Prologue

What Is Governance?

There are various definitions of corporate governance. The definition depends on the particular situation of each business, suggesting firms may use different governance structures based on the size of the firm and whether the firm is publicly or privately held (Huse and Landström 2002).

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring (OCED 2007).

Sir Alan Cadbury is the most noted governance scholar. He provides a simple definition: A system by which companies are directed and controlled (Cadbury 1999). The governance of a family firm is more complex than nonfamily firms. Family as well as business relationships need to be considered (Cadbury 2000).

In summary, the governance (how a company is directed and controlled) of a family firm is more complicated than a nonfamily firm. Nonfamily firms focus mainly on corporate governance. As we will discuss further in this book, there are three areas of governance in a family firm: governance of the business (corporate), governance of the family, and ownership governance.