We the Family: The Benefits of Creating a Family Constitution

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 with 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 generation 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 businesses 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 – but 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.

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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

The family assembly is a family-only body intended to gather around issues that are germane to the family and the operations and ownership of a family business. The agenda for and charge of the assembly can also extend away from the family business and into more familial-focused topics, such as discussing family vacations, philanthropy and financial literacy. Alternatively, it can focus on business-specific topics, such as educating family members about their rights and responsibilities as well as the election of family council members (if a council exists) and approval of family employment policies. In larger families, the family assembly could take place at a bigger venue with a formal agenda, or the assembly could take the form of smaller, informal meeting.

Family Council

The family council provides a forum in which select family members can articulate their values, needs and expectations vis-à-vis the company and develop policies that safeguard the family’s long-term interests.1 Thus, it carries information up to any nonfamily owners (should they exist) and back down to the family. The council is typically charged with making decisions around policies that pertain to the intersection of the family and the business, including family employment, liquidity, succession, conflict resolution and communication policies. It can be a voice for the family in the board of directors. Family member directors often serve on the family council. In addition, junior family members not on the board are typically on the family council.

Family Advisory Board

A family advisory board is a body external to the family and the business intended to provide objective industry and functional expertise to the board of directors and management of the family business. Family businesses often carry extensive industry knowledge, which a family advisory board can complement with objective, independent insight. Well-functioning advisory boards can act as an independent sounding board for strategic business considerations. Critical to the success of a family advisory board is the ability to openly communicate with the business owners; thus, the board should have a strong relationship with the owners.

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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.

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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.

 

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1 Gersick, Kelin E. Generation to Generation: Life Cycles of the Family Business. Boston, MA: Harvard Business School Press.