Did you know that New Zealand is the most franchised country in the world per head of population? The 2021 Survey of Franchising which was conducted by Massey University in conjunction with the Franchise Association of New Zealand confirmed that there are 590 franchised brands and over 32,000 franchise units. The turnover from business format franchises is $36.8 billion, and when motor vehicle sales and fuel retail are added, the figure is $58.5 billion contributed to the New Zealand economy. The total number of people employed in New Zealand franchises exceeds 156,000 which is substantial.
In New Zealand in relation to corporate governance and in being a director of a company, the four pillars of governance best practice are very important and they are as follows:
Quite simply the board must add value by leading the development of the franchisor’s purpose, goals and strategy; and the board must take ownership of the franchisor’s strategic direction. We all know or should know that the central duty of directors is to act in good faith and in the best interests of the company, and franchising is no different. Any director of a franchisor company needs to understand his or her relationship with the law and compliance, both as an individual and as an officer of the franchisor company. Directors must be involved in strategic planning and strategic analysis and today’s society demands some corporate social responsibility.
The strength of good franchising is to have a very sound system which requires strong procedures as far as the franchisor (the person who owns the system and the name) is concerned. Corporate governance which requires, in particular, proper procedures and high standards fits very well into the franchising arena. It follows that a franchising system which adopts good corporate governance practices will be far stronger than one which does not but if corporate governance principles are not followed the system will be weaker.
Under this pillar the board must add value by acting as a team with a high-performance culture committed to engaged, quality governance of the franchisor company. There should be debate, diversity, thoughtful challenge and dissent and board members should be recognized for their commitment, candour and integrity. This culture is characterized by effective relationships between the board members and with management, shareholders and stakeholders.
Non-executive directors of a franchisor company should display good business judgment, have integrity, have an entrepreneurial talent if possible, have common sense by displaying practical sense in everyday matters, have a perspectival vision for the company, and have personal skills and traits including excellent communication.
The strength of a franchise system is having the detail of how to operate it and the secrets of the business written down in what are known as operating manuals. These manuals form part of the intellectual property of the franchisor. The name plus good manuals means a strong system which means adherence to good corporate governance principles.
A value-adding board should hold management strictly and continuously to account through informed, astute, effective and professional oversight. The board should not carry out the job of management but it must ensure that the purpose and strategy of the franchisor company are understood by management and implemented according to a clear plan with proper resource deployment, allocation of tasks, and performance management. A key function of the board is to select the CEO, to negotiate a suitable employment agreement and to institute incentive schemes for management.
The Franchise Association of New Zealand Inc (www.franchiseassociation.co.nz) which was founded in 1996 has a Code of Practice and Ethics mandatory for all members.
Buying a franchise enables people to be selected, trained and supported on an ongoing basis. They receive an advertised brand and proven systems for marketing, production and management and they have the benefits of group research and buying. The failure rate for franchised units is under 5% over the first 3 years which compares extremely well with independent businesses which attract a 66% failure rate in the first 5 years.
The board must add value by ensuring that the franchisor company is, and remains, solvent. It must ensure the probity of financial reports and processes and a high standard of compliance with regulatory environments. Risk management must be a key focus and the board should scan and manage existing and prospective risk in relation to the franchisor company.
The board must ensure compliance with financial reporting, that the franchisor company is solvent at all times and it should oversee the appointment and operation of board committees like order committee and remuneration committee. Together with the CEO, there must be annual meetings and the franchisor company must have suitable insurance and indemnities.
While providing many strategic advantages franchise systems also provide a layer of complexity to the governance and chain management role. The additional challenge is primarily due to the addition of franchisees which gives rise to two challenges. The first of these is attracting and retaining franchisees and the second relates to the ongoing management of the relationship with franchisees who must take responsibility for employing and managing staff.
While having an interdependent relationship, franchisor and franchisee goals are never totally aligned. The franchisor is understandably interested in the development and protection of the brand and the system-wide sales. Conversely, the franchisee is driven by profitability and return on investment so franchisors are often challenged with managing compliance while franchisees focus on short-term profitability.
Good Governance
Governance is complicated by changes in the franchise relationship over time which require careful management. A franchisee’s basic needs, attitudes and subsequent actions change as they gain knowledge, operating experience and confidence. Although franchising provides many unique challenges for directors and managers to learn about franchising, its structure and management will be well positioned to receive the benefits which franchising can provide. Good governance stems back to the decision to franchise the business and the Board and management must understand the rationale for their own franchising structure, how it differs from competitors and its relationship to best practice. The Board composition and allocation of duties should reflect the specific knowledge and requirements of managing a franchise system. The Board and management must at all times promote and practise ethical and responsible decision-making.
Choosing the right franchise system and brand is critical to success and if you are considering getting into a franchise you must do your due diligence which includes talking to existing franchisees and seeking advice from lawyers and accountants experienced in franchising. You should ensure that the franchisor is a member of the Franchise Association of New Zealand which brings together franchisors, franchisees and those with an interest in the franchise sector such as specialist lawyers, accountants and consultants to facilitate the process of learning and sharing information, and to encourage high standards of conduct which aligns itself to the principles of corporate governance. Through conferences, meetings, seminars, publications and other activities the Association seeks to help those considering buying a franchise. It also assists those who wish to franchise their own businesses to ensure that the correct procedures are put in place right from the start.
In my opinion, the principles of corporate governance as they apply to companies also relate to franchising. In the corporate area, the public and shareholders are demanding higher standards from directors and boards and there is no room for shortcuts. If directors on boards cannot keep up to speed and show professionalism then they must go. Franchising and corporate governance go hand in hand for without a robust franchise system which has been carefully planned and without a committed franchisor who strives to improve the system, the franchise will most likely fail.
In conclusion, franchising is no different from any other non-franchised business and the Four Pillars of governance best practice must be present, monitored and adhered to at all times.
Stewart Germann
Franchise Attorney
Auckland, New Zealand
stewart@germann.co.nz
