Graphic showing range of governing bodies in a family business, including family assembly, family council, board of directors and family business advisory board. Graphic covers various considerations for each type, including purpose, family involvement, typical members, governing documents and meeting frequency.
Strong family business governance is a common and critical characteristic among family businesses that thrive for multiple generations. Each family’s approach to governance is unique and suited to its individual circumstance. For all families, though, the journey to a governance system that works for them starts with asking what the family and the business seek to achieve by formalizing decision-making. In the article that follows, we discuss the general components of a family business governance structure, providing a framework to consider for your own family.
The Definition and Purpose of Family Business Governance
What Is Family Business Governance?
Definitions abound for family business governance. Admittedly, there should be multiple definitions to accommodate the wide range of unique family businesses in existence – large and small, first or fifth generation. In its most simple terms, governance is a set of processes for making decisions. Family business governance, then, refers to the processes in place to govern decisions made around the family, the business, and the intersection of the two.
Frequently, governance is associated with complex committees, policies, and procedures, which may be appropriate for families and family enterprises of a certain size. However, in other cases, family business governance is a simplified, disciplined process that is well-structured and balanced.
What Is the Purpose of Family Business Governance?
Family business governance structures usually serve two constituencies: the family and the business. A well-developed, implemented structure provides a framework for decisions and effective communication, unique to the family and business. At their best, governance systems create harmony between both constituents.
From the perspective of the family, family business governance serves to:
- Provide a formal forum for routine family and family business matters
- Gain transparency into the business, its operations, performance, and strategy
- Communicate on key issues, both within the business and outside of its scope
- Foster development of new ideas for the family (philanthropy, family trips, policies, and so forth) and the business
From the perspective of the business, family business governance serves to:
- Create a forum for communication, “funneling” ideas from the family to the business and vice versa
- Provide a consistent voice from the family for the business’s adherence to the mission, vision, and strategy of the firm and the family
- Identify and groom talent within the family for positions within the business
What Are the Benefits of Setting Up a Family Business Governance Framework?
There are many benefits to implementing a strong family business governance framework – far too many to create a definitive list. One of the most powerful is the consistency it provides in the decision-making process. Decisions that materially affect the business – succession planning, ownership changes, liquidity, and so forth – should be made within the confines of a decision model that balances input from all stakeholders. A strong governance framework will ensure those decisions are made in the best possible environment.
Another benefit of a family business governance framework is the additional transparency provided by a committee. Charters, committees, and proper policies ensure that family members, stakeholders, employees, and management are on the same page about important aspects of the management of the business. Black-box decision environments can cause undue stress within an organization. Good governance is created by all stakeholders, which ensures that appropriate communications are set out in reasonable fashion.
Finally, an additional benefit of family business governance is the provision of continuity within the family and the promotion of the family’s culture.
How Does Family Business Governance Work?
As mentioned, family business governance can take many forms depending on myriad factors, such as the size of the family and the business and the family’s culture. With that said, there are several common bodies used in a family business governance framework.
- Family Assembly
- Family Council
- Family Advisory Board
- Board of Directors
What to Watch Out for When Setting Up a Family Governance Structure
The nearby table summarizes some key items to mind when beginning the process of setting up a family business governance framework.
| Considerations When Constructing a Family Business Governance Framework | |
|---|---|
| Time Commitments | The time and energy commitments necessary to build a strong framework can be large. Understanding that the process will potentially take years to implement and tune will help manage expectations. |
| Stakeholder Engagement Accountability or Decision Rights | Governance must be set up so that it is agreed upon by all stakeholders involved. Family assemblies can be established with input from all generations, and family councils can be built with input from both owner and nonowner family members and socialized with the board of directors. Designating a “champion” who is well connected with the family and the business for this type of initiative helps drive it forward and socialize it with all the necessary parties. Understand each family member’s interest level and desire to participate (not everyone wants to engage equally). |
| Accountability or Decision Rights | Ambiguity or a lack of social buy-in will create “half-measure” decisions that may not be followed. Documenting the decision rights once the governance framework is set up is imperative to make sure that the system functions properly and as intended. |
| Future Generation Needs | It is important to identify the business’s future governance needs. This involves understanding where the family and the business are in terms of ownership, and management evolution as well as having a well-understood vision for the business, ownership and family. Governance ties to the stage and evolution of the family and the business. Understanding where the family and business are and where they intend to go will help to build a framework that addresses challenges at each stage. |
How to Begin Implementing a Family Business Governance Process Today
The process of establishing a functional family business governance structure is iterative. As such, it is important to begin by identifying the most important needs that the family wishes to solve by instituting a more formalized governance process. Soliciting input on this process requires thoughtful outreach and structure.
To help set expectations for all constituents, it is necessary to create timetables for exploration, socialization, design, and implementation. Partnering with a trusted advisor with relevant experience can help avoid common pitfalls and imbue best practices into the development process.
Regardless of where the family and the business are in their progression, a discussion about how to implement governance is always a worthwhile exercise.
If you would like to discuss family business governance in more detail, please reach out to our Center for Family Business.
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1 Gersick, K., J. A. Davis, M. M. Hampton, and I. Lansberg. Generation to Generation: Life Cycles of the Family Business. Boston: Harvard Business School Press, 1997.
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