Family businesses are unique, and the way they are run differs from family to family. Each business has varying degrees of corporate governance. Formal governance structures grow as the business expands and becomes more complex. Governance processes follow business needs in most situations.
When family business owners realize they have issues they can’t solve, they reach for outside help. What usually starts with the lawyer, banker, or golf buddy evolves into an advisory board over time. If the family is active, and competent in running the business, there may not be much need for outside fiduciary directors. But, if the business is being run by non-family professionals, then the family is likely to have fiduciary outside directors to protect its interests. This is the model of the modern corporation. There is a well-known body of work on how to manage these matters that I’ve mentioned in prior articles.[Editors’ Note: For more information on private board of directors, please see The Effective Director or read Psychology of a Private Company Board Part 2: Family-Owned Businesses.]
Family governance is different from business governance. Family governance determines how the family manages itself in relation to the business. Most managers understand the basics of business governance through their everyday jobs, but if you work in a family business, it’s not obvious that you should put family governance structures into place, and there may not be easy ways to learn.
Sometimes family governance doesn’t become an issue until transitioning between generations of owners or active business participants. The founder may be worried that the following generations do not view the business in the same way they do. A family member who is not active in the day-to-day workings of the business may feel they should still have an equal say in how it is run. It is important that families have discussions prior to these issues coming up, rather than addressing them on an ad hoc basis.
Sometimes family governance doesn’t become an issue until transitioning between generations of owners or active business participants.
A well-governed family has a written, enforced family constitution, annual family assemblies to teach the family about the business, and a family council where ownership makes business decisions. The family governance needs to cooperate effectively with the business governance, especially if the business is run by professional managers.
A family constitution should provide rules on the roles, responsibilities, and rights of family members, whether they are in the business or not. It should be clear on what the family values are, especially in regard to the business (e.g., you earn your position or get paid because of your last name). The constitution should define how business insiders and outsiders relate to the business and business decisions. Most importantly, a constitution provides consequences for unacceptable behavior.
Here is the table of contents for a family constitution for an active situation:
Annual family assemblies become more important when there are many generations, especially if they are geographically dispersed. These gatherings should educate the family about the business and have the individuals build relationships with each other.
The family council should set policy for the family and provide direction to the board of the enterprise. The board of directors then sets policy for the business, and may also make recommendations to the family council in matters that concern the business.
Annual family assemblies become more important when there are many generations, especially if they are geographically dispersed.
Most family ownership groups have a degree of dysfunction, in addition to the usual family issues. It’s unusual for families to be able to figure it out alone. The family business consulting industry exists for this reason. There are many highly skilled professionals who can help families move through these issues. Having been on both sides of this table, I advocate that families find the right professional for their needs. It’s simply just too hard to do it alone.[Editors’ Note: For more information on the balance necessary in a family-owned business, please read The Art of Balancing Family Dynamics in Family-Owned Businesses and Structure is the Key to Stronger Family Business Succession Planning.]
Family governance is a latent need that happens whether you acknowledge it or not. It takes time and money, and doesn’t service clients or employees, or generate profits. But if you have a family business, you essentially end up choosing priorities between the family and the business, and both can suffer if issues are not addressed. If your goal is to pass the business to the next generation, you need to determine what structures allow you to do that successfully so that the business will prosper even when new people are running it.
This is an updated version of an article originally published on December 5, 2018]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Bruce Werner is the Managing Director of Kona Advisors LLC, which provides advisory services to owners and investors of private and family-owned companies. With exceptional experience in finance, strategy, M&A, governance, and succession planning, Kona Advisors creates practical solutions to the most challenging corporate problems. Mr. Werner is an experienced Corporate Director, leading businesses through…
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