     The committee’s tasks include following up on the         companies follow their legislation and corporate
     preparation of the financial statement, supervising       governance codes for publicly listed companies.
     financial reports, monitoring internal control (if it
     exists) and the governance and control system of a        Annual meetings of shareholders form the main
     company, official auditing processes and evaluating the   event of communication and interaction in family
     independence of auditors and preparing a resolution       firms. At the meeting, at least the managing direc-        3.1 M AnAGInG DIRECTOR                                  edged by the different agents of the company. In
     for selection of an auditor. Other supervisory tasks      tor and the chairman of the board will be present.         The managing director is hired and dismissed            particular, good communications and cooperation
     and duties regarding the follow up of the company’s       If needed, the key persons from operative manage-          by the board of directors. when selecting the           between the managing director and the chair-
     financial position may belong to the audit committee,     ment and auditing may be requested to be present.          managing director, it is important that the per-        man of the board will bring extra strength and
     including the compliance with laws and regulations as     The annual meeting can be arranged jointly with,           son in question is qualified and suitable for her/      additional value for the company. Generally, it is
     well as communications with the auditor.                  for instance, a family dinner or an introductory visit     his position. Qualified refers to those professional    the responsibility of the chairman of the board
                                                               to a factory, which can act as a communications            qualities needed to manage independently and            to communicate with the owners and to bring
     The auditing committee is a highly important or-          channel between all the shareholders. In this way,         successfully the activities of the company. Suit-       the opinions of the owners for consideration of
     gan for the financial control of a family firm. Over      not only are important decisions made at the an-           ability refers to the compatibility of principles and   the board.
     time, the committee members will gain consider-           nual meeting, but a large amount of information is         operations with the values and practices of the
     able information and know-how, thus making it an          also distributed, as well as a identity is given to the    family firm. The compatibility of the managing di-      Together with the managing director, a written
     important platform for growth and development             ownership, with each owner gaining an opportu-             rector in the family business is defined based on       management contract is drafted which is also
     of individual family members. However, it is vital to     nity to become familiarised with the activities of         the fit with the practices of major owners. This is     important when selecting the managing director
     remember that the whole board is responsible for          the company and its management.                            the basis for business success in accordance with       from amongst family members.The contract is ac-
     the success of the company and that the actual deci-                                                                 the best interests of the family firm.                  cepted for the company by the board. The man-
     sions are made in the board not in the committee.         The contents of the report of the board of direc-                                                                  aging director is responsible for his actions only
                                                               tors are defined by law and each member of the             For family members, the qualifications of the           to the board.
     2.6 COMMU nIC ATIOnS                                      board is personally responsible for the content of         managing director must be the same as for oth-
     Communications increase trust between persons. It         the report. It might be wise, and especially in pub-       ers who would be hired as a managing director. It       3.2 R E wARDInG THE EXECUTIvES
     is highly important that the owners and other stake-      licly listed companies it is vital, to follow the scarce   is useful to identify over the long-term potential      The salaries of the managing director and other
     holders are aware of the activities occurring in the      form of reporting as defined by law. However, wider        candidates for operative management within the          executives are constructed in accordance with
     company.The transparency and openness of different        communication concerning developments in the               owner family. This is the way to confirm that the       the overall strategy of the company. Family com-
     processes improve the commitment of these parties         company with external stakeholders, and owners             family members have a chance to participate in          panies are characterized by the values of the fam-
     and decrease misunderstandings and presumptions.          is necessary and significant. For this purpose, each       the operational activities of the company in ac-        ily and long-term continuity of company opera-
                                                               company may tailor the most suitable and functional        cordance with their own personal skills.                tions. It is thus important that the compensation
     Communication is a strong tool for the unlisted           means of communication, such as annual reports or                                                                  plans should consider the mission, vision and the
     family firms. It can be used to strengthen the aims       managing director’s biannual reports to the person-        The responsibility areas and duties of the manag-       long-term goals of the company, as well as sup-
     of a company, as defined by the owners, as well as        nel and shareholders. The company’s internet pages         ing director, chairman of the board and the board       port and strengthen the implementation of the
     the company itself. The amount and the form of            may also act as a means of communication.                  must be clearly written down and be acknowl-            strategy and the annual action plan.
                                                                                                                           >Good        GoVernanCe and
                                                                                                                                t h e Fa M i Ly

     Executive compensation must be competitive in           also brings extra responsibilities to family mem-

12                                                                                                                                                                                                                                    13
     order gain the most qualified and motivated man-        bers. Family members must work in an exemplary
     agement. A competitive salary also decreases the        manner, since they represent to the company the
     risk of losing the executives to other companies.       whole family owner.

     The reward system should estimate the influence         For the future success of the family firm, it is criti-
     of different elements of compensation on the            cally important to have capable and motivated
     motivation of the executives to create wealth for       young family members to commit themselves to
     the owners, as well as, the cost effects of these       the development of the family firm.The next gen-
     different elements. In family firms, rewarding ex-      eration should be motivated to become familiar                BUSInESS
     ecutives with share ownership might be difficult,       and committed to the operations of the family
     though it could be possible if the family owner-        firm. It would be good to create close connec-
     ship or power structure is not excessively diluted      tions between the company and the next genera-
     or distorted.                                           tion through internship arrangements, summer
                                                             jobs, writing thesis, etc.
     Bonus systems may be used to support long term
     activities if the profit measures are closely con-      when a family member is hired to a manage-
     nected to strategic goals or if a bonus bank sys-       rial position, it is useful if the managing director                                                                                            FAMILy
     tem is used for paying the incentives.                  participates in the recruiting process. The family
                                                             member needs to fulfil the selection criteria for
     The board decides the salary of the managing di-        the position and must also be strongly motivated.
     rector. As regards other executives, the managing       As a general rule, the family members work in the
     director will make a proposal to the board, which       company without any special privileges. If any ex-        Traditionally, good governance supports the com-       4.1 C OUnCIL OF Own ERS
     then decides about the amount and the structure         ceptions are made to this rule, they must be gen-         munication of investor information. Good gov-          Family ownership requires a special forum for
     of the rewards. It is useful if the board can rely on   erally known by the executives of the company.            ernance of family firms must be evaluated based        defining the effect of the owner. Especially when
     objective expertise in the construction of com-         The expectations regarding the achievements are           on the starting-point of each family and which         the number of share owners is increasing, it is im-
     pensation systems.                                      basically the same for family members as for any          principles support the value management. Fam-          portant to pay special attention to the question of
                                                             other employees. It is vital for the person himself,      ily ownership differs from traditional governance      how to channel the effect in order to best serve
     The size and structure of the executive compen-         as well as for the whole organisation, that the pro-      in that the owner of a family firm brings to the       both the company and the shareholders. It is quite
     sation would be important to disclose in an un-         motion of a family member is based on achieve-            company a certain value world which actively af-       natural that, at the latest, by the time company
     derstandable manner to the owners, for instance,        ments and personal abilities.                             fects the future success of the company. By con-       shares are transferred to the third generation, dif-
     at the annual meeting.                                                                                            trast, in non-family companies, the responsibility     ferent perceptions will arise on how to manage the
                                                             If there is need to dismiss a managerial level per-       for taking care of these matters belongs to the        company. Some of the owners might think that the
     3.3 FAMILy MEMBERS In                                   son from her/his duties, the managing director            board and operative management, whereas the            steady flow of dividends is enough, whereas others
     O PERATIO nAL ACTIvITIES                                and the closest superior must be involved in this         owners are solely in the investor’s role. Therefore,   may want to invest all their skills into the company,
     The nature of family ownership is embodied in           decision-making. when a family member to be               in family firms there is a need for different forums   and there might also be owners who want to exit
     those operational activities undertaken by fam-         dismissed in the best interest of the company is          for official and unofficial activities. The annual     the company in search of better profits.
     ily members. Each family member will bring along        working directly under the managing director, one         meeting of shareholders, the board of directors
     family values and reflect the family’s commitment       of the members of the board or the chairman of            and the supervisory board are legal and official       At this point, it is reasonable to found a Coun-
     to the company. working in their own company            the board should be involved in the process.              decision-making forums of the owners. Although         cil of Owners with the purpose of mapping and
                                                                                                                       the Family Council and the Council of Owners           defining the will of the owners. The Council of
                                                                                                                       are non-legal, they act as complementary chan-         Owners will discuss the expectations of the own-
                                                                                                                       nels for interacting with the official institutions,   ers regarding the company. It is useful to clearly
                                                                                                                       especially within the family. They form part of the    write down and to communicate the will of the
                                                                                                                       governance conventions for a future-oriented           owners to all the shareholders, the board and the
                                                                                                                       and proactive family firm.                             executives.
     Usually, all the adult owning family members be-         no separate Council of Owners exists. It is not,         tively in the Council of Owners), training of the       Council is not allowed to take a public stand re-

14   long to the Council of Owners. In larger family
     firms, the Council of Owners can be constructed
     from representatives of different family lines. It is
                                                              however, the Family Council’s role to become in-
                                                              volved with the business activities.
                                                                                                                       next generation, and problems related to com-
                                                                                                                       petition between family members. The Family
                                                                                                                       Council faces the challenges of the future by rais-
                                                                                                                                                                               garding the activities of the publicly listed com-
                                                                                                                                                                               pany. All the shareholders are equal. In listed com-
                                                                                                                                                                               panies, the family may not assume a role different
     recommended that the number of members in                It is important to elect persons of different age        ing family members into good owners.                    from that of any other owners. To some extent,
     the Council of Owners be kept to a maximum               with different skills and personalities. In the larger                                                           this type of structure restricts the position, aims
     of ten persons. The Council of Owners meets in           family firms, the Family Council might be con-           3) transmission of the tradition                        and activities of the Family Council. For instance,
     accordance with official meeting conventions. The        structed from representatives of the different           Honouring and respecting the traditions of the          the exchange of communication is much more
     Council of Owners might be given official status         family lines. The representative membership of           founder(s) of the company is realised in different      restricted in a listed company than in a non-listed
     by changing it into the board of directors of the        the Family Council may be on a voluntary basis           ways created by the Family Council. (social events      family firm.
     family firm. (chapter 2.4.)                              or other criteria might be set, similar to that for      and training).
                                                              membership on the board. A precondition for                                                                      The further the family-owner is from the daily ac-
     In addition to mapping out the will of the owners,       an active Family Council is that there is renewal        4) Guaranteeing the unity of the family                 tivities of the company, the more important is the
     the Council of Owners could serve as a suitable          through, for example, the rotation of its members.       The Family Council aims to maintain family har-         position of the Family Council. when the number
     forum for dealing with current company activi-                                                                    mony through its existence and activities. It aims      of family owners changes and the next generation
     ties, financial results, family and company values,      The number of members on the Family Coun-                to maintain family connections and internal com-        begins to get involved in the activities, this is the
     as well as selection of the board members. The           cil should not exceed ten persons. The members           munication within the family, as well as promotes       right time to reconsider the structures and the
     Council of Owners should provide a structured            of the Family Council may found working groups           understanding of the role of the owner. The             conventions of the Family Council.
     manner for the owning family to discuss changes          which could include more members from the                founding of the Family Council is especially rec-
     in the company and ownership structures. The             family lines. These working groups should act ac-        ommended for increasing interaction between             no matter whether good governance have been
     Council of Owners is not intended to be a fo-            cording to separately specified time periods and         family members.                                         dealt with and planned in the supervisory board,
     rum for decision-making, and it has no authority         goals.                                                                                                           Council of Owners or Family Council, it is recom-
     to interfere with business activities. It is allowed                                                              5) the next generation                                  mended that these family principles, values and
     to show emotions in the work of the Council of           The tasks of the Family Council may be                   Membership in the Family Council might be a             guidelines be written down into a single docu-
     Owners which is typical, and even recommend-             divided as follow:                                       useful way to familiarise the next generation with      ment. An appropriate name could be considered
     able, in such debates within family firms. If fam-                                                                activities in the family firm. The Family Council       by each for such a document.
     ily members disagree regarding the future of the         1) Communications and interaction                        may act as a platform for preparing family mem-
     company, it might be best for each of the family         Communications and interaction are vital in              bers for membership in other bodies, including          4.3 R AISInG THE nEXT GEnERATIO n
     members to have a reasonable way to exit the             family firms especially amongst the family mem-          the governance and administration of the family         when the family firm is transferred from one
     company. In such a case, the Council of Owners           bers. The representative members of the Family           firm, thereby committing the next generation to         generation to another, one of the greatest chal-
     would provide a natural place for pondering the          Council represent the voice of the family and            various possibilities, duties and responsibilities of   lenges is to maintain entrepreneurial and innova-
     rules on the sale of shares.                             are responsible for communicating information            ownership.                                              tive attitudes. when founding the company, the
                                                              on matters dealt with at the formal meetings to                                                                  first-generation owner-entrepreneur had a mis-
     4.2 FAMILy COU nCIL                                      their family or family line. This interaction might      For example, the Family Council of a listed com-        sion that he was willing to work towards both
     The Family Council is a discussion forum for main-       be strengthened, for instance, by arranging a social     pany might discuss how to react to certain cur-         day and night as well as undertake great risks. The
     taining and improving the unity of the family. The       event at the same time as the annual meeting of          rent proposals, such as changes in the structure        future owners of the family firm must be encour-
     Family Council, for instance, organises activities in    shareholders.                                            of the board of the company proposed by the             aged to continue this entrepreneurial attitude in
     which all the family members may participate, in-                                                                 nomination committee. The position taken as a           order to make them responsible family-business-
     cluding the spouses and other family members             2) Commitment                                            result of this discussion would not, however, pro-      owners instead of mere investors.
     who have no ownership relation to the company            Generally, the Family Council is founded in order        ceed to the agenda of the board, even though the
     (for instance, traditional festivities, training occa-   to commit family members to responsible own-             existence of the Family Council is known to the         Family firms need to consider early enough how
     sions, charity work, training of the next genera-        ership and the owning family. The Family Council         company.                                                to raise the members of the next generation into
     tion). The council must have jointly prepared and        provides a forum for pondering the continuity of                                                                 intimate, responsible, and qualified owners. In a
     written action principles and practices. The Family      the company and family ownership, as well as for         The owners are obliged to follow the rules of           young, small company, it is easier to recognise
     Council may also define the will of the owner if         discussion regarding the common will (alterna-           good corporate governance, and the Family               the successor of the company and train her/him
                                                                                                                         >BedroCKs           oF Good GoVernanCe
                                                                                                                              i n Fa M i Ly F i r M s

     systematically to fill her/his post and duties. Of     of Owners and Family Councils, working groups,

16                                                                                                                                                                                                                                     17
     course, this requires that the founding and next       supervisory boards). However, it is important to
     generations agree about this. The situation be-        recognise that, for instance, the work at the su-
     comes more complicated if the group of owners          pervisory board carries personal legal responsi-
     and those willing grows larger.                        bility and already requires strong experience.

     Usually, the first contact with the family firm is     4.4 E XPEnSES OF FAMILy
     gained through summer or seasonal jobs. These          GOvERnAnCE
     experiences are vitally important for young fam-       The activities of the Council of Owners and the
     ily members, and being successful in these tasks       Family Council, as well as the training of the next          BUSInESS
     has great importance for the future. After having      generation cause expenses which are not imme-
     graduated, it also is usually beneficial for young     diately related to business activities. According
     family members to gain experience outside the          to the law on taxation of business incomes, the
     family firm, where they will benefit from a more       expenses caused by either acquiring or preserv-
     neutral position to learn as well as make mistakes.    ing the business income are tax-deductible from
     As they become more experienced, it becomes            business taxation.This right to a tax deduction has
     easier to assume responsibilities in the family firm   been widely interpreted to include all direct and
     and to offer themselves to the company. Some           indirect expenses resulting from business activi-                                                                                                 FAMILy
     of the family firms have even a separate train-        ties. The private expenses of the owners are not
     ing programme for the next generation, involving       therefore tax-deductible expenses.
     training the next generation for responsible own-
     ership and expanding their understanding of the        Thus, the expenses caused by the annual meeting
     business activities.                                   of shareholders are tax-deductible, since holding
                                                            an annual meeting of shareholders is considered a
     Characteristics of different kinds of ownerships       duty based on the law on limited companies, even         Common to all the family firms is the power of            Good governance and the responsibility of the
     should be increasingly introduced to the next          if it is a meeting of owners. Furthermore, it is also    family ownership. It not only provides a variety of       owner in developing the business is emphasised
     generation. All do not need to have, nor should        assumed that the expenses caused by meetings             possibilities but also responsibilities regarding the     in the family firms, since intervention of the ex-
     they aim for an active role. There is, nevertheless,   of the Council of Owners and the Family Council          governing of the company, business and the family.        ternal owners is not usually possible when there
     a great need for different kinds of owners in the      and the training expenses of the owners, i.e., the       Companies differ in nature, as do families. There-        is the need for a change in business activities. If a
     family firm: active, business-experts, owners who      shareholders, would be considered tax-deducti-           fore, the structures regarding governance can also        well functioning and active relationship does not
     do not participate in governance at all but trans-     ble. However, it is important to keep in mind that       vary considerably. For instance, the age, scope of        exist between the owners and the management,
     fer the family traditions, and patient general sup-    such expenses are reconsidered on a case by case         the business, the share of family ownership, as well      the economic base of the family might decline
     porters.                                               basis, and a tax-bound must, for instance, in the        as the number of individual owners influence the          over time. For this reason, a family firm cannot
                                                            case of tax audit, prove how these expenses are          selection of the governance tools. In selecting of        afford to have a passive board. The work of the
     The representative of the next generation who          related to the business activities. In these cases, it   these tools, it is vital to consider means for securing   board is highly important in family firms, since
     will participate in governance may be trained and      is justified to appeal to the tax expert preferably      the competitiveness and continuity of the company.        successful communication with the stakeholders
     initiated through various means (e.g., Councils        already in advance when planning the activities.                                                                   of the family firm –two-way interaction – brings
                                                                                                                     The owner has a major role in family firms. In or-        additional value to all of the parties. Properly
                                                                                                                     der to get her/his voice heard and to ensure that         functioning board work enables the family firm’s
                                                                                                                     the interaction between different institutions will       activities to become more efficient, and improves
                                                                                                                     be functional, at least one of the owners must be         the company’s ability to make profits, which over
                                                                                                                     active in the governance of the company – at the          the long run ensures the future and the continuity
                                                                                                                     core of ownership, business activities and the family.    of the whole company.
                                                                                                                    >the        F i n n i s h Fa M i Ly F i r M s
                                                                                                                         a s s o C i at i o n

     The guiding principles for family firms allow the     Each family firm has special characteristics that    The Finnish Family Firms Association was founded      The vitality and uniqueness of The Finnish Family

18   owners of family firms to create the rules of
     ownership and to get them approved by as many
                                                           should be utilised in the development of good
                                                           corporate governance. when changes occur in
                                                                                                                in 1997 with the name of Family Business net-
                                                                                                                work Finland. It became a nation-wide associa-
                                                                                                                tion of family firms in 1999. The founder of The
                                                                                                                                                                      Firms Association is partly driven from the pres-
                                                                                                                                                                      ence of different generations. For the responsible
                                                                                                                                                                      next generation owners The Finnish Family Firms
     owners as possible. Success in this project re-       the company, ownership or family, for instance, in
     quires interaction and discussion within the fam-     the form of a change of generation, it is wise to    Association was deceased, Mr. Peter Fazer, who        Association acts as a useful way of networking,
     ily. This interaction will also commit the parties    update the governance structures. At best, good      succeeded in assembling the owning families with      developing and gaining content to one’s own life
     involved to follow commonly agreed rules. The         governance can provide a family firm with an ac-     diverse activities under one single umbrella.         mission. It is also a platform for different genera-
     most important factors in this process are trans-     tive, continuous additional value and competitive                                                          tions to communicate and learn to know each
     parency as well as clearly defined tasks and roles    advantage. The aim of good governance in family      The mission of The Finnish Family Firms Associa-      others.
     of different institutions for guiding the corporate   firms is to ease and make the governance of the      tion has crystallized in improving of preconditions
     governance of the company.                            company and the family more efficient.               of operation of family firms and responsible own-     The Finnish Family Firms Association is an active
                                                                                                                ership. One of the special aims is to secure the      education institute which amongst other things
                                                                                                                continuity of business activities.                    prepares the next generation for responsible
                                                                                                                                                                      ownership. In addition to the importance for the
                                                                                                                The Finnish Family Firms Association acts as a        continuity of family firms this activity has also vital
                                                                                                                communications network of Finnish family firms,       importance in the context of larger society and
                                                                                                                an interest organization, as well as an expertise     national economy.
                                                                                                                and education institution.
                                                                                                                                                                      In order to form a joint affect it is also required
                                                                                                                Education, research, taxation, and influencing on     being together. Therefore, The Association organ-
                                                                                                                development of business and on society in gen-        izes lots of chances for interaction between its
                                                                                                                eral are subjects of which the Association forms      members.
                                                                                                                the aims of the family firms.The Association’s duty
                                                                                                                is also to convey these aims to and influence on      In 2009 there were over 300 member firms in
                                                                                                                the decision-makers.                                  the Association which of total turnover amount-
                                                                                                                                                                      ed roughly to 30 billion EUR and which employed
                                                                                                                The values of The Finnish Family Firms Association    almost 150.000 persons. Ms. Anne Berner is act-
                                                                                                                are familiness, continuity, trust and transparency.   ing as Chairman and Mr. Anders Blom as Manag-
                                                                                                                Based on these values it is necessary to bonder       ing Director of the Association.
                                                                                                                the questions of responsibilities of ownership.
                                                                                                                How to act as a responsible owner? How should
                                                                                                                I as an owner run the business and grow it?