How can a family governance framework help strengthen your family business?

Many family businesses, especially in their early years, are influenced by their founder or founding family. While this is beneficial in many aspects, decision-making is highly centralized. With the business and the family growing, the organizational framework may reach its limits, and the current generation should plan for the transition of ownership and control to the following generations. This also requires a structured collaboration and cooperation framework and straightforward decision-making.

According to the 2021 PwC Family Business Survey, most family businesses have difficulties navigating family dynamics, although they focus on succession planning.

With many stakeholders involved, it becomes essential for a family and its business activities to implement professional structures. This doesn't mean eliminating the family from the family business, but accounting for family dynamics and the sometimes distant relationships within large families. Often external professionals join the family business and need to be integrated into an overall setup. While some family members follow the family firm's day-to-day business, others may only occasionally get in touch with it. In such scenarios, relationships get more complex, and the company may face additional challenges to be tackled in an organized manner.

How is family governance defined?

Family governance is a shared decision-making system for families. It is based on its legacy, purpose, and values. Although formalities are not at the core, it may follow corporate governance concepts. Family governance should enable difficult and complex conversations and integrate all family members to allow them to contribute to the business and the family. Depending on the family, it can define roles, limits, expectations and provide for conflict resolution mechanisms. It is all targeted toward the preservation of family unity and family wealth.

A family governance framework may cover the following issues:

• The individual's role within the family
• The individual's position within the family business
• Communication within the family and with the family business
• Rules for family members' engagement in the family business
• Ownership structuring and estate planning
• Succession planning for leadership roles in the family business
• Distribution of profits

Success factors

Research shows that family governance positively correlates with family business success and preservation. Unified families with clarity about their purpose and values achieve greater alignment in their business activities. Regular exchange lays the fundament for preserving a family firm over long periods. Transparency further defines the individual's role in the family and the family business and ensures consistent communication and decision-making.

An ideal family governance framework covers three areas:

• The family itself by defining its legacy, values, and purpose. It organizes the structure of family meetings and the family council.
• The ownership structuring provides guidelines for ownership, estate planning, and execution with estate planning vehicles such as trusts and foundations.
• The family business with a ruleset for the board of directors, the executive board, and succession planning for leadership positions.

As mentioned, these are essential success factors for a family business. There are many stories of family feuds around a family firm, and often they go back to the lack of governance frameworks. Family members may have wrong expectations, feel excluded from shaping family wealth, and not have a voice for their concerns.

Thus, families position themselves for future success and unity with a coherent governance framework. Conflict may still arise but will be addressed formally with defined mechanisms to overcome such difficult situations.

Family assemblies

Regular family meetings foster conversation, interaction, exchanging viewpoints, and the unity of the family. Sessions can cover various aspects of interest to the family and the business. Again, alignment is at the core of those gathering and should balance wealth, business, and relationships.

Family assemblies can be the forum for

• Strategic decision-making
• Sharing relevant information
• Sharing concerns of family members

It's also an excellent opportunity to reconnect, remind the importance of shared values and purpose, celebrate success and individual achievements, and build the path for future collaborations.

The involvement of all family members ensures their commitment to preserving family wealth and contributing to transitional ownership for future generations. In particular, younger generations ask for transparency about family wealth and want to make an impact with their investment and business activities.

Family assemblies may also prepare the younger generation for taking over wealth ownership and assisting them in developing the required sense of responsibility. With awareness of the family's legacy and becoming ambassadors of its values and purpose, they have already started to shape family wealth for future generations.

The family council

As the family grows, resulting in multi-generational family business ownership, a family council ensures structured communication between the family and the family firm. It can elect diverse family representatives to represent the entire family and allow for different standpoints. Ultimately, the family council acts as a bridge between the business and the family and ensures efficient communication and decision-making.

The family council obtains all relevant information from the firm's board and management. Usually, the family assembly makes important decisions, and the family council can provide specific recommendations.

Further options

Families can further level up their game with enhanced business governance. An advisory committee can bring external views into the family business next to specific corporate governance levels, such as the board of directors and the executive board. A mix of experts with broad experience can provide valuable guidance on the long-term strategy and oversee things from a certain unbiased distance. It may also liaise with the family council regularly for extensive involvement of all stakeholders.

How to implement a family governance framework

The intersection between family and business is complex and challenging. Family governance frameworks are effective facilitators for long-term business success, harmony, and wealth preservation. Communication is the essential element in a tailored system that develops over time. Only those frameworks that include all family members and consider their concerns ensure the unity of the family. The business governance will then follow naturally. Since each family is different, a standard approach will not lead to individualized results.

Families have a unique potential for unity and alignment in purpose due to their relationship held together by trust and communication. Family governance ensures that they tackle the potential regardless of their size and business. That's an opportunity for business families to seize since it will make their business more competitive and resilient by balancing family, business, and ownership over a long-term period.

There's no need to solve everything right from the beginning. Family members must learn more about each other rather than following strict rulesets that will not resonate with them. Thus, creating awareness of the risks associated with the lack of family governance is the first step. The conversation about their values, purpose, and shared vision will lead to a common understanding of how a family can formalize decision-making and collaboration.

All of the above can be achieved through proper family governance, so if you have more queries or want to deep dive into it, visit Centro LAW for more information.