Family governance provides structure and discipline to help a family nurture a business and related assets that might otherwise be diminished by various forces while also addressing the interests of family members. If the owners of a family business are wondering whether they to develop a family governance system, the answer probably is yes.
Why is family governance important?
Let’s say that Mr. and Mrs. Watson start a business together. It does well over the years. Their three children join the family business and help it grow. Through hard work, daring and good fortune it becomes a corporation worth $300 million. The family grows too. The children have children, and some of them begin to think of the family business as their destiny.
Mr. and Mrs. Watson want to preserve their legacy and, as they always have, do what’s best for the business and their family. Will the accursed “three-generation rule” (or myth) hit the Watsons? Without their leadership, the business might fall apart and the family could go from rags to riches to rags in three generations. Or, as the expression goes in Brazil: Rich father, noble son, poor grandson.
They have always seen eye to eye. Decision making has been done informally. That has been their form of family governance for decades, but it’s not working so well anymore. Issues involving power, money and some very strong emotions are brewing, and a consensus may no longer be possible to reach or maintain.
Now, imagine a family with a billion-dollar company going back five generations. Informal family governance means no governance. And that’s not an option.
What are the functions of family governance?
Family governance is a framework that helps members of family businesses communicate with each other and make decisions about the family-business relationship. Regardless of the level of family governance established, its purpose is not to run the business. It should, however, create lines of communication between family members and the business’s executives (some or all of whom might also be family members).
Here’s a look at some of the main functions of family business governance. Some of them are tightly connected to the success of family businesses and some are more family oriented.
Establish the family vision
Family members join forces and develop a vision for the family, the business and the way they work together. They can identify the values that have brought the business success and that should guide its daily operations, and then develop a mission statement. It’s a great opportunity for established leaders to get fresh ideas about the business and the thinking of family members who might otherwise never speak on the subject.
These aspirational items can be included in a family governance constitution that lays out “best practices” for a wide range of topics. The document would not be legally binding, but still could have great influence. Many of the topics below could be part of such a constitution.
Educate family members
Family members, especially the youngest ones, can contribute more to the effort if they are well-grounded in the history, values, finances and functions of the business. They also need to learn the rights and responsibility that come with their connections. Family governance offers a way to formalize this through educational events, teaching moments incorporated into meetings and other means.
Strengthen family bonds
Even nuclear families sometimes feel pulled apart by the pressures of daily life. A formal system of meetings, social gatherings, communication, rituals and celebrations can bridge the gap between siblings, cousins and people from different generations. For example, every gathering can begin with recognition of individual and family highlights. Life-changing connections can happen over a meal or a cup of coffee.
Build a strong bench
The two previous items will help the family prepare new generations for leadership positions. For this purpose, many experts recommend being as inclusive as possible at meetings by welcoming young family members, even in their early teens. The connections forged through family governance help leaders find new talent for the business.
Another key function of family governance is to help plan for the succession of ownership and key leadership positions.
Spell out compensation and employment policies
Families can set polices on members’ activities with the business. The policies might cover selling ownership interests, receiving dividends and other distributions, reinvesting, and employment, including issues such as what degrees are required to hold certain positions and whether in-laws are considered for employment or banned.
Hold family meetings
Family governance requires regular meetings, and they can take many forms. They give family members a chance to stay informed about and weigh in on current business, new plans, family matters and other issues. The meetings also give family members a venue for letting the board of directors know what they are thinking, and vice versa.
How does family governance work?
We have just reviewed a very broad list of functions, and many more can fit under the heading of family governance. Now that we’ve described the “what,” we need to address the “how.”
Every family business has a family governance system, it’s just a question of how loose it is and how small a circle it involves. The bigger the business and the more family members and generations of family are involved, the broader and more organized the system needs to be. Starting down that path might feel uncomfortable for the leader or leaders of the family business. It will mean sharing with family members financial information that has been held tightly. It will lead to difficult discussions about things like hiring other family members and how much of a say in-laws should have in the business. Anyone who has built a successful business knows, however, that chaos is deadly. Creating this structure is just one in a long line of investments in the business. But it also is an investment in family, so there’s no telling how invaluable the dividends will be.
A qualified consultant can help a business owner set up a system that fits the needs of her business. The consultant also can help change the family governance structure as her business and family change. Of course, she can develop a plan of her own, or at least lay the groundwork.
Experts suggest starting small. Work up a mission statement and list of values. Write out the reasons for formalizing family governance and set some goals for it. The owner can do this alone or with a trusted colleague or two. The next step might be to hold a meeting to get a feel for how the family will respond. The effort required to do that and the response will provide many answers as to the next steps.
The structure of family governance
If a company is big enough, it will have a board of directors that concerns itself with the management of the business, its employees and its customers. That board is a link with, and overlaps with, the owners on one side and the top managers of the business on the other. The ownership, which might include family members who are deeply involved in the business and some who have little concern for day-to-day operations, is in turn linked to the family and the family governance.
Family governance can be formed in any number of ways, but certain structures have become common, including: the family council, executive committee, family assembly and family board.
A look at some of the common structures will provide insights as to how family governance functions.
A core group of family members comprise this group, which is like a board of directors for the family. The council should represent the entirety of the family by having men and women from all branches and of different ages. That said, experts recommend having no more than 12 to 15 members. Beyond that, things become unwieldy. The family council meets a few times a year, perhaps quarterly.
Its functions include:
- Communicate among family members and between the family and the board of directors.
- Decide on policies and direction on issues like employment, liquidity for individuals and family branches, investment strategies and philanthropy.
- Develop a code of conduct for family members regarding their actions in governance and the way they talk about family business in public. The council might also write a confidentiality policy.
- Educate family members about the state of the business and responsible ownership.
- Provide a forum for airing conflicts.
- Forge a sense of purpose and unity.
- Plan family assembly meetings.
The family assembly is a much bigger body – all adult family members – that meets once a year for one or two days. The family council can report to the group about its activities and the state of the business. Non-family executives also might attend to give reports and answer questions.
Spouses and children typically attend these meetings, too. One of the main purposes of the assembly is to forge bonds between generations and branches of the family. Another purpose is to educate family members about the history and accomplishments of the business and its values and culture.
The assembly can include educational workshops, planned by the family council, on topics like estate planning, business affairs, and family history.
Just as a board of directors might have an executive committee, and for the same reasons, the family council might have one. It enables a handful of the leading decision makers at the top of the family hierarchy to meet, as needed, to act quickly on confidential matters.
The board of directors of a company should come mostly or entirely from outside the family – and friends of the family are out, too. The board needs to hold executives accountable, keep the interests of investors in mind and be open to change, whereas a family member might be inclined to favor stability and the needs of the family.
Some family owners find it necessary to create a family board to deal, in a fiduciary capacity, with matters such as foundations, trusts and the management of shared assets.
Finally, a particularly wealthy family might also have a family office. A family office focuses on the business of the family, including managing assets, tax and estate planning, philanthropy, and family operations. They often perform some of the functions of family governance, such as succession planning and education of younger members of the family about the business and their responsibilities. So, a governance plan might position a family office report to a family council.
The family business and the business of the family
Family governance is an important matter, and it can be thoroughly seeded with emotional landmines. You can turn to Cope Corrales for help when your business and family have reached the point where this major undertaking is needed.