4 (a) Family business and a listed company.
Compare family and listed
There are a number of differences between the governance arrangements for a privately-owned family business like Lum Co
and a public company which Lum Co became after its flotation.
In general, governance arrangements are much more formal for public companies than for family businesses. This is because
of the need to be accountable to external shareholders who have no direct involvement in the business. In a family business
that is privately owned, shareholders are likely to be members of the extended family and there is usually less need for formal
external accountability because there is less of an agency issue.
Linked to this, it is generally the case that larger companies, and public companies in particular, are more highly regulated
and have many more stakeholders to manage than privately-owned, smaller or family businesses. The higher public visibility
that these businesses have makes them more concerned with maintaining public confidence in their governance and to seek
to reassure their shareholders. They use a number of ways of doing this.
For example, public companies must comply with regulations that apply to their stockmarket listing (listing rules). Whilst not
a legal constraint in a principles-based jurisdiction, listing rules require listed companies to meet certain standard of behaviour
and to meet specific conditions. These sometimes include using a unitary board structure and thus, in the case, would require
a change in the governance arrangements at Lum Co.
The more formal governance structures that apply to public companies include the requirement to establish a committee
structure and other measures to ensure transparency and a stronger accountability to the shareholders. Such measures
include additional reporting requirements that do not apply to family firms.
Assess Crispin’s view
It is likely that the flotation will bring about a change in the management culture and style in Lum Co. Flotations often cause
the loss of the family or entrepreneurial culture and this contains both favourable and unfavourable aspects. Whether the
company loses the freedom to manage as they wish will depend upon a number of factors.
Firstly, whether Gustav Lum’s ‘wishes’ (such as the values and beliefs) are known and trusted by the shareholders. The need
for returns to meet shareholder expectations each year often places cost pressures on boards and this, in turn, sometimes
challenges a paternalistic management style (such as at Lum Co) which some investors see as self-indulgent and costly.
Second, the company will become subject to listing rules such as the governance code, and, because of its higher visibility
on the stock market, a range of other societal expectations may be placed upon the company. This will have an effect on all
aspects of the company’s internal systems and norms, including its prior management style. Because of these things, the
family will no longer be able to choose how to act in a number of ways, which supports Crispin’s view.
Third, the board of Lum Co will be subject to influence from institutional investors. They will demand an effective investor
relations department, information on a number of issues throughout the year, briefings on final year and interim results and
sound explanations whenever performance or behaviour is below expectation. This places the management of Lum Co in a
very different environment to when it was privately owned.
Fourth, the board will be under pressure to produce profits against targets each year, which may militate against the
company’s previous long-term and sustainable commercial approach. If, for example, the long-term approach may have
meant taking less profit from a particular operation in one year to leave liquidity or cash in place for a future period, this may
become more difficult for a listed company, which can sometimes be under pressure to achieve short-term financial targets
such as a dividend payment.
