Lessons from Europe for Spanish Family Firms
Only 17 percent of the board members of major Spanish family-owned businesses are independent, compared with 51 percent of German companies. This is just one fact to emerge from the study "Practices of corporate governance in family business in Europe," by IESE and Russell Reynolds Associates, presented yesterday on the Madrid campus.
The study, led by IESE professor and holder of the IESE’s Chair of Family-Owned Business, Josep Tàpies, surveyed the 400 most important unlisted family businesses in France, Germany, Italy and Spain. It then laid out key recommendations to improve the effectiveness of the boards of Spanish family businesses.
The report noted that although European family businesses have undergone professionalization in recent years, this process is still incomplete. For example, barely a third of boards of family businesses have an emergency succession plan.
It also explored the structure and functioning of the boards of these companies in four areas: composition, efficiency, CEO succession, and the track records of CEOs and presidents.
The results showed that 30 percent of family businesses don’t handle strategic issues in board meetings and 64 percent merely approve the strategic plan that is presented to them.
Who Sits on the Boards?
In Europe, the average board size was 7.4 members, compared with 8.1 in Spain. Across Europe, members of the owning family occupied half of those seats and representatives of other shareholders held only 9 percent. Of the rest, 14 percent were occupied by company executives and only 17 percent by independent members.
Board composition varied considerably from one country to another. In Spain, 62 percent of board members belonged to the owning family, while in Germany that figure was only a quarter.
What Do the Boards Do?
Almost all boards claimed to review the economic and financial situation of the company, as well as its capital investment and sales. Nevertheless, only 80 percent of boards addressed trends related to competition, customers and the sector. In Spain, the figure was only 72 percent.
In Europe there was no clear trend in the role of boards with respect to strategic plans. 40 percent participated in the preparation and approval of plans and 57 percent merely approved them, with this latter figure reaching 64 percent in Spain.
Boards showed a range of approaches to CEO succession planning. 95 percent of German boards had at least one member with relevant experience, while in Italy this was true in only 28 percent of cases.
According to the study, the ideal is to always have two or three internal candidates as possible substitutes. However, the reality is that only half of boards surveyed (49 percent) had identified possible internal candidates for the position. It is also important to compare internal candidates with external ones, a practice that 60 percent of companies employed.
On the other hand, only a third had a plan to replace the CEO in the event of an emergency. French boards were the most forward-looking: 62 percent had a plan, compared with only 18 percent of Italian companies. Spanish companies were slightly below average, at 32 percent.
Presenting the report, professor Josep Tàpies outlined five key recommendations to improve the effectiveness of the boards of Spanish family businesses:
Appoint independent board members. According to Josep Tàpies, family businesses need to involve more independent board members to complement the nominee members appointed by the owning family. "This is the best way to balance tradition, innovation and knowledge on the board."
Put strategy on the agenda. 28 percent of Spanish boards do not address strategic issues such as competition, sector conditions and market trends. This is the highest percentage of the four countries analyzed (Germany: 5 percent, France: 17 percent, Italy: 24 percent).
Get more information, sooner. Although 69 percent of Spanish boards define themselves as "decision-making" and their members hold the most meetings per year (6.9), the survey reveals that they are also the boards that receive information latest and that have the least contact with management.
Define strategic objectives. The board should raise strategic issues for debate and it should endorse the proposal made by the management team with its CEO as spokesperson. Around 30 percent of Spanish boards surveyed do not cover strategic issues and 64 percent merely approve the plan presented to them.
Plan ahead for succession. The majority of Spanish family businesses are not prepared to handle the loss of their CEO. Only 32 percent of the Spanish businesses surveyed define succession planning as a responsibility of the board.