Governance in Family Business: A Literature Review

Abstract

Public and academic discussion on corporate governance and its related issues are clearly visible in any country with active capital markets. This suggests that good governance is a crucial factor for ensuring economic development. However, few studies can be found relating to non-listed or smaller firms. With the aim of contributing to this knowledge gap, this study reviewed the literature specific to corporate governance in family business in an emerging market, Sri Lanka, a small developing country with average lower middle income. The development of corporate governance best practices in Sri Lanka has been strongly affected by British models and systems, which derive from the Anglo-Saxon model of corporate governance. However, previous researchers who found that ownership of many listed companies was concentrated mainly in individual shareholders or a family concluded that family business in Sri Lanka is very critical to the economic development of the country. This study presents a review of non-listed and small to medium family business, and their two-tier mechanism of governing.

The Impact of Family Business Governance on Organizational Innovation: A Field Study at Family Firms Operating in Yemen

“…Family council may include multiple branches and/or generations who periodically come together to discuss issues arising from their family's involvement with a business (Berent-Braun & Uhlaner, 2012;Gersick & Feliu, 2013;Koeberle-Schmid, Kenyon-Rouvinez, & Poza, 2014). Family council can influence and affect the performance of the family firm (Daspit, Chrisman, Sharma, Pearson, & Mahto, 2018) and operate as a central governance tool that extends far beyond the purpose of governing the family (Ediriweera, Armstrong, & Heenetigala, 2015;Gallo & Kenyon-Rouvinez, 2005;Suess, 2014). The family council may also serve other functions relating to the building of family team works such as developing shared vision, discussing and clarifying members' roles as well as enhancing norms of behavior needed for future family owners and managers (Berent-Braun & Uhlaner, 2012;Brenes, Madrigal, & Requena, 2011) The family council can also partially substitute roles of other governance mechanisms such as shareholders' meeting and the board of directors, namely ownership and monitoring (Gnan, Montemerlo, & Huse, 2013).…”

“…Finally, family committees are specific task entity created by highly active families which can play a significant governance role as verifying compliance with family's values, appointing candidates for the position of the firm CEO or the board of directors, resolving, and managing conflicts on specific shareholders' issues (Ediriweera et al, 2015;Neubauer & Lank, 1998;Saleem et al, 2019).…”

“…The board of directors is a formal and core element of family business governance structure (Cadbury, 2000;Daspit et al, 2018;Heuvel, Gils, & Voordeckers, 2006;Maseda, Iturralde, Aparicio, Boulkeroua, & Cooper, 2019) where issues related to corporate governance usually fall upon the board of directors and factors affiliating with its selection, responsibilities, composition, size, age, and gender affect the board efficiency and impact the firm's top management functions (Briano-Turrent & Poletti-Hughe, 2017;Ediriweera et al, 2015;Jaskiewicz & Klein, 2007;Wilson, Wright, & Scholes, 2013). While the primary function of the board is the provision of advice for the CEO and management as well as its control task (Bammens, Voordeckers, & Gils, 2011), it also aligns the business strategy with the interests of its stockholders, acts as a communication link among shareholders and top management and accordingly mitigating agency problems, and ensures objective and fair treatment of all the family business stockholders (Maseda et al, 2019;Brenes at al., 2011).…”

The Importance of the Governance Role in Achieving Stability and Sustainability in Family Business Companies Through Generations

“…Essentially, family businesses have pronounced separation of management and ownership; thus, they require a governance system to reduce the conflict of interests among the stakeholders. Ediriweera et al (2015) note that businesses that adopt good governance structures and processes have better performance than poorly governed businesses. This assertion is very important, especially when focusing on family businesses under the management of second and third generations.…”