How to introduce corporate governance into family-owned firms?

By Marta Viegas and Bruno Cossi

The most prevalent ownership model in the Latin America and the Caribbean region is, by far, the family-owned firm. By formalizing the different roles of its members, family-owned firms can greatly enhance their sustainability and performance.

Surviving the transition across generations is one of the main challenges all family-owned firms face. It is an often-cited fact that less than one third of family businesses makes it to the second generation, and another 50% don’t survive the next transition from second to third generation.

By formalizing the different roles of family members as shareholders, board members and managers and setting up the right corporate governance (CG) structures, family-owned firms can greatly enhance their sustainability and performance, while fully benefiting from their distinctive long-term commitment to growth and deep industry expertise.

To illustrate how family-owned firms can improve their corporate governance practices, and to and exemplify one more IDB Invest approach  to provide additionality to its clients, let review the Argentine company Citrusvil.

Corporate governance in motion

Citrusvil is a leading company in Argentina’s Tucuman-based lemon cluster, the largest of its kind in the world, which concentrates around a quarter of global production. The company produces, processes and sells lemons and lemon-products, mostly in the international markets. It is part of a larger agribusiness group, wholly owned and managed by the Lucci family.

As part of a process to improve their governance practices, the Lucci’s realized it was time to lay the foundations of a good corporate governance framework that secured the long-term sustainability of their company. Working together with IDB Invest’s corporate governance team during the preparatory phase of a loan project, they identified opportunities for improvement in corporate governance and decided to implement a thorough corporate governance program.

Practical and feasible action items were defined, an owner for each of them was identified, and a timeframe for their implementation was agreed and incorporated into a CG action plan. The key steps of the plan included:

  1. Creating a Family Protocol that formalized the interaction of family members with the company, laying the groundwork for an orderly firm succession. This document states the family’s values, mission and vision, establishes a family employment and shareholding policy, and agrees on certain provisions for settling family conflicts.
  2. Revamping the Board of Directors by incorporating non-executives and independent board members with expertise on key issues for the company. These external advisors will allow the board to go beyond the mere compliance of the company’s legal requirements and play a more strategic role in guiding the business and overseeing management more effectively.
  3. Strengthening the company’s control environment by creating an internal auditing department and by enacting an audit committee at the board level. These control mechanisms will infuse some extra discipline into the company, increase the transparency and reliability of its information and foster accountability.

Corporate governance is a core area in which IDB Invest can fulfil its development-oriented mission through its private-sector investments. By encouraging its clients to upgrade their governance standards, IDB Invest not only helps them enhance their market leadership, but also promotes the diffusion of a regional culture that values transparency, equitable treatment, corporate accountability, and long-term sustainability.

Citrusvil is confident that the governance structures implemented will contribute to better operational performance, better internal controls and risk management and overall increased long-term corporate sustainability, leading to higher market valuations and greater access to capital.