Why is it important to have a solid family business governance?
When your family business is at its initial founder(s) stage, very few family governance issues may be apparent as most decisions are made by the founder(s), and the family voice is still unified. Over time, as your family business goes through the next stages of its lifecycle, newer generations and more members join the family business. This brings different ideas and opinions on how the business should be run and the direction of the strategy. A clear family governance structure becomes necessary to bring discipline among family members, prevent potential conflicts, and ensure the continuity of the business.
A well-functioning family governance structure will help you:
- Communicate the family values, mission, and long-term vision to all family members.
- Keep family members (especially those who are not involved in the business) informed about major business accomplishments, challenges, and strategic directions.
- Communicate the rules and decisions that might affect family members’ employment, dividends, and other benefits they get from the business.
- Establish formal communication channels that allow family members to share their ideas, aspirations and issues.
- Gather the family in an orderly nature to make decisions.
What should your family governance constitution cover?
Your family constitution is a statement of the principles that outline the family commitment to core values, vision, and mission of the business. The constitution also defines the roles, compositions, and powers of key governance bodies of the business: family members/shareholders, management, and board of directors. In addition, the family constitution defines the relationships among the governance bodies and how family members can meaningfully participate in the governance of their business.
It is a living document that evolves as your family and its business continue to evolve. As a consequence, it is necessary to regularly update it to reflect any changes in your family and/or the business. Its form and content also differ from one family business to another depending on the size of the family, its stage of development, and the degree of involvement of family members in the business.
Family governance constitutions typically cover the following elements:
- Family values, mission statement, and vision.
- Family institutions, including the family assembly, the family council, the education committee, the family office, etc.
- Board of directors (and board of advisors if one exists).
- Senior management.
- Authority, responsibility, and relationship among the family, the board, and the senior management.
- Policies regarding important family issues, such as family members’ employment, transfer of shares, CEO succession, etc.
See this Sample Outline for a Family Business Protocol to help you structure your key points.
What is the key to solidity?
Improve the odds of survival of your family business by setting in place the right governance structures adapted to your growth stage. See below some characteristics of good governance according to your business development stages.
Stage 1: the founder(s), controlling owner(s)
At this stage, the business is entirely owned and managed by the founder(s) with a strong commitment of the founder(s) to the success of their company and a relatively simple governance structure.
Stage 2: The Sibling Partnership
This is the stage where management and ownership have been transferred to the children of the founder(s). As more family members are now involved in the company, governance issues tend to become relatively more complex than those observed during the initial stage of the business’ existence.
Stage 3: The Cousin Confederation (Cousin Consortium or Family Dynasty)
At this stage, the business’ governance becomes more complex as more family members are directly or indirectly involved in the business, including children of the siblings, cousins, and in-laws. Since many of these members belong to different generations and different branches of the family, they might have diverse ideas on how the company should be run and how the overall strategy should be set. In addition, any conflicts that existed among the siblings in the previous stage would most likely be carried to the cousin generation as well. As a consequence, this stage involves most family governance issues to be addressed.
Key governance adaptations for each growth stage
Stage 1: Governance with solely the founder(s), controlling owner(s)
Stage 2: Governance as part of the Sibling Partnership
Stage 3: Governance in the Cousin Confederation (Cousin Consortium or Family Dynasty)
Family-owned companies will not necessarily go through all three stages mentioned. For example, some companies may disappear during the early stages of their lifecycle because of bankruptcy or acquisition by another firm.
For more information, consult IFC Family Business Governance Handbook
Explore more resources about IFC Family Business Governance
- How strong is your governance? Try out the Sample Listed Family Business Governance Self-Assessment Tool
- Why it is important to start planning the governance of your family business
- Is succession planning taboo in your family business?
- Roles and conflict resolution in your family business
- Communication and conflict resolution in your family business
- Family managers versus outside managers in your family business
- Setting up the shareholder policy of your family business
- How to set up an effective board in your family business
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