Keeping it in the family

Corporate and family governance challenges in family businesses.

Family business is huge in Latin America. According to the Family Business report by Ernst & Young, 43% of the largest companies are either controlled by a family group or relatives of the founder and 85% of companies across the region are family-owned. These businesses account for 60% of GDP and employ 70% of the workforce.

One of the main challenges facing family-owned businesses in Latin America is poor governance – and we should know, analysing governance in Latin American businesses is a major focus of our activity. As these businesses attempt to grow, enter new geographies, attract talent and secure financing from global capital markets, the importance of good governance becomes crucial.

It’s not just corporate governance either, according to an executive at a private wealth management advisory firm, “Corporate governance frameworks are already implemented within successful family-owned businesses but major challenges remain on family governance. This could include whether the family will maintain day-to-day control of the business or leave others to manage the next stage of growth such as IPOs or internationalisation.”

“Corporate governance frameworks are already implemented within successful family-owned businesses but major challenges remain on family governance.”

Executive, wealth management advisory firm

It is important to get both family and corporate governance right. OECD research into Latin American family-owned businesses over the past decade concluded that the creation of formal governance structures within family-owned companies resulted in higher profitability.

Blurry governance frameworks hinder the company’s business both internally, with a lack of control mechanisms over the company, and externally, as potential clients and customers can get a perception of informality. Transparency, equitable treatment, accountability and long-term corporate sustainability all thrive under clear governance structures.

Succession is also a major issue. Of all family-owned business in the region, 50% continue to be controlled or supervised by the first generation while only 10% are managed by the third and fourth generation showing that wealth deterioration is the major challenge that these businesses need to address.

The wealth management executive had observed the same challenge, “Traditionally, successful LatAm families grow their businesses across the region by keeping strong ties to their culture and legacy heritage to the initial founders. Many of these families are now in a transition process either from G1 to G2 or G2 to G3 accompanied by governance challenges that in most cases have been resolved at the corporate level but not yet from a family angle.”

“Education and alignment of family members with the business are key factors to drive continuity.”

Director, Private Bank, London

As with most things in life, education is the key to overcoming this particular hurdle, the director of a private bank with many Latin American clients commented, “Education and alignment of family members with the business are key factors to drive continuity, otherwise future growth would be exclusively conditioned to the strength and management skills of the founders, a recipe for disaster.”

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