Family governance – Getting the basics right

by | Jul 28, 2014

Family Governance – Getting the basics right

Advantages of family businesses

What makes family business different from ordinary businesses is that they commonly have a small base of manager-owners. This can translate into fast strategic decision-making. At the same time, family shareholders are more likely to take a long-term view of the development of their company than financial investors thus giving more importance to sound basic structures and operational principles. Contrary to businesses held by unrelated owners, family businesses are conducive to a family ethos being realised and shared within the business. Lastly, but importantly, a family-run business regularly has access to the capital of the family and its members.

Despite this positive background, tensions in family-run businesses eventually and inevitably arise. Running a business operation is an inherently organic, multifaceted and ever-changing challenge putting to the test family structures comprising different attitudes, age groups, genders etc. To successfully mitigate or avoid such tension ownership and management are often and must frequently be separated. It is vital that such situations are addressed progressively and timely.

Family charter

Family run businesses frequently experience tensions between family interests and commercial necessities. In order to accommodate and balance these sometimes juxtaposing interests it is vital that the family owners draft fundamental principles that they want to adhere to and enforce in the running of their business. This is essentially what family governance is about: agreeing on control mechanisms and clear regulations to protect the business against undue influence and the exertion of power by family individuals and intrusion from outside. Such principles and mechanisms can ensure the necessary stability for the business to flourish.

These fundamental decisions on the family goals and values as well as the instruments for achieving and implementing such aspirations are best laid down in a family charter. The family charter should address the family goals such as increasing the value of the business or the realisation of personal ambitions by family members, who should be involved in the management (family members or outside managers), what direction the development of the business should take, what financial expectations the family members have, how the business should be funded, how ownership is structured and what place the family business takes in respect of the overall wealth of the family.

Further, the family charter should deal with the values of the family. Which are the sources of pride of the family which should be upheld in the business? What corporate culture does the family wish to cultivate in the business? What is the family’s view on corporate social responsibility and its commitment to the general public?

Finally, the family charter should set out by which instruments the family goals will be implemented in the business. How is the family organised and how are decisions made? Which are the channels of communication among the family members and to the outside world? Which are the crisis scenarios and emergency procedures should the business strike existential difficulties? How are disagreements amongst family members resolved, who has the final say and what is the status of minority family members?

Since values change with the passing of time, the family charter should make allowance for its revision or restatement after certain intervals.

Wealth strategy

The aim of a wealth strategy is to ensure the survival of the family assets for posterity by allocating the family estate to various sectors of investments. Wealth strategies include options for family members to exit the family company. Setting up a wealth strategy should take into consideration the personal development, needs, assets and risk trends of the family individuals whilst dividing the family’s wealth into a variety of investment fields such as participations in companies, real estate, securities and alternative types of investments such as art.

At the same time it is important to secure that both the chosen investment fields remain independent from each other and at the same time, family wealth is kept separate from commercial assets used for daily operations.

The wealth strategy is an important guideline for the family and should be approved by the family council.

These archived articles are written by authors no longer participating in the Family matters on line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.