5Governance challenges

Tangible
Benefits

For Family-owned businesses

Implementing
Tangible
Benefits

Motivation

Implementing

Purpose
Alignment

Family
Business
Challenges

Planning
What To Do

Family
Business
Challenges

What To Do
Chapter 5
Governance Challenges
for Family-Owned Businesses

KEY MESSAGES

Family Business Challenges

To an extent, family control yields benefits. Academic research and experience from many
companies and investors all show that a certain degree of family ownership/control provides
positive benefits to the family business and its shareholders.

Family-owned firms face unique challenges. However, many failures of family-owned com-
panies indicate that such firms also face a multitude of challenges which risk destroying share-
holder value or even the business itself.

Corporate governance measures lead to long-term success and keep peace in the family.
Corporate governance measures at the family and business levels provide good solutions to
family ownership challenges and often are indispensable to the long-term success of the family
business — and peace in the controlling family, especially with succeeding generations.

“…We have two options; there is no right or wrong decision, nor one
that is better than the other. But whatever is to be done, will be defini-
tive. There is no turning back. We can continue being a family business,
like in my grandfather’s and father’s days, or become a professional
company with a strong and clear capital market strategy.”

—David Feffer, Suzano, Chairman of the Board,

speaking to his relatives after his father’s death

Practical Guide to Corporate Governance 121

F amily-owned or controlled companies are the leading form of business organization in Latin
American countries, even among large listed companies: one recent study from Brazil re-
vealed that 51.5 percent of the 200 largest listed companies are family-controlled.59

This predominance of family companies shapes particular corporate governance challenges

and opportunities not always considered in markets where ownership is dispersed and manage-
ment is mainly composed of external and hired specialists. But for Latin American markets, any
discussion of corporate governance improvements must address the unique governance chal-
lenges that family companies face.

This chapter examines:

ff How investors view family businesses and the benefits of family ownership
ff Challenges related to family control
ff Governance solutions to address investor concerns related to family ownership
ff First-hand stories of governance challenges in family-controlled companies

1 Family Business Edge

Family ownership may be seen as an opportunity or a threat, depending on a variety of factors.

The family ownership and commitment to the business may be understood as adding value,
provided that the company and the controlling family can respond to the concerns of the inves-
tor community.

Investors—both shareholders and creditors—may look with distrust on family-controlled

companies, because of the risk that the controlling family may abuse the rights of other share-
holders. So investors likely will scrutinize such companies with care before taking the plunge
and investing.

There is a long and storied history of family-owned companies with highly-concentrated

ownership, poor transparency and absence of accountability and fairness principles that led to
abuse of minority shareholder rights.60

From an investor perspective, the key is to establish the right corporate governance condi-
tions so that the positive aspects of family ownership are coupled with assurances that investor
interests will be recognized and addressed.

Investor perception on ownership concentration, and the value associated with it, is re-
vealed in a report of emerging market firms published at the beginning of 2007 by Citigroup
Global Markets. The analysis suggests that investors place a three percent valuation premium on
firms in which family insiders wield significant, but not absolute, control. Conversely, for emerg-
ing market firms where families are majority owners, investors assign a valuation discount of
5-20 percent. See Figure 5.1.

59 SILVEIRA, A. Di M. da, LEAL, R. P., CARVALHAL-DA-SILVA, A. L., & BARROS, L. A. (2007). Evolution and determinants
of firm-level corporate governance quality in Brazil. Available at SSRN <http://ssrn.com/abstract=995764>
60 LA PORTA, R., LOPEZ-DE-SILANES, F., SHLEIFER, A., & VISHNY, R. (2000). Investor protection and corporate gover-

nance. Journal of Financial Economics, 58, pp. 3-27.

ANDERSON, R. C.; REEB, D. M. (2004), Board Composition: Balancing Family Influence in S&P 500 Firms. Administra-
tive Sciences Quarterly v.49, http://ssrn.com/abstract=590305, pp. 209-237.
CLAESSENS, S.; DJANKOV, S., and LANG, L.H.P (1998), Expropriation of Minority Shareholders: Evidence from East
Asia, Mimeo, World Bank, Washington D.C., Research Paper 2088, pp. 33.

122 Chapter 5 Governance Challenges for Family-Owned Businesses

Figure 5.1 Relative Valuation by Family Ownership in Emerging Markets61

10

5
Relative Valuation (%)

-5

-10

-15

-20

Family Business Challenges

-25
0%-10% 10%-25% 25%-50% 50%-70% 75%-100%

Family Ownership

Sources: FactSet and Citigroup Financial Strategy Group

Research quantifies the value of good governance in family businesses. In a study by Pro-
fessor Panikkos Poutziouris62 of the Cyprus Institute of Management of 42 companies on the
London Stock Exchange, listed family firms outperformed their listed non-family rivals by 40 per-
cent from 1999 to 2005. But the study also shows that the outperformance of the Family Busi-
ness63 Index only applies when the interests of shareholders and management are aligned.

Credit Suisse64 research also showed that family-owned companies perform better: over
the long term, such firms tend to achieve superior returns and higher profitability than com-
panies with a fragmented shareholder structure. Credit Suisse analysts compared the stock
performance of European companies with a significant family influence to firms with a broad
shareholder base. The study uncovered several factors that contribute to the success of family-
owned firms:

ff Longer-term strategic focus of the controlling shareholders and management, instead of

operational focus on trying to surpass quarterly results
ff Better alignment of management and shareholder interests
ff Focus on core activities

Anderson and Reeb found a similar result when investigating the link between founding-
family ownership and firm performance in large, publicly-traded U.S. firms listed on the S&P
500 in 2003.65 The main finding: family firms outperformed non-family firms and had higher
valuations as well.

61 CITIGROUP GLOBAL MARKETS. (2007). What investors want: how emerging market firms should respond to the

global investor. This report examines shareholder patterns among 1,500 largest listed firms in the emerging markets (the
“EM 1500”). The EM 1500 represents the top 1,500 firms by US dollar market capitalization at the end of 2005. It is a
subset of the Citigroup/BMI and IFC indices that essentially comprises every listed company with a market capitalization
above $ 300 million across Asia (excluding Japan), Central and Eastern Europe, the Middle East, Africa and Latin America.
All financial data for the EM 1500 is from Bloomberg.
62 POUTZIOURIS, P. Z. (2004). Views of family companies on venture capital: empirical evidence from the UK small to

medium-size enterprising economy. Family Business Review, 14, n. 3, pp. 277-291.

63 A family business was defined by the study as one where at least 10 percent of the shares of a company were owned

by the founding family and also had a family member on the board.
64 Credit Suisse Family Index, 2007.

65 ANDERSON, R. C., & REEB, D. M. (2003). Who monitors the family. SSRN Discussion Papers. Available at SSRN: http://

ssrn.com/abstract=369620 or DOI: 10.2139/ssrn.369620.

Practical Guide to Corporate Governance 123

 The research shows that family businesses can generate value for all shareholders, based
on several factors, known as ‘the family business edge.’ This is what attracts many investors to
invest in family-owned/controlled companies:

ff Long-term view in decision-making

ff Ability and willingness to adopt unconventional strategies, enabling family businesses to
respond rapidly to changing market circumstances and giving them the flexibility to take
advantage of opportunities and address emerging risks
ff Desire to build a business for future generations, translating to a focus on sustainability and
reducing the risk that controlling shareholders will run down company assets and destroy
value
ff Commitment of family management to their company, providing continuity in the way the
business is run

“I am certain that high ethical standards and good corporate governance

in business generate value and increase the public investors’ trust.”

—Eustaquio de Nicolás Gutierrez,

Homex, Chairman of the Board

A number of Companies Circle members have significant experience in the area of gover-
nance for family-owned companies. Here is a highlight.

Homex implements governance practices 

With the goal of generating value for all shareholders, Homex has implemented a series of
governance practices.

Since going public in 2004, the company’s controlling family has held a sizeable stake in the
company. Still, the family has relinquished a larger portion of shares for public purchase over the
years: the 2005 IPO launched with 22.2 percent of shares available for purchase. Today, other
shareholders control 64.9 percent66 of ownership, as shown in Figure 5.2.

Figure 5.2 The Ownership Structure of Homex

Founder Family
35.1%

Float
Source: Homex
64.9%

66 As of October 31, 2008.

124 Chapter 5 Governance Challenges for Family-Owned Businesses

This ownership structure demonstrates the De Nicholas family’s commitment to the Mexican
housing market, and confidence in the company’s continued prosperity and ability to create
value for all its shareholders. In turn, Homex’ controlling family has found that this approach
resonates with other investors, giving them greater confidence in the company.

Homex sought to do its best to ensure all shareholders that their rights and interests will
be properly protected by introducing high corporate standards in its by-laws that focus on pro-
tection of minority investors’ rights. Moreover, it has never incorporated provisions like anti-
takeover practices, diluting schemes or the existence of different types of shares that provide
for different voting privileges.

Homex’ leaders see additional advantages of having 35.1 percent of company’s ownership
such as:

Family Business Challenges

•• Aligning shareholder interests that leads to better decision processes
•• Attracting investment and increasing share liquidity
•• Increasing investor confidence: high percentage of shares in the market gives minor-
ity investors confidence that a dominant group will not make decisions contrary to their
interests — an important factor in Homex’ success.

“Walking the path of true institutionalization and creating value with it

requires a powerful level of commitment, internal control and high cor-
porate governance practices are critical tools to get this job done.”

—Gerardo De Nicolás, Homex, CEO

2 Family Business Governance Challenges

Together with certain advantages in comparison to non-family owned firms, family businesses
also face a set of challenges which they need to address to obtain the trust of investors and, in
many cases, to make the company sustainable in the long run.

Through the years, numerous academic studies have looked at some of these challenges
and weaknesses:

ff In 1988, Holderness and Sheehan67 found that among US corporations, family firms have a
lower market value than non-family firms.68

67 HOLDERNESS, C. G., & SHEEHAN, D. P. (1988). The role of majority shareholders in publicly held corporations. Journal

of Financial Economics, 20, pp. 317-346.

68 The study measured companies’ “Tobin’s Q,” a proxy for corporate market value calculated as the market value of a

firm’s assets divided by replacement value of the firm’s assets.

Practical Guide to Corporate Governance 125

 ff In 2001, Pérez-González found that the stock market reacts negatively to the appointment
of family heirs as managers.69
ff In 2004, Villalonga and Amit reported that family control exhibits specific weaknesses when
descendants are involved in top management.70

So, even if family businesses are recognized as a valuable asset, the risks associated with
concentration can drive away additional sources of finance, thereby reducing the company’s
value or restricting available credit terms.

The main challenge in family business governance relates to the existence of an additional
layer of relationship that the owning/controlling family brings to the business.‑ For shareholders
this complexity includes understanding the various interconnections among the owning/control-
ling family members. These roles include:

ff Family member/owners
ff Family member/directors
ff Family member/managers
ff Family member/employees
ff Family members who are not shareholders, but are extended family and heirs
ff Family members who are some combination of these roles

Typically, family businesses in the first generation—and sometimes in the second gen-
eration—are managed by the founders and other family members. These businesses often
face the challenge of attracting good specialists to assume management positions. They face
even more difficulties in retaining such qualified professionals. The relationship between family/
managers and non-family professionals must be carefully crafted to maintain a well-functioning
management team and to lead the company to success.

Relations between the family as shareholders and non-family investors also present chal-
lenges. Non-family external investors often have significant influence over the shaping of the
family business’ governance. Their views on corporate governance are converging due to eco-
nomic globalization and emergence of global investors.

Despite convergence of governance patterns in the competition for capital, differences are
likely to remain, from country to country and from industry to industry.

There is also a trend toward standardizing understanding of good governance for investors
and international capital markets. Notes one institutional investor in response to a 2006 global
study of institutional investors:71

“Global capital markets have become more integrated. Corporate gover-

nance becomes a common theme in the global investment community.
It can serve as a screening tool to nail down the portfolio candidates.
Moreover, it can also serve as a benchmark for our investment
portfolio.” —Institutional investor 2006

69 PEREZ-GONZALEZ, F. (2001). Does inherited control hurt firm performance? Working paper Columbia University.
70 AMIT, R., & VILLALONGA, B. (2006). Benefits and costs of control—enhancing mechanisms in U.S. family firms. SSRN
Working Paper.
71 2006 ISS Global Institutional Investor Study, by RiskMetrics’ wholly owned subsidiary, Institutional Shareholder Ser-

vices (ISS), 2006. Reproduced by permission of RiskMetrics Group, Inc. . ©2006-2009 RiskMetrics Group, Inc. All rights
reserved.

126 Chapter 5 Governance Challenges for Family-Owned Businesses

 This study, from RiskMetrics’ subsidiary, also finds that the majority of investors say that
corporate governance is more important today than it was three years ago. They also say that
it will become even more important in the next three years — including for family businesses.
Investors place a strong value on corporate governance, minority shareholder protection and
transparency. As a result, they want family businesses to have structures and processes that
are globally recognized as good practices without necessarily considering the family business
governance specifics.

In addition, family-controlled firms often face a difficult choice as they confront the need
to fund growth by attracting equity: do they cede partial control to external shareholders and
change their old habits and ways of running the business, promoting tangible improvements in
corporate governance in exchange for capital for growth?

Family Business Challenges

This discussion shows that family companies must consider a variety of sometimes con-
flicting issues when competing for resources alongside global companies, particularly in coun-
tries with institutions, regulatory frameworks and enforcement mechanisms that do not inspire
the confidence of investors. There are additional challenges as well:

ff Quite often, especially during the early, start-up stages of the family business, the company
and family relationships are not clearly distinguished. This is particularly true with respect
to financial relations and accounts — the company’s and family’s assets are not legally sepa-
rated. This causes problems in distinguishing company-owned assets, and how company-
owned assets can be used by the family as a shareholder.
ff Existing governance-related policies are informal, as a general rule. This can lead to reliance
on key people rather than on structures and processes. Such “common” understandings
may not be as universally-held or understood when situations change. As a result, there could
be some uncertainty on the part of external investors and non-family employees.
ff Weaknesses in governance systems of family businesses are most evident in internal con-
trols, internal audit and risk management. Since many family businesses are managed by
the founders or their children, the control environment is largely tailored to their needs. The
problem: the controls do not grow along with the company, as the business becomes more
complex. This gap is a primary area of concern for external investors.
ff Governance challenges only increase as the family and business grow more complex with
each succeeding generation.

3 Governance Solutions to Family Business Challenges

This section looks at various governance solutions to the challenges unique to family-owned
businesses, and covers a variety of topics:

ff Distinguishing governance solutions in different ownership stages of the family business

ff Family governance institutions
ff Family governance documents
ff Specific solutions to some family governance challenges
ff Succession planning in family-owned business
ff Case study: Ultrapar

To address the challenges detailed in the previous section, family businesses have come up
with many governance solutions that are specific to their ownership structures.

Practical Guide to Corporate Governance 127

 Research published by IBGC in 2006 analyzed 15 family-controlled companies and found
that these companies had five main motivations for seeking improvements in their governance
policies and practices:72

ff To institutionalize and perpetuate the business model

ff To provide the means to implement the defined strategic plan
ff To add value for shareholders
ff To enhance the potential for attracting debt financing, resources and shareholders
ff To improve the company’s image abroad, facilitating globalization and reaching a base of
foreign investors

The study provides clear evidence of the value of good governance to such companies. The
study sample was comprised of listed companies with certain liquidity levels. They also met a
certain standard of relatively advanced corporate governance practice. The research found a rel-
evant and meaningful positive correlation between the quality of corporate governance at these
companies and their operational and market success.

The analyzed companies are on average larger and are worth more. They have higher mar-
ket multiples. They are operationally more profitable, with more liquidity. They pay higher divi-
dends. And they are more solvent in the short term and more leveraged than the average of all
listed companies on BM&FBOVESPA. The study also concluded that the analyzed companies
typically follow better corporate governance practices than an average company listed with
BM&FBOVESPA.

Family-owned members of the Companies Circle have faced a similar set of motivations.
The stories that follow provide concrete illustrations of the reasons to initiate corporate gover-
nance improvements in family companies and the benefits they afford to the controlling family,
the family business and outside investors.

“I don’t know cases of families in Latin America that had become more
united because of money, but I do know of many cases where families
have destroyed companies because of money. The lesson to be learned
here is that company value is what unites shareholders, irrespective of
whether these are family members, institutional shareholders or inves-
tors who are external to the controlling groups.”

—Roque Benavides, Buenaventura, CEO

72 IBGC, Brazilian Institute of Corporate Governance (2006). Corporate governance in family cotrolled com-
panies: relevant cases in Brazil. São Paulo: Saint Paul Institute of Finance. The companies analyzed include Gerdau, Gol,
Itaú, Klabin, Localiza, Marcopolo, Natura, NET, Pão de Açúcar, Randon, Sadia, Saraiva, Suzano, Ultrapar and Weg..

128 Chapter 5 Governance Challenges for Family-Owned Businesses

Buenaventura transforms from family-run firm to professionally-managed company 

In Latin America, as elsewhere, family fights have destroyed value and companies to the detri-
ment of all. Buenaventura set out on the corporate governance improvement path as a way to
avoid this situation, transforming the company from a family-run business to a professionally-
managed firm. With a focus on aligning the family’s objectives with those of long-term share-
holders and ultimately maximizing value for all shareholders and implementing good corporate
governance, the company’s founders and their successors believe they have avoided the kinds
of family disagreements that could have harmed or destroyed the company.

As a listed company on both the NYSE and the Lima Stock Exchange, company leaders
have seen that investors really care about corporate governance, and adopting such practices
truly pays off. The company underwent an entire culture shift, affecting all shareholders, includ-

Family Business Challenges

ing family members, to focus on the benefits for the company as a whole. The family’s objec-
tives with respect to the company and non-family shareholders’ objectives are the same, as all
are interested in enhancing shareholder value.

Generational shift at Ferreyros 

This company’s significant change in the pattern of ownership and control over time is rooted
in family factors. The first generation of founding partners passed on their ownership to the
second. But not every second generation family member wanted to participate in the business,
since the heirs had other interests for their careers and lives. So the owners opted to turn over
the company’s management to professional non-family managers and to create a broad and
diverse base of shareholders. To facilitate the transfer of the company’s stakes to new own-
ers, Ferreyros registered its shares on the Lima Stock Exchange, an initiative that required the
implementation of corporate governance improvements to attract investment and enhance the
company’s controls and performance.

3.1 Distinguishing Governance Solutions in Different Ownership Stages

of the Family Business

Corporate governance solutions that family businesses can adopt will vary depending on the
stage of the controlling family’s ownership. Some structures and processes are adapted to
situations in which there is a single person, the founder/patriarch of the company, in charge of
the company. Other solutions are better suited when the next generation takes over the busi-
ness. And a third set of governance solutions are appropriate for companies controlled by family
members of later generations.

Harvard professor John Davis developed a model to help understand the three-phased evo-
lution of family companies, shown in Figure 5.3.73 The initial phase, in which all dimensions are
concentrated in one family, groups of families or the individual founder is known as the “found-
ers stage.” As time goes by, the company grows and transitions ownership to the next genera-
tion, a stage called the “siblings’ partnership.” As more time passes, the company transitions to
future generations, reaching maturity — a stage Davis calls the “cousins’ confederation”. When
the firm reaches maturity, according to the model, the challenge is to renew and recycle in order
for the company to continue.

73 GERSICK, K. E., DAVIS, J. A., HAMPTON, M. M., & LANSBERG, I. (1997). Generation to generation: life cycles of the

family business. Boston: Harvard Business School Press.

Practical Guide to Corporate Governance 129

Figure 5.3 Development and Transition of Family Businesses Over Time

Initial Phase Growth/Development Maturity

Family Family

Family

Ownership

Business

Ownership Business Ownership Business

Source: Better Governance, based on GERSICK, Kelin E., DAVIS, John A., HAMPTON, Marion M., and LANSBERG,
Ivan I. Generation to Generation: Life Cycles of the Family Business. (1997)

For Your Consideration

Remember that what works at one stage of this ownership cycle usually does not work
well at other stages. So controlling families should take a careful look at the governance
solutions recommended for their particular stage of development.

The governance solution you choose for your family business should depend on the
ownership stage your company is in.

3.2 Family Governance Institutions

Transferring the values and business knowledge of the founders to future generations becomes
more difficult as the family grows. The challenge is to keep the generations and all family mem-
bers united and their interests aligned over the years. When families reach the third and fourth
generations, their members may barely know each other. It becomes more difficult to maintain
aligned interests within a large family, especially given that the demand for creation of wealth
for future generations increases as time passes.

As the competition for resources and power within the family intensifies, it becomes in-
creasingly difficult to maintain a common purpose. How does a family maintain a shared vision
about the company? All sorts of diverging views can arise: on ownership, on the degree of con-
trol that the family intends to retain, on the family’s involvement in the company’s governance
either through the board of directors or executive management.

The good news: help is available. Family business consultants and groups focused on
governance say that several easily accessible publications can help families and their busi-
ness with finding answers to these and other relevant questions. The IFC Family Business
GovernanceHandbook,74 published by the International Finance Corporation, recommends the

74 IFC, INTERNATIONAL FINANCE CORPORATION (2008). Family Business Governance Handbook, http://www.ifc.org/

130 Chapter 5 Governance Challenges for Family-Owned Businesses

establishment of family governance institutions that can help strengthen family harmony and its
relationship with the business.

The handbook, aimed at guiding families as they initiate best governance practices on the
corporate and family levels, suggests that allowing family members to gather under one or
more organized structures, strengthens communication links between the family and its busi-
ness. This approach also provides opportunities for family members to network and discuss
issues related to the business and the family. Table 5.4 highlights the types of governance struc-
tures families might establish, depending on the stages of the family company’s development.
In addition to governance-related structures presented in the table below, families might con-
sider establishing other structures, such as family office, education committee, share redemp-
tion committee and career planning committee.

Family Business Challenges

Table 5.4 Family Governance Institutions

Family Meeting Family Assembly Family Council

Stage Founder Sibling partnership/ Sibling partnership/
cousin confederation cousin confederation
Status Usually informal Formal Formal
Membership Usually open to all fam- Usually open to all family Family members elected
ily members. Addition- members. Additional mem- by the family assembly.
al membership crite- bership criteria might be set Selection criteria defined
ria might be set by the by the family by the family
founder
Size Small size since family still Depends on the size of the Depends on criteria set
at founder stage. Usually family and membership cri- up for the membership.
6–12 family members teria Ideally 6–12 members
Number of Depends on the stage of 1-2 times a year 2-6 times a year
meetings the business’ develop-
ment. When business is
growing rapidly, can be as
frequent as once a week
Main ff Communication of ff Discussion and communi- ff Conflict resolution
Activities family values and vi- cation of ideas, disagree- ff Development of the
sion ments, and vision major family-related pol-
ff Discussion and gener- ff Approval of major family icies and procedures
ation of new business related policies and pro- ff Planning
ideas cedures ff Education
ff Preparation of the next ff Education of family mem- ff Coordination of the
generation of business bers on business issues work with manage-
leaders ff Election of family council ment and the board
and other committees’ and balancing the busi-
members ness and the family
Source: IFC Family Business Governance Handbook

Figure 5.5 shows that once the “cousins’ confederation” stage is reached and the com-
pany opts for renewal and recycling, the company adopts good governance practices for the
company and the family with the creation of the family office and the family council.75 This action

ifcext/corporategovernance.nsf/AttachmentsByTitle/Family+Business_Second_Edition_English+/$FILE/Englilsh_Family_
Business_Final_2008.pdf, pp. 31-32.
75 The family office is an investment and administrative center that is organized and overseen by the family council commonly in

large and wealthy families. The office is the mechanism through which advice on personal investment planning, taxes, insurance
coverage, estate planning, career counseling and other topics of interest is provided to individual family members. For more de-
tail, see IFC, INTERNATIONAL FINANCE CORPORATION (2008). Family Business Governance Handbook, <http://www.ifc.org/

Practical Guide to Corporate Governance 131

separates the various dimensions and establishes practices that generate greater transparency
and the trust of outsiders. This stage involves the most extensive family governance institutions
and business governance structures. Good communication between the two sets of structures
is key to business success and family peace.

Figure 5.5 The Governance Structure of Family-Controlled Companies with Good

Practices

Family Family
Office Council

Owners

Independent
Auditors Board
of
Directors

Committees

Auditing
Committee

Internal
Audit

Management

Source: Better Governance

3.3 Family Governance Documents

Family governance structures and institutions require a certain degree of formalization if they
are to function well. As families adopt policies on the family’s approach to the business and
on governing the business, they will formalize these efforts with documents that will differ
depending on their ownership stage.

ifcext/corporategovernance.nsf/AttachmentsByTitle/Family+Business_Second_Edition_English+/$FILE/Englilsh_Family_Busi-
ness_Final_2008.pdf>, pp. 32-33.

132 Chapter 5 Governance Challenges for Family-Owned Businesses

 Typically, in the earlier stages when the company is governed by the founder or his/her chil-
dren, many aspects of family and business governance are informal. Any efforts to formalize re-
late mostly to the business itself. First attempts at written policies usually are brief documents
that state a general family vision and mission with respect to the company.

The next level of formalization comes with the need to develop a family employment policy.
This becomes more apparent when the company reaches the sibling partnership stage. The
family employment policy sets clear rules on terms and conditions of family employment within
the firm. For some families, these rules stipulate conditions of entry, retention and exit from
the business. The policy also should cover the treatment of family member employees vis-a-vis
non-family employees.76

In third, fourth and succeeding generations, family businesses can barely survive unless full

Family Business Challenges

family governance policies are written and communicated within the family and the business, as
well as to other outside stakeholders. The document covering all of these policies is commonly
called a family constitution. This document expresses the family’s principles regarding the family
commitment to core values, vision, and mission of the business. It often defines the roles, com-
positions, and functions of family governance institutions and the company’s own governance
bodies, such as the shareholders’ meeting, the board of directors and senior management.77

For Your Consideration

Creating a family constitution will codify all of your family-related governance policies.

3.4 Specific Solutions to Some Family Governance Challenges

As companies focus on maintaining all the benefits afforded by family ownership and supple-
menting them with good governance processes and structures to enhance competitiveness
and foster growth, they will face challenges.

Solutions used will include mechanisms to:

ff Separate functions of ownership, control and management

ff Create family offices to clarify the boundaries between the family’s and company’s accounts
ff Develop the skills and knowledge of heirs so they can become responsible owners, as they
can assume various roles as an owner, director or an employee

Processes and structures for decision-making will vary: it is one thing to decide on family
matters and quite another to tackle company business, with issues such as division of equity
and the like. The family council, created to address family issues should remain completely
separate from the board of directors and from shareholders meetings, both of which focus on
company-related decisions.

76 IFC, INTERNATIONAL FINANCE CORPORATION (2008). Family Business Governance Handbook, <http://www.ifc.
org/ifcext/corporategovernance.nsf/AttachmentsByTitle/Family+Business_Second_Edition_English+/$FILE/Englilsh_Fam-
ily_Business_Final_2008.pdf>, pp. 23-27.
77 For more information on family constitutions, see IFC, INTERNATIONAL FINANCE CORPORATION (2008). Family Busi-

ness Governance Handbook, <http://www.ifc.org/ifcext/corporategovernance.nsf/AttachmentsByTitle/Family+Business_

Second_Edition_English+/$FILE/Englilsh_Family_Business_Final_2008.pdf>, pp. 24-25.

Practical Guide to Corporate Governance 133

 It is true that introducing governance measures will not resolve every investor concern
about family-owned or controlled firms. Still, instituting structures and processes for the family
and the business can address some key challenges.

Keeping peace in the family: Keeping peace in the family is important for inter-personal, social
and business reasons.

The problem

Conflicts among the siblings who run the business or misunderstandings between different
family branches may spill over to the company’s domain and create problems for other share-
holders.

ff How to manage relations between family members who work for the family business and
those who are only owners and rely on dividend income from the success of the company:
These two groups may have diverging interests and varying degrees of access to company
information, which may lead to an atmosphere of distrust in the family.
ff How to manage situations in which some family members want to work for the company,
and others want to pursue their own interests, possibly leaving the family business entirely.

Suggested solutions

Family governance institutions can play an important role as places where sensitive issues can
be discussed and solutions found.

ff A family assembly or family council can mull over the issues and develop policies on how
dividends are determined and distributed to make sure that the family is satisfied in ways
that are not detrimental to the success of the business. Putting things on the table and
openly discussing contentious issues is often the fastest way toward finding a solution ac-
ceptable to all concerned parties.
ff The family can create a liquidity fund, which could be used by the family to redeem the
shares of family members who wish to pursue their own interests outside of the family
business. Some companies even establish special committees with oversight for the re-
demption policies.

Presence of outside, non-family shareholders: This situation poses its own set of
challenges.

The problem

ff How can the company ensure that these external investors are fairly treated? These inves-
tors might have interests and views on the role and results of the business that diverge
from the controlling family’s point of view. Investors also might have different levels of ac-
cess to company information. In some cases, external investors have even less information
than non-management, family shareholders.

Suggested solution

Corporate governance improvements may help.

ff Empower the board of directors to arbitrate between the family and outside shareholders.
A board that performs classic functions of management oversight and helps management
define and pursue the company’s strategic direction is capable of aligning the interests of
all types of investors.

134 Chapter 5 Governance Challenges for Family-Owned Businesses

 ff The presence of independent directors can reinforce the board’s mediating role. Indepen-
dent directors can provide an outside, objective perspective for business decision-making.
They can act independently to resolve conflicts of interest and family governance prob-
lems, such as employment issues.

3.5 Succession Planning in Family-Owned Business

Succession planning is a sensitive issue and involves such dilemmas as:

ff How to maintain objectivity when family feelings are involved.

ff How to make objective judgments unimpaired by emotions.

Family Business Challenges

Some useful steps for dealing with executive succession are presented in the checklist in
Table 5.6.

Table 5.6 Checklist: Ensuring Strong Senior Management for the Family-Owned Company78

Analyze the organizational structure and contrast the current and optimal roles
and responsibilities (compared to peer companies) of each senior manager.

Design a formal organizational structure that clearly defines the roles and re-
sponsibilities of all senior managers. This should be based on the company’s
current and future business operations’ needs.

Evaluate the skills and qualifications of the current senior management based on
the new organizational structure.

Replace and/or hire senior managers.

Decentralize the decision-making process and approval levels as necessary. De-

cision-making powers should be linked to the roles/responsibilities of managers
and not to their ties to the family.

Establish a clear family employment policy and make its content available to all
family members.

Develop an internal training program that allows skilled employees to be pre-

pared for taking on senior management assignments in the future.

Establish a remuneration system that provides the right incentives to all manag-
ers depending on their performance and not on their ties to the family..

Over the years, the Companies Circle members have confronted the succession issues
head-on. Here is a sampling of their approaches to resolving the problems.

78 IFC, INTERNATIONAL FINANCE CORPORATION (2008). Family Business Governance Handbook, <http://www.ifc.
org/ifcext/corporategovernance.nsf/AttachmentsByTitle/Family+Business_Second_Edition_English+/$FILE/Englilsh_Fam-
ily_Business_Final_2008.pdf>, p. 47.

Practical Guide to Corporate Governance 135

 “…The times we live in, where competition for capital is fierce and glo-
balization forces us to compete globally, the international competitive
scenario requires companies to be experts in adapting to ever-changing
scenarios. The preparation of an advance succession plan will allow for
the transition from one stage to another to be carried out smoothly,
avoiding interruptions.”

—Roque Benavides, Buenaventura, CEO

Buenaventura separates board and management 

This firm’s initial succession process involved separating the position of chairperson of the
board from that of general manager. This was a controlled and natural process, approved by
most shareholders.

The next stage—succession planning at the general manager and other senior manage-
ment levels—is a topic of frequent discussion at Buenaventura’s board meetings. Now, the
company is in the preliminary process of identifying and evaluating potential in-house candi-
dates, with the idea of developing new capabilities. The search also will extend to consider
outside candidates.

As a company and as a family, Buenaventura seeks to ensure continuity of the corporate

vision. The executives who are appointed to manage the business in the future must be the
candidates best equipped to continue generating growth and increasing value for the sharehold-
ers and stakeholders. The board is playing an essential role in this succession process, ensuring
that competent professionals are involved in the selection process and that the decision criteria
fit with the company’s vision, mission, values, and strategic choices. The board also can exer-
cise its full powers to resolve any internal conflicts that might arise during the process.

Non-family professionals take the helm at Marcopolo

Non-family professionals took the management helm for the first time at Marcopolo in 1995,
with the appointment of a team of executive directors who were not shareholders. Ten years
later, although this executive team was still young, it became apparent that the company need-
ed a succession plan. Since 2005, the company has focused on managing succession.

Currently, Marcopolo’s senior executive succession plan looks like this:

•• Retirement policy: At age 60, with possibility of a five-year extension period in special
cases
•• Retirement preparation plan: Policies for potential continued relations between the
company and the retired executives, such as consultancy, or appointment as a board
member in controlled companies

136 Chapter 5 Governance Challenges for Family-Owned Businesses

 •• Board role: Regular follow-up on the succession plan, mainly through the company’s
human resources committee

In addition to the succession of business leadership positions, family businesses should

pay close attention to ownership succession and preparing future generations of owners.

For Marcopolo this meant developing a formal ownership succession plan. Currently, the
two potential candidates for succession attend in-house and external training programs. The
main theme of these courses is the enhancement of knowledge, skills and technical know-how
to become competent company shareholders — the successors at Marcopolo decided that they
would only assume the role of shareholders, with seats on the board. They leave the role of
managing company operations to external management professionals.

Family Business Challenges

Elements of Marcopolo’s Training for Family Ownership
Succession Candidates
•• In-house training: Lectures on specific characteristics of industrial, engi-
neering and manufacturing areas
−− commercial knowledge-building emphasizes sales and marketing strate-
gies
−− administrative and financial knowledge-building focuses on strategic
planning, budgets, accounting, cash management and company finance
•• External training: Courses and seminars given by institutions that are highly
regarded in the academic world and the corporate community

“This was an outstanding process, brilliantly planned and executed ac-

cordingly. Succession was successful and created room for new execu-
tives to join our group.”

Ana Maria Igel, wife of Pery Igel, son of Ultrapar’s founder

Succession process for Ultrapar 

At Ultrapar, Pery Igel, the son of the company’s founder, viewed some of his hired executives
as allies who could help protect the company from the uncertainties that a business dependent
on family management and capital could face. In the 1980s, Igel drew up a process for his suc-
cession based on two key elements:

•• Professionalization of Ultra Group’s management

•• Shared control of the company between heirs and key executives

To carry out this plan, Igel distributed beneficiary shares to his heirs and transferred shares
to executives. A shareholders agreement, formalized in the mid-1980s provided for recipro-
cal rights of first refusal in the event of sale of controlling shares. It established two separate

Practical Guide to Corporate Governance 137

holding companies with a defined life span of twenty years and control over the umbrella firm,
Ultra S.A:

•• Igel Participações: held by the heirs of the family

•• Avaré Participações: held by Ultrapar executives

During this period, new management leaders were trained to prepare them to lead the
company’s growth. These executives who were now also owners had their interests aligned
with those of the family. In the transition stage, a new group of executives received shares, but
with a shorter time horizon in which to dispose of the shares.

In late 2004, the two holding companies were dissolved, and the corresponding shares
were passed on directly to Ultrapar’s heirs and executives.

Two years later, in 2006, a new succession process took place. This time the CEO — one of
the executives who received shares from Igel as part of the original 1980s share transfer — was
replaced by a professional groomed internally by the company. The former CEO retained his
position as chairman of the board of directors — yet another step in the company’s evolution
towards better governance.

Suzano Restructuring

In 2002, as the Feffer family’s third generation began to assume more leadership, the company
initiated a thorough restructuring process. The goal: to ensure that the businesses in which
the Group had decided to invest — pulp and paper and petrochemicals — would be sufficiently
capitalized for long term sustainability, able to grow, with competitive costs of capital through
its partnerships with the capital markets. Efforts also were designed so that the businesses did
not depend excessively on the controlling shareholder’s capital.

Case Study: Suzano and 83 Years in a Family-Controlled

Company
The path to good governance requires a tailor-made approach that addresses the particular
challenges, vision and purpose of each company. It also must be understood in the con-
text of the level of maturity of the controlling family, its shareholders and the controlled
companies.

Working with strangers who are managing your company and sitting in your boardroom
for the first time might be an uncomfortable experience at first, especially when you are
not sure of its value. This challenge was experienced thirty years ago at Suzano by Max
Feffer, son of founder Leon Feffer and father of current board chairman David Feffer. The
different stages experienced through the years helped make it possible for the organiza-
tion to react in a fast and effective way when Max Feffer died, creating a model to survive
family uncertainties.

The Suzano Group designed a structure based on family control and on maintaining a close
relationship with capital markets. The arrangement allows heirs of the founders to exer-
cise control through the board of directors, while management is comprised of non-family
executives. The family acknowledges that this move has enabled more potential develop-
ment and expansion of the company, and protects the business from possible intra-family
conflicts.

138 Chapter 5 Governance Challenges for Family-Owned Businesses

Of course, the extent of governance processes and structures that the company follows
depends on the development stage of the company and the controlling family. It requires
careful and gradual introduction and implementation of governance measures, which can
be improved and enhanced over time.

A big picture of the phases of Suzano’s company development as shareholders’ involve-

ment in the company evolved is shown in Table 5.7.

Table 5.7 Suzano´s Development Phases

Phase Benchmarking Process

First phase (1920s-1970s) ff Founded by Leon Feffer at the age of 20.
He maintains leadership until his death in

Family Business Challenges

1999.
ff Management highlighted by his entrepre-
neurial style and centralization

Second phase (1970s-2001) ff Max Feffer joins executive management in

the 1970s
ff Development of executive managers and
heirs
ff First executive president and first non-fami-
ly board director

Third phase (2001-present) ff Max Feffer dies

ff New model of governance and manage-
ment
ff David Feffer presides over the board with
executives in management

The timeline in Figure 5.8 shows the milestones in each phase of company development,
the impact and next steps. On the right-hand side one can see the most recent phases of
the process, culminating in the installation of a new governance structure and the sale of
one of the units, generating significant value for the shareholders

Details of the Restructuring. In 2002, as the Feffer family’s third generation began to as-
sume more leadership, the company initiated a thorough restructuring process. The goal:
to ensure that the businesses in which the Group had decided to invest—pulp and paper
and petrochemicals—would be sufficiently capitalized for long-term sustainability, able to
grow with competitive costs of capital through its partnerships with the capital markets.
Efforts also were designed so that the businesses did not depend excessively on the con-
trolling shareholder’s capital.

For this to happen, the two companies, Suzano Papel e Celulose and Suzano Petroquímica,
had to comply with corporate governance standards consistent with best market practices.

In 2003, the Group implemented a new business model based on three pillars:

•• Family control: For the Group’s long-term vision, reputation and values

Practical Guide to Corporate Governance 139

 •• Professional management: For capital discipline and a fast decision-making process
•• Partnership with the capital markets: To assess company performance on a perma-
nent basis, promote the continuous practice and enhancement of corporate governance
standards and ensure business growth and development

A first step in the Group’s restructuring process: Suzano Holding began to run Suzano
Papel e Celulose and Suzano Petroquímica subsidiaries through a professional manage-
ment team, recruited in a search that considered internal and external candidates from the
marketplace.

The new professional management team, comprised of highly-qualified executives,

streamlined corporate operations spread among the subsidiaries. Their efforts have re-
sulted in 30 percent cost reduction, improved management performance, implementation
of appropriate subsidiary control mechanisms, and management accountability for results.
The team also implemented a new monitoring model allowing for improved monitoring of
and reporting for subsidiaries.

These successes have enabled members of the controlling family to step aside from their
executive role in these subsidiaries and assume a more strategic position, minimizing
succession-associated risks to the continuity of the Group’s businesses. Some members
of the family began to participate in the strategic management of Suzano Papel e Celulose
and Suzano Petroquímica through appointments to the boards and related management
and strategy committees, along with other Suzano Holding executives. So, the Group cre-
ated processes to ensure a better balance between greater management independence
for the subsidiaries and long-term strategy for the controlling shareholders.

These improvements have marked an important change in the behavior of the controlling
shareholders. After decades of a hands-on approach to the businesses, the controlling
family withdrew from day-to-day management, delegating to professionals and assuming
a more strategic role. For members of the family who had truly grown up in and with the
company, this represented a huge paradigm shift.

In the Words of the Entrepreneur: David Feffer Tells the Suzano Story 79

Understanding the enhancement of corporate governance practices in Suzano Group

demands, at first, the rebuilding of the path since its foundation in 1924 by my
grandfather, Leon Feffer.

The implementation of the Brazilian industry in the early 1950’s, more concentrated
in the state of São Paulo, was the scenario of the beginning of our industrial activi-
ties. This movement was led by important entrepreneurs, who set up family-owned
conglomerates strongly responsible for the development of Brazilian industry.

The beginning of our activities was in the pulp and paper industry. In the 1950’s,
we developed the technology for the production of pulp from eucalyptus and be-
came the first company in the world to produce it on an industrial scale. For that,

79 Written for UPsides, FMO quarterly magazine, Number 2, Netherlands, April 2007.

140 Chapter 5 Governance Challenges for Family-Owned Businesses

Figure 5.8 Progression of Suzano´s Leadership Succession and New Governance Model

1924 • Foundation of the firm by 2007 • Sale of Suzano

Leon Feffer in São Paulo Petroquimica

• David Feffer only in

2006 Chairman role
• Hired managers at both
companies
• Improved governance:
1929 • Leon Feffer acquires a lot

Family Business Challenges

independent committees
of paper that remained
from the fire

2005 • Improvement in Suzano

1950s • Max Feffer joins the company Petroquimica’s Board

• Suzano Petroquimica
2004 Level 2 BOVESPA

1970s • Max Feffer assumes executive

management 2003 • New management model
• Preparation of managers • Liquidity and remuneration for
shareholders
• Suzano Papel e Celulose Level 1
BOVESPA
1980s • 3rd generation begins to be
prepared 2001 • Max Feffer passes away
• External executive CEO • 3rd generation in command

Growth, development of
executives and
preparation of heirs

Source: Better Governance with Suzano data

my father, Max Feffer, and a group of Brazilian scientists spent some months at the
University of Gainesville, Florida (USA), studying alternatives for pulp production us-
ing native Brazilian trees, since all the pulp produced at that time was based on pine
trees, common in European countries.

In the 1970’s we diversified our activities towards the petrochemical industry since
we identified an important growth trend in the use of plastic in the packaging seg-
ment, an important market for the paper industry, thus seeking to keep our presence
in that segment.

My grandfather’s management ended with his death in 1999, at the age of 96, leav-
ing behind entrepreneurship as his legacy, which enabled the substantial growth of
our business.

Practical Guide to Corporate Governance 141

 Then, my father, Max Feffer, assumed command and marked his management by
preparing the Group for the strategy towards the capital market. Under his com-
mand, the Suzano Group defined its growth platform, divested from non-core assets
and focused investment on our main businesses, which were separated into two dif-
ferent companies, Suzano Papel e Celulose and Suzano Petroquímica.

With my father’s unexpected death in 2001, after little more than two years lead-
ing the group, the controlling shareholders — my brothers, my aunt and my mother
— unanimously invited me to assume command of the Group. I accepted and we
discussed how we would face the future. I said: “We have two options; there is no
right or wrong decision, nor one that is better than the other. But whatever is to be
done will be definitive. There is no turning back.”

We could continue being a family business, like in my grandfather’s and father’s

days, or become a professional company with a strong and clear capital market strat-
egy. In the first case, I explained, Suzano could perfectly serve the current genera-
tion of our family, but the future would be uncertain because it would probably be
difficult to access the necessary resources for modernization and growth of the busi-
nesses. We need to always keep in mind that we participate in two capital intensive
companies. Therefore, we could begin to face serious difficulties to invest, reinvest
and compete in the marketplace.

On the other hand, professionalizing the companies and reinforcing the partnership
with the capital market, would allow us to leave the 21st century better than how
we started it, also having access to competitive funding to successfully face future
investment challenges.

Both options were correct. The second one, however, presented another advantage:
the perspective of solid value generation, business sustainability and the mainte-
nance of the values and beliefs of the founders, who did not just think about the
present, but also the generations to come. Everybody was conscious that taking the
capital market route would entail having to live from the results of the businesses
rather than directly from them. Between the two options, the second one prevailed.

Despite all the changes this process has brought, the transitional phase was very
smooth and, in fact, represented an enhancement of our way of doing business.
We had very sincere and realistic conversations. We closed the door to the past and
opened the gates to the future. The basic foundation was that Suzano should belong
to all shareholders, including the Feffer family. When we made that decision, the
difficulties started to be felt. First, we requested to be dismissed from our positions.
We needed to create a meritocracy criteria in the Group, paving the way to promote

142 Chapter 5 Governance Challenges for Family-Owned Businesses

stronger development, to reformulate assessment parameters and, particularly, to
treat all shareholders equally.

All these changes were very challenging. I had grown up getting ready to be the
president of the Group one day. Suddenly, I was forced to commit a kind of hara-
kiri. I left management’s front line to take over as chairman of the board of directors
of both companies, which are responsible for defining business policies, long-term
global strategy and for the supervision and management of executive directors. It
was not easy. The process progressed. We hired executives from the marketplace.
We began to define and align strategic actions for the pulp and paper and petro-
chemical businesses counting on the support of a professional senior management.

Family Business Challenges

In 2003, we implemented the new management model with the adoption of high
standards of corporate governance practices, based on three pillars: family control,
professional management and partnership with the capital market.

Independent members are also part of the board of directors of both companies,
transforming them into an important place for debates focused on adding value
for the businesses. Suzano Papel e Celulose and Suzano Petroquímica are listed in
Bovespa’s special of corporate governance segments, which ensure a fair, transpar-
ent and reliable relationship with the shareholders and the capital market. We cre-
ated the Audit, Sustainability and Strategy, and Management committees, which are
responsible for discussing these subjects in depth, with the goal of better support
for the board of directors in its decision making. The boards of directors at the Suza-
no companies have internal rules defining their operating procedures and guidelines
for performance, qualification and assessment of their members.

We launched our code of conduct based on the ethical principles that always guided
our activities: integrity, equality, transparency, professional recognition, corporate
governance and sustainable development.

The benefits of better corporate governance and the capital market strategy became
evident when we realized that the access to capital was bigger and easier, coupled
with lower sensitivity to market volatility. The capital market has an additional impor-
tant role of permanently evaluating the performance of the company and its manage-
ment. If the results do not meet expectations, they are criticized by analysts, and in-
vestors tend to step back. It is a matter of coherence between what is promised and
what is done. If there is good management, what was promised is delivered and the
capital flows. Otherwise, the market penalizes the company. There is no way to hide
this reality. Management is either positive or negative. The capital market, naturally,
is practical, very clear and pragmatic.

Practical Guide to Corporate Governance 143

 When a company adopts high standards of corporate governance, it should have
greater responsibility for results. The balance between right and wrong has a higher
importance since the control systems acquire a wider perspective, with respect to
detailed and clear rules. For Suzano Group, corporate governance is a guarantee of
the sustainability of what the founders created. It is the evolution of a dream. We
may face difficulties along the way, which are natural. But good corporate gover-
nance practices contribute to the continuity of the Suzano companies, and make its
foundations resistant to this irreversible movement called globalization. And, thanks
to these good governance principles and the good performance of our businesses,
the capital markets have learned to value and respect our controlling position.

—David Feffer, Suzano, Chairman of the Board

Suzano Group sold its petrochemical operation to Petrobrás in 2007, creating value for its
shareholders. This would have not been possible without key improvements in corporate gov-
ernance.

This chapter addressed the unique corporate governance challenges facing family
businesses.

For Further Thought and Discussion

➤➤ Are you a member of a family that owns a company? If so, identify some of the
main challenges facing your company and your family.

➤➤ Are you a non-family senior executive in a family-owned company? List some of

the main challenges facing the firm.

➤➤ Based on the discussions in this chapter, name some specific steps towards re-
solving these challenges, using suggested corporate governance practices. Re-
member to first identify the company’s ownership stage—still led by the original
founder? Are direct heirs in control? Effective actions will depend on pegging
them to the right phase in the company’s lifecycle.

­­­­­­­

144 Chapter 5 Governance Challenges for Family-Owned Businesses