As Britain and Germany continue their voyage on the road to economic recovery, statistics frequently remind us that the unsung heroes of our prosperity are the small and medium sized enterprises that form the backbone of the economy in both countries.  Often these are family owned businesses.  They cover a wide range of activities, from farming businesses to cutting edge global technology leaders.  In the legal jargon they are also known as ‘closely held companies’, which means that the majority of voting shares in the company is concentrated in the hands of a small number of members.

Running a family business presents its own challenges in legal and corporate governance terms.  Once the company passes on from the original owner/founder into the hands of the next generation, and then on to G3 and G4, ownership becomes spread over an ever widening circle of people.  Naturally, they can have quite diverse and, indeed, sometimes opposing interests and visions of the future.  The family must then be managed as carefully as the business itself.

Typically, most family businesses do not survive in their original form past G2.  Having said this, we have the privilege of working with a very successful closely held pharmaceutical company which is now in the process of transitioning to G3 (with the wider family now approaching something like 100 family members) and is going stronger than ever.  Obviously they got a few things right.  Of these, the most important was to keep family conflicts out of the company by creating a written family ‘constitution’, which governs how family members are consulted, decisions are made and conflicts are resolved within the family.  This allows the family to speak with one voice and give clear direction to the company.

Under English company law, directors owe general duties to their company, in particular, the duty to promote its success for the benefit of the members as a whole.  The company’s directors must take a range of factors into account beyond family interests, such as the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.

Against this background, it helps if the management of the company can draw on outside talent and any family members who are looking for employment within the company, whether at management or at any other level, must compete on merit.  The family’s interests are nevertheless safeguarded through executive and non-executive board memberships and through control at shareholder level.  Another key to success is a sensible dividend policy, which balances the financial benefits for family members with the need to retain sufficient profits in the company to allow effective R&D and to take the company forward commercially.

I am grateful to Stephen Morrall, our head of business services, for his assistance with his article.  As you may have guessed, his pet topic is closely held companies.

This article was originally published in Discover Germany and can be found here.

Gregor Kleinknecht

Hunters incorporating May, May & Merrimans