Why Consider Formal Governance as a First-Generation or Small Family Business?
Formal family governance structures are often present in multigenerational, mid- to large-cap family businesses, with dozens, if not hundreds, of family members. As companies grow larger, the need for formal governance typically becomes more palpable; however, the benefits of a formal governance structure are not solely reserved for large family businesses. Formal councils and policies typically associated with larger family businesses can be translated to those with fewer shareholders – specifically, first- or second-generation businesses whose family members may not number more than a dozen. Not only can effective and efficient governance structures be implemented at smaller family-run companies, but they are oftentimes critical to the ongoing success of a young, thriving family business.
What Is Governance and What Are the Benefits?
Definitions of governance vary widely depending on the goals of the family or business. Generally, governance is a set of policies, structures and values that inform or govern decision making. These policies, structures and values are intended to maximize the value of the business through an orderly facilitation of ownership and business operation.
Similar to the definition of governance, the benefits of governance are also varied. Early in the life of a family business, the benefits of discussing and considering governance are largely cultural and foundational, meaning that what is really being created is an acceptance of an overarching governance framework and the discipline that accompanies it. Specifically, discussing governance early can yield the following benefits:
- Formalizing not only the decisions that need to be made, but also which stakeholders will be included. This process guides how decisions are going to be made and streamlines the decision-making process, which is especially important in times of stress or sudden change for the business or family
- Engaging the family to develop the policies, structures and most importantly, the values, that form the foundation for the governance can both increase buy-in to the eventual governance structure and build enthusiasm for the business and the family
- Instituting governance can help avoid potential issues through guidelines and controls, while also reducing ambiguity and potential tension
- Communicating the governance process and the process through which it was built can inform the next generation of owners and operators and give them a firm foundation off which to build a better enterprise
Developing buy-in for a governance structure can take a generation or more to build. Younger family businesses have the ability to be patient, thoughtful and deliberate in crafting governance structures. Despite the opportunity to delay, starting earlier than “necessary” often means that complexity and conflict levels are lower, and greater space may exist to be more forward-thinking with governance design.
Enhancing Communication through Governance
Governance also enhances and thrives on effective communication. Without highly functional communication, the success of governance bodies – and quite possibly the business overall – becomes increasingly improbable as the years go on. Beginning the dialogue on governance early allows leadership and ownership to prioritize communication. It is imperative that governance, formally or otherwise, be in place during growth or transition periods – specifically, generational, leadership or ownership transition.
Family Governance for the First- or Second-Generation Family Business
Whether they know it or not, every family business – large or small – operates under a governance structure, because every business has a decision-making framework. The following graphic outlines how to begin to formalize that framework and set the groundwork for a more sophisticated governance structure that will be necessary as the business and family ownership group expands. In a sophisticated family business structure, four major governing bodies typically exist (family assembly, family council, board of directors and family business advisory board), which provide formal points of engagement for the entire family and ownership group. Understanding what a typical governance framework looks like in a sophisticated family establishment allows the ownership team to “work backward” and create the precursors and conditions for success to build each. Most importantly, in contemplating the construction of any formal decision-making process, it is critical to consider what the family and business hope to achieve. Starting with the opportunity at hand will guide how the governance model is formed.