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.