In words published in a practitioner journal just over three years ago, this author was of the view that: “It is difficult to see member states agreeing to proposals from the European institutions for substantive rapprochement of their internal [insolvency] laws unless there were overwhelming economic benefits for them to do so.” (“European Insolvency Laws: Convergence or Harmonisation?”, Eurofenix, Spring 2012, p21). Though not in itself intended as a prediction, these cautious words have nonetheless turned out to be quite far from the direction in which views on harmonisation have now apparently travelled.
The first salvo was in fact fired long before the above thoughts were published. An INSOL Europe Report of April 2010, authored by a practitioner body of some repute and entitled Harmonisation of Insolvency Law at EU Level, was written with a view to the eventual review of the European Insolvency Regulation (EIR), which would take place from 2012 onwards. It was presented to the European Parliament Committee on Legal Affairs and advocated consideration of substantive harmonisation in a number of areas, including the opening criteria for proceedings, stays of creditor action, procedural management rules, ranking and priority rules, the filing and verification of claims, responsibility for any rescue plan, the scope and extent of a debtor’s estate, avoidance actions, contract termination or continuation, directors’ liability, post-commencement financing availability and insolvency practice qualifications. While many of these areas were procedurally focused, as befitted a review of the way in which the EIR could better function, the report seemed to suggest that the time had come to consider ways in which insolvency law across Europe could go beyond mere convergence and reach the stage at which harmonisation becomes feasible.
Echoes of the 2010 report in fact found their way into a response by the European Parliament in 2011, entitled Report with Recommendations to the Commission on Insolvency Proceedings in the context of EU Company Law (document A7-0355/2011), which acknowledged the difficulty of creating a “body of substantive insolvency law at EU level” but postulated the desirability of “worthwhile” harmonisation in a number of discrete areas, chiefly to avoid the adverse consequences of disparities in national laws that might favour so-called ‘forum shopping’. These areas included the opening criteria for proceedings, the filing of claims, avoidance actions, insolvency practice qualifications and common aspects for restructuring plans. Again, although quite modest, this report can be taken to represent a change of thinking on the part of the European institutions – which, apart from a brief dalliance with harmonisation in the first drafts of what was to become the European Bankruptcy Convention 1995 (and a direct model for the EIR), had always shied away in practice from anything beyond promoting the idea of eventual convergence in good practice.
The energies of the European Commission were directed from 2012 onwards to the reform of the EIR itself, although this process did not conclude till the Recast EIR emerged in May 2015. However, even during this process, attention was given to whether it was desirable to proceed to what was described as an “approximation of laws” in discrete areas, some of which replicated items on earlier lists. In the 2012 Communication from the Commission etc. on a New European Approach to Business Failure and Insolvency (document COM(2012) 742 Final), the context articulated is not the ideal of harmonisation or the avoidance of disparity, but the need to eliminate legal uncertainty and an “unfriendly business environment”, deemed to constitute obstacles to cross-border investment. In fact, rejecting some of the rationale of earlier proposals, the communication suggests that the type or focus of legal systems per se do not determine entrepreneurial success or the possibility of rescue, but instead the availability of specific tools that favour early warning of distress and promote the efficiency of procedures. In language reminiscent of the (final) report in connection with Best Project on Restructuring, Bankruptcy and a Fresh Start in 2003, the European Commission advocates concentration on improving “second chances” by introducing fast-track procedures for honest debtors, aligning and shortening discharge periods and, for small and medium enterprises (SMEs) in particular, improving prevention, access to out-of-court settlements and debt recovery generally.
In a 2008 article on family-controlled media companies, Professor Jonathan A Knee, the then director of Columbia University’s Media Project, wrote:
“The prime determinant of how long a family dynasty will endure is how well its business is run. Nothing is more likely to spur a family insurrection and provoke demands to sell than the perception that the business is not being managed efficiently. Those who romanticize family ownership are often the same people who encourage policies that will almost certainly accelerate its disintegration.” (Portfolio: 2008)
I think Knee was on to something very important at a time when virtually all of the writing on family business was about succession (ie, how the older generation owners of a family firm pass control to their progeny). To gauge by the number of pages of articles and books about family business focused on succession, it would seem that the views of most ‘experts’ were (and remain) that succession is the primary issue in family business. I do not agree.
Should ‘success’, not ‘succession’, be the primary focus of families that control operating companies? In my view, the answer is clearly, “Yes, but...”
Here is a nasty little secret about corporate governance in family-controlled companies: no one ever resigns as a matter of principle, even when use of this ‘nuclear option’ is clearly called for by the facts of the situation.
For virtually my entire career as an adviser to family-controlled companies, I have endeavoured to persuade my clients that either adding directors independent of management to their board of directors or creating a non-fiduciary council of advisers would enhance their competitiveness and improve their bottom line. Most of them have concurred, eventually. I have participated as governance architect, independent director, independent trustee or council of adviser participant in more than 75 governance bodies for family-controlled companies, both publicly traded and privately held. But in 35 years of advising family firms and the family shareholders that control them, I have witnessed resignation as a matter of principle only once.
Some situations expose the hidden underbelly of corporate governance in family firms – that loyalty to the controlling family can erode and eventually undermine an independent director's commitment to his or her sense of urgency about taking a dissenting position on a matter of principle. There are at least three exceptions to the rule that independent corporate governance correlates positively to enhanced performance of a family-controlled company. These exceptions include at least the following three scenarios.
When owner/managers are leading the family firm to disaster
This is a question that many families around the world are asking. Industry trends – such as the shrinking number of traditional private banks, financial market unreliability and increases in private wealth – are causing families to rethink the best solutions for managing their family wealth. For many, this means exploring the option of creating their own family office.
A single family office (SFO) has the advantage of maintaining control by the family. The family chooses its paid staff and those staff are dedicated to the one family. However, on the other hand, it is costly to staff a dedicated private office and difficult to find and retain the right talent.
A family is likely to consider a number of alternatives before finally deciding on the bespoke model of its own SFO. The alternatives range from joining an existing multi-family office (MFO) to taking advantage of one of the multitude of investment institutions and claiming that it has a branded family-office service.
On closer examination, it is likely that investment institutions are focused more on asset management than on providing the softer range of family-office services. If those services are provided, it is often at no charge (because they are difficult to charge for), and they are thus available only to those clients with sizeable investment funds managed by the institution (which is the source of traditional fees). Is this really a family office? Or is it a private bank department rebranded as a family office? When the provider offers its own proprietary investment products, is the advice really independent or are conflicts of interest inevitable?
Family-controlled companies are growing by acquisition, more now than at any time in the past 35 years that I have been advising these enterprises. Most corporate finance professionals whom I have met, and the lawyers who advise them, view family firms as inventory for their deals – and low-hanging fruit at that. In my opinion, this view is both obsolete and dangerously myopic to private equity partners and business development executives as strategic players in the acquisition market.
In the first instance, most of the low-hanging (family business) fruit that did exist has been harvested by private equity firms. In the United States 15 years ago there were hundreds of such firms; now there are thousands. But – more significantly for the future of the private equity industry in its never-ending search for deal targets – what is left of the family-business sector in the United States is largely too small and too weak to be worth acquiring, or too strong and too sophisticated to be purchased at a bargain price.
In other words, family-controlled companies that used to be targets for acquisition are now competitors of both financial and strategic buyers. Most intriguing is the entry into the acquisition business of single family offices with both substantial liquidity and deep expertise in the world of family enterprise. Both family-controlled operating companies and single family offices bring assets to the business of acquisition that non-family controlled buyers cannot match.
It's not often that you will find me at an event before 7:30am, but an invitation to an interview with Arianna Huffington was certainly a strong enough draw. And I am very glad I made it.
Organised by Red Events (of *Red* magazine), the event was held at the rather glamorous premises of the British Academy of Film and Television Arts. This was the second Red Event I have been to and I have to say that I rather like the formula. The hosts offered free-flowing coffee and mini-croissants, and a presumably super-healthy green juice concoction, before we took our seats in the auditorium and claimed our goody bags.
During the interview with Red Editor Sarah Bailey, Huffington explained her concept of the third metric as expounded in her new book Thrive: that a full and healthy life is based on the four pillars of wellbeing, wisdom, wonder and giving. This could sound trite were it not for the fact that Huffington herself experienced a major life-changing moment brought on by overwork, and throughout the interview clearly and persuasively made the case for a healthier approach to work/life balance.