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The Importance of Governance in Family Businesses

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12 November 2013

The Importance of Governance in Family Businesses

Never has it been more important to fully understand the need for good governance - particularly for family-run businesses. Family businesses are notorious for having very informal governance structures in place, if at all. We are delighted to welcome Jo Haigh as our latest FIB Ambassador. Jo specialises in family business governance and approaches this not only as a superb professional adviser but also as someone with very personal experience of being part of a family business herself. Many family businesses simply evolve over time. They have travelled through the first phase of entrepreneurship with a passionate and energetic founder who flew by the seat of his or her pants - not really caring about board minutes or directors duties. As the business begins to mature many family-run businesses fall foul of putting solid governance systems in place. It was common for the founder's wife or mother, typically, to be an appointed director and shareholder. It was viewed that this would be "in name only" but in reality the duties and responsibilities both as a director and shareholder are no different. It is so important to get a full understanding of your obligations and duties - and should be an automatic area of continual understanding and awareness for next generation executives. You have a responsibility to yourself, your family, your employees, your stakeholders, your clients and your suppliers.
This top ten tips, taken from Real Business magazine (and contributed by Amy Collins and Linda Whittle from Fladgate LLP),  may help you begin to address the area of governance:
Breach of directors’ duties can have serious consequences for directors including personal and potential criminal liability. Have constant regard to them, check the indemnity provisions in the company articles of association and your directors’ and officers’ insurance arrangements.   Here’s how to avoid the pitfalls: 1. Don’t assume that other directors have compliance “covered”. Particular directors may be tasked with ensuring the company’s compliance, but penalties may still be imposed on other directors if statutory requirements are not met. Make sure it is clear what needs to be done and who is doing it. 2. Don’t assume that not officially being a “director” means the duties won’t apply. Various duties apply to individuals effectively acting as directors without being formally appointed (“de facto directors”) and to individuals in accordance with whose instructions the board are accustomed to act (“shadow directors”). 3. Don’t hold board meetings without keeping accurate records. Accurate board minutes provide a record of decisions made as well as the fact that such decisions were discussed and carefully considered. 4. Don’t neglect key filing requirements. Ensure you are aware of filing deadlines for key documentation such as the annual accounts and annual returns, and note that other matters, e.g. certain shareholders’ resolutions, allotments of shares, the appointment of new directors, etc. need to be notified to Companies House within specified periods. 5. Don’t forget to check the articles of association. The articles are effectively another layer of rules imposed upon directors and the company and may set out, for example, specific requirements for the calling of a shareholders’ meeting or provisions relating to directors’ meetings and remuneration. 6. Don’t assume that declaring an interest means that you are not conflicted. There is a difference between the duty to declare an interest in a transaction, and the duty to avoid a conflict of interest. Simply noting your interest in board meeting minutes does not necessarily mean you have avoided any existing or potential conflict. 7. Don’t accept a benefit from a third party without authorisation. A benefit gained as a director might include, for example, corporate hospitality, and there is no minimum threshold. The rule does not apply where there is no reasonable possibility of a conflict of interest, but what this means remains unclear. Any authorisation must be given by the company’s shareholders. Other transactions involving directors, such as directors’ loans and transfers of non-cash assets to or from directors or persons connected with directors, may also require shareholder approval. 8. Don’t neglect obligations other than statutory company law duties. Directors may be pursued personally if their company breaches, for example, certain environmental and health and safety laws. 9. Don’t forget that insolvency (or the threat of it) means another regime applies. As a company nears insolvency, there arises the possibility of personal liability for, amongst other things, wrongful trading. In the unfortunate event that your company does become insolvent, you will continue to owe duties as a director, but primarily to the company’s creditors rather than its shareholders. This situation requires specialist advice. 10. Don’t ignore warning signs. If you have concerns about any company decisions, or the content of any documents such as accounts or board papers, make your views known. It is your duty to act with reasonable skill, care and diligence.