Applying corporate principles to the family farm
- By: "Farm Tender" News
- Hay & Fodder News
- Sep 12, 2018
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The continued growth in scale and business complexity of family farms has driven interest in improving the quality of governance and management processes.
While corporate practices can seem unwieldy and unnecessary for family businesses, there are examples of them being selectively adopted to improve governance, management and communication for better business outcomes.
There are three general corporate principles that are the focus of this article:
* governance – strategic decisions and board oversight;
* documentation – policy and operating procedures; and
* accountability – monitoring and reporting.
The practical application of these is demonstrated through the experiences of a family farming operation from the medium-rainfall zone of Victoria. The experiences of this family are presented as a case study known as Future Farms Partners (names have been changed.)
Future Farms operates 5500 hectares and is a partnership of four family discretionary trusts comprising the two founding brothers and their wives (Bill and Grace/Jack and Betty) and two of Bill and Grace’s sons and their wives (David and Anne/Brett and Jenny) (Figure 1).
This business structure is not uncommon; however, how the business model operates and how the business conducts and communicates its governance and management processes reflect principles that are more often seen in the corporate world.
Core principles
Future Farms operates from a clear and agreed set of core principles:
* risk and reward for all partners and employees are transparent and commercial;
* roles and responsibilities are clearly defined and partners and employees are encouraged to move between roles subject to their ability, aspirations and the business’s needs; and
* clear differentiation is made between:
- employment by the business as a manager or worker and receipt of salary;
- business ownership, taking on risk and a share of profit; and
land ownership and receipt of rent.
FAIR AND COMMERCIAL
According to Bill, a founding partner of Future Farms, family farms can have satisfying years (including loss years) if they approach their management in a fair, but commercially sound manner and work on having the following:
* Empowered people – give them confidence, respect and trust. Let people grow and grow with them.
* Structures – appropriate, and each individual position clearly defined. Fairness must be seen in each of the three areas of land, operation and labour.
* Incentives – for individual performance and investment.
* Management performance – enhance it with timely operations, intensive monitoring and flexibility in decisions.
* Trusting and commercial relationships – with key stakeholders.
Partnership agreement
The partnership agreement formally outlines the arrangements for ownership, equity and other transactions as depicted in figure 2
Governance
A consultative board comprises all four partner family units and three independents with finance, production and strategic management expertise. One of the independent members chairs the meetings. The independents are remunerated. The board meets four times a year.
Opportunities for new business growth, diversity and investment are analysed by the board and include the production of internal discussion papers that are circulated and debated. A decision-making methodology and voting process is documented and followed.
The key success measure of the board is ongoing business growth. One measure of this has been the farm scale growing by 57 per cent over the past decade.
Another less tangible gauge of success is the smooth and amicable integration of two new business partners into Future Farms over the same period.
Operating agreement
The operating agreement is a document recognised by the partnership agreement and designed to assist with day-to-day management of the business. Areas covered in this agreement include:
* Decision-making methodology and voting processes.
* Values and relationships – to encourage constructive communication and productive and progressive relationships, ground rules have been agreed and documented. These rules are important when resolving conflicts and outline what behaviour is expected.
Operating processes:
* works in progress;
* financing entry into the partnership;
* assets and liabilities;
* business equity distribution;
* dividend policy;
* insurance arrangements; and
* retirement planning
Progression planning – this section focuses on the future projection of the business including:
* needs and aspirations of the current partners;
* future implications for the business of these needs and aspirations;
* farm business performance objectives; and
* implications of actual farm business performance against objectives and future growth and succession of Future Farms.
Monitoring and reporting
Future Farms works hard to closely monitor business performance. The process includes:
* benchmarking – external comparative analysis and internal enterprise analysis over time;
* budget vs actual cash-flow reporting;
* yield modelling and forecasting;
* cost analysis and cost trends; and
* return on invested dollars and balance sheet performance.
Adopting corporate principles and practices takes discipline and a willingness to record, monitor, report and be transparent, accountable and fair.
In the case of Future Farms, it has provided a pathway to a shared vision of growth, equitable rewards according to risk level, and transparent, effective governance and succession outcomes.
More information - ORM Pty Ltd - www.orm.com.au
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