One of the most challenging topics to introduce to clients is Governance. Perhaps rightly so. It doesn’t sound like a lot of fun. At least with areas like Risk Management, people can imagine that bad things happen without it, so it pays for its own supper. Governance could be considered a sector in the broader category of risk management that deals with risks of a more subjective, and sometimes personal nature. Good Governance enables family enterprises to prevent bad things from happening (between people) and improve the operational efficiency of businesses and investments (creating growth).
Types Of Governance
Company / Enterprise / Corporate Governance
Whatever you want to call it, this is the business or business interests that your family maintains. Corporate governance provides a framework for management and decision-making at company level and will inform how the business operates and how it executes strategy. Implementing corporate governance is always the easier of the two because people understand that fundamentally, companies are stratified, with different parts and people responsible for different things, potentially with their own separate hierarchies.
Family Governance
Family governance deals with member roles, responsibilities, decision making, conflict management, conflict resolution and how everybody interacts with the family business. This can often be the tricky part as “roles” among family members are not pre-defined outside of lineage (father, sister, uncle etc.). It is often the allocation of responsibility and authority among family members, along with succession, that becomes contentious. As such it could be argued that good family governance is even more important, and valuable, than corporate governance when considering quality of life for a family’s members.
What Does It Look Like?
Governance for family offices is about providing structure. Almost all business owners are receptible to the idea of adding extra, or re-modelling the existing systems in place that keep their business in order, but the idea of adding a formal structure to the relationship between family members might sound like overkill- and might even be overkill- if you throw solutions where no problems exist. Accordingly, implementation of governance for businesses and families takes different forms and may overlap where necessary.
Company Structure
Companies will commonly have boards of directors who are responsible for governance. The board will qualify and quantify the strategic aims of the company and provide leadership with a roadmap and directions. The board of directors will usually feature family, non-family, and professional director members. This board will report directly to the owners and/or shareholders of the business. The board’s activities are usually subject to rules, regulations and laws.
Family Structure
Family governance structures are a lot more diverse. They might have a Family Council which could be compared to a corporate board of directors, but AGM’s are shelved in favor of ‘Family Forums’ or retreats. At their base, is often a set of documents, often the product of a collaborative effort by the family members themselves, that state the values, beliefs and ethics of the family, along with their mission for themselves, their business and their wealth. The degree to which a family is able to perpetuate these ideas among themselves will determine if a family is able to create a culture that stretches beyond surnames. These documents will evolve over time and aside from values based considerations will also address business decisions, shareholding transfer and valuation, member roles in the business and/or family office, dispute resolution, financial education and philanthropy.
What Are The Goals Of Family Governance?
Ensuring That People Communicate
Sounds simple but rarely is. Creating a framework to normalise open and honest communication between members is important in all families, but of critical importance for those families that are also in business together. Maybe those family members have to navigate not one, but two relationships with each family member, e.g that between ‘Father’ and ‘Son’, but also that of ‘Chairman’ and ‘CEO’.
Codify A Process For Making Decisions
Even family businesses functioning autocratic rule (see: HBO’s Succession, for example), regularly put decisions to some or other form of voting among members. Having an equitable system to decide family outcomes is key, but will be limited in effectiveness without open lines of communication, whereby people are able to express themselves and their opinions without fear of reprisal or discrimination. If the members feel like they have made the decision together they will accept, if not always agree, with the outcome.
Ease Transitions Of Wealth And Power: Succession
Family members will transition in and out of family businesses with some regularity. Particularly for larger, multi-generation families and those operating internationally. The best outcomes are achieved when governance focuses on presenting and defining opportunities within family enterprises as opposed to obligations and responsibilities. Once the ‘track’ is laid out, members are free to participate in family operations as they wish. Succession is central to the idea of governance. The elephant in the Succession room is wealth-transfer and even the Swiss Family Robinson would have got into it if wealthy Grandpa Robinson died intestate (without a will). Governance can defeat problems before they exist.
Avoid And Manage Conflicts
If you’ve got the first three areas pinned down you’ve already reduced the potential for conflict significantly. You would however be foolish if you thought that you could remove conflict entirely, and family businesses often present family members with innovative ways to disagree and fight with one another. The conflict resolution framework for family enterprises is heavily nuanced and has to cater to the individual family in question- the variation; culturally, ethically and otherwise can be staggering and hard to navigate, even within the same ‘group’. A good framework allows you to resolve conflict swiftly and objectively, minimising the potential for long-standing grudges which, left unaddressed, can erode the foundation of any good family.
Answerable Questions
By now you’re probably gaining an impression of how good governance practices serve to make things easier by significantly reducing uncertainty, conflicts, stressful family politics and power games. The following are some common concerns for family business founders/principals, and their family members, that can be answered with simple and effective governance.
- How do you ensure that younger family members get real-world experience in business outside of the family ecosystem?
- How do you ensure that the promotions, remuneration policy and corporate hierarchy balances the value of inside (family) and outside (employee) members?
- How do you deal with estranged family members and shareholders?
- How do you deal with births, deaths and divorces?
- How and when do you interact with the board of directors?
- How do you achieve consensus when decision making?
- How do you account for modern families- i.e divorced, remarried, multiple and LGBT families?
- How do avoid conflict surrounding who-gets-what during succession in life, and in death?
- How do you keep family members interested and bought-in to the family vision?
- How do you prepare heirs and beneficiaries to be prudent guardians of family wealth, traditions and beliefs?
Sources & Further Reading
– The Family Council Handbook: How to Create, Run and Maintain a Successful Family Business Council – Chris Eckrich and Stephen McClure
– Understanding Family Business: A Practical Guide for the Next Generation – Andrew Drake
– “Is Family Governance an Oxymoron?”, Family Business Review, XIV – Harry F. Martin
– Unconventional Wisdom: Counterintuitive Insights for Family Business Success – John Wiley & Son