What is Family Business Governance?
Governance is often held out as the solution to all challenges in a family business. Whilst this may be partially true, it can be difficult to know firstly what is meant by the word ‘governance’ when discussing family business, but also to understand what forms of governance may be useful to your own family business.
This post will answer those questions for you.
What is Governance?
Unfortunately there is no universally accepted definition of what governance is. There are various different definitions that various different organisations or professions will use, but none of them really are, tailored to family businesses.
My definition of governance is ‘the collection of rules, systems, and processes that are put in place to help set and deliver the objectives of the family and the business whilst also holding the business and its key stakeholders to account’.
Now that may not be the most succinct description or something that just rolls off the tongue.
If you want something like that, Professor John Davis did summarise it rather brilliantly by saying ‘it is bringing the right people together at the right time to discuss the right things’.
Broadly, governance can be split into family governance and business governance, we will concentrate on Family Governance in this post.
What is Family Governance?
Now, as you can imagine, every business has some form of ‘business’ governance, for example a Shareholders Agreement, Articles of Association and the rules that the Board will have to follow, processes within the business etc.. This is not exclusive to family businesses. Whereas family governance really is specific to family owned businesses.
As the name suggests, ‘Family Governance’ deals with the family, and I don’t just mean family members that are within the business or have ownership of the business, but generally the family overall.
It can help ensure that the voices and opinions of everybody within that family ‘system’ are heard .
Family governance is voluntary, so it’s important to understand that these agreements or forums are entered into voluntarily and is not legally binding One way to think of it is as being ‘morally binding’ on the family once it’s been implemented.
There are a number of different family governance forums that each have their own role, but are very often used alongside each other to cover all of the interactions of the family with the business.
The Family Charter
The Family Charter is a good starting point for family business governance. It can set the tone for all future governance discussions and often forms the foundation for all family governance.
A Family Charter will cover the views and attitudes of the business owning family on matters such as
- What are the values of the business owning family?
- Who is family?, i.e. does that include the spouses, step-children, adopted children?
- What is the overall purpose of the business? i.e. wealth generation, employment opportunity for family etc.
- What are the employment policies for family members?
- What experience or qualifications are required to sit on the Board?
- How does the family communicate its needs, views and opinions to the Board in a constructive way?
- How do you deal with conflict?
The process of putting a family charter, or constitution in place should not be one that is rushed or based on an ‘off the shelf’ solution. The process itself can take many months and is based on in depth discussions to reach a consensus as a family on the important issues affecting the family’s interaction with the business. Great care and attention should be paid to this process as it is often the discussions themselves that provide the ‘value’ rather than the final document.
The Family Charter will become a living document and one that is referred back to on a regular basis to ensure that the views of the family continue to be represented by the Charter.
The Family Council
A Family Council is a forum that can be useful in managing the communication between the family and the family business. In essence, it is a communication bridge between the family and the board of directors.
Ideally it is made up of family members drawn from different parts of the family with a range of ages and experience.
The Family Charter will usually include some guidance to help the Family Council to understand their role. This helps to improve the communication between the family and the business.
It is not the same as the board of directors, the board are there to manage the business, however the family council is there to communicate how the family are feeling about issues linked to the business.
It is there to provide feedback and advice , which can be taken on board, however the Family Council is not able to make decisions within the business.
The Family council doesn’t set the strategy for the business either, this responsibility lies again with the Board of Directors.
The Council is acting as that bridge between the family and the business, via the board. In essence it can be seen as the family’s ‘representative’ to the board.
Family Councils tend to be introduced as a family grows and it becomes harder to ensure consistent communication across all family members.
The Family Assembly
A Family Assembly is a meeting of the members of the family, whether they are shareholders or not and whether they work in the business or not.
The overall purpose of these meetings is to be able to bring the family together, learn about what is happening in the business but also to help to create some emotional connection to the business for those that may not work in it or be that close to it.
This would normally be once a year and can be used to promote unity and help avoid the ‘us and them’ situation that can sometimes arise when there are elements of the family that are not directly involved in the business and don’t get to see each other much.
They give the wider family an opportunity to hear how the business is doing and to feed back to the board (via the family council) how they are feeling about the business.
They are often structured, but informal meetings organised by the family council. It is important to point out that any discussions or viewpoints put forward are not binding but that doesn’t diminish the validity of the meetings or the views expressed at these meetings and it is always better that these views are heard, in a safe environment than to let them fester.
The family assemblies / retreats will often have a a social element to them but can also include training and education. They are an opportunity to educate everyone but many focus on the next generation and some are even used to identify those who may be the leaders of the future. The training could concentrate on the business side of things, including finances, marketing etc or they could be focussed on the family side of things.
Why is Family Governance useful?
Family business governance focusses on how to get the best out of the ‘family system’ that is unique to family businesses. This isn’t exclusive to those in the family that own shares but includes the whole family.
It helps to create the right forums for discussions to take place in the right environment, with the right people discussing the right stuff, back to Prof. John Davis’ definition.
Families are emotional systems and when emotions are involved, very often logic takes a back seat. Effective family governance can help to manage some of this emotion and deal with these common challenges:
- Clarification of the purpose of the business
- Defining roles and responsibilities
- Ensures the business is run professionally and responsibly
- Helps to set the strategic direction of the business
- Ensures consistency
- Can be used to reinforce the values of the family.
- Creates transparency, accountability and fairness amongst all
- Creates effective communication
- Manages the complexity of family dynamics within the business
- Helps with dispute resolution and prevention
- Risk management
- Helps create the right boundaries and controls within the business
- Helps to manage the personalities within the business.
- Increases the overall well-being of the family
- Ultimately it can help ensure the survival of the business between generations.
Family governance is voluntary but is growing in popularity as the benefits become clearer. During the COVID-19 crisis we are seeing that those with good governance in place are proving more resilient than those without.
How to get Started with Family Business Governance
The most common question I am asked once families decide to embark on the introduction or formalisation of governance within their family business is how to get started.
As you can imagine each family and each business is different so there isn’t (and shouldn’t be) a blanket approach to any of this. However, my suggestion for a starting point is to firstly look at what it is that you are trying to achieve, what problem are you trying to solve and then look at whether the introduction of any of the above forums will actually do that.
It may be the case that the way things operate at the moment is actually OK, and that introducing governance may not in itself actually solve anything.
That is not to put you off, but there is often some form of informal governance in place any way and so being clear on what you are trying to achieve and how you think governance can help with this, is a good start.
There needs to be an understanding amongst the family that the introduction or formalisation of governance takes time, effort and commitment on the part of all those involved in its introduction.
There are no ‘off the shelf’ solutions and the value in family governance is usually found in the discussions involved rather than in any of the documentation itself.
I would obviously say this, but if you are looking for help with where to start, please get in touch. I am really happy to talk through whether governance is right for you and your family business.