12 Oct “What is Family Governance and Why do I Need It?”
What is Family Business Governance?
Everyone knows what our government does (or shouldn’t do) but few outside the world of family wealth planning understand what is meant by Family Business Governance. Family Governance can be difficult to define because it means so many different things to different people. In the context of family enterprise (and in the broadest possible sense) Governance helps families make better decisions and in the long run, minimize conflict. That’s pretty good stuff. So why wouldn’t most business owners embrace such a notion.
The answer is that Governance is simply not well understood. In fact, I’ve found it to be a tough sell.
But the reality of the situation is actually very straightforward – even obvious. Over time, business-owning families tend to grow more complex. Thus, it becomes critical to have some form of Governance in place early enough to deal with the inevitable challenges that family firms are known to present. The key phrase here is early enough. In my 12 years of working with families as an independent consultant and strategist, I have noticed that the families who need it the most are often the least likely to have anything in place. In fact, many families don’t ever address their Governance needs at all or they wait until it’s too late.
Due to the complexity and uniqueness of most family enterprises, Governance is something that must be custom-built from the ground up. Some of the things an effective system should embrace include – but are certainly not limited to – include the following:
• A sense of shared values
• A transparent decision-making process
• A reasonable set of expectations
The process of drafting Governance-related documents, such as a Family Constitution or Mission Statement, is typically more valuable than the end result or the nice-looking binder it’s printed on. What is truly paramount is that the family be made to come together and engage in a collaborative process (perhaps with the help of an outsider). This kind of exercise can help a family come to terms with what their enterprise is all about. Revisiting these principles from time to time – by reading them out loud at the annual family meeting, for example – and holding family members accountable can help a family stay connected to each other and achieve their collective goals.
While reaching agreement on a set of shared values is vital to continuity, it doesn’t create a framework for decision-making. This is where the Family Council comes in to play. Ideally, the Family Council is the chief decision-making body of a family enterprise. Families that have created Family Councils often find that each time they come to a good decision, respect for the process grows. With each favorable outcome, the system gains more and more credibility. Eventually, it might become a violation of the family’s culture to challenge decisions reached by the Council. If the family can get to this point, the authority of the Council can become sacrosanct – and this is usually a good thing.
Setting Reasonable Expectations
Policies help us to create boundaries and boundaries in a family business system are often violated which can lead to a lot of problems. Without boundaries, most organizations will eventually devolve into some form of controlled chaos. Having a clear set of rules, policies and procedures can prevent a great deal of conflict in the first place. The best example I can think of is a Family Code of Conduct to be followed and enforced during company meetings (e.g. turn off cell phones, don’t interrupt, no blame-casting, etc.) A Family Code of Conduct helps enforce the structure that families so often need but don’t have. Here is the key point: conflict does better under structure and Governance creates such a structure.
Components of a Family Governance System
The major components of a Family Governance System include the following:
A Family Council: An entity composed of family members to address family issues, business issues and the potential for conflict between the two. This is the chief decision-making system as well as a conflict management system.
Advisory Board: Typically composed of family and a few non-family members, it helps identify and prioritize business issues objectively and then makes recommendations to the Council on how to address them.
Family Meetings: Periodic and official gatherings of all adult family members; it provides a forum to educate family members on the family business; updates on important events; and to reinforce the family constitution or mission statement, etc.
Family Mission Statement: An articulation of a family’s shared values and collective mission; it spells out what is important to the family and the direction – in broad terms – of where it wants to go.
Family Wealth Constitution: More administrative and specific in nature, this document expresses more precisely how the family puts its mission statement into place within the operations of the business.
Family Bylaws: A more precise set of guidelines and regulations by which the family agrees to govern itself. The Bylaws augments and enforces certain general provisions of the Family Constitution.
Outside Advisors: Having the right team of advisors in place can create a strategic advantage that often spells success or failure. Many organizations will live and die by the advice they receive from the outside. Your enterprise deserves the best advisors money can buy.
Don’t Go It Alone!
Governance is a tough sell because the typical business owner doesn’t have a good understanding of it. Even if they do, they still don’t see the value of it. The successful entrepreneur is someone who knows his business very well and enjoys making money. He or she does not enjoy Governance because they don’t see it as a profit center. And this is right! Sure enough, Governance is not a profit center in the short term. But in the long term, Governance (or the lack thereof) will usually determine success or failure. Furthermore, most business owners are simply too busy working “in” the business to work “on” the business. This is where the outside advisor becomes important.
In conclusion, before you take on such a daunting task as Governance represents, I highly recommend you first seek the help of professional with a proven track record in family wealth planning. Let them do the heavy lifting. Don’t go at this alone.