How to create a good Family Governance system?

by | Jul 28, 2014

The process the family follows in creating a good family governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. Here is “how to” create a good family governance system.

Family governance is the key to multi-generational success!

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

All around the world is a well-known saying “Shirtsleeves to shirtsleeves in three generations.” The odds of success are not great.

→Only six to ten of 100 wealthy families and family businesses survive to the third generation. Families agree in general that they will do better if they have the benefit of an outside advisor to lead them through the governance process.

How can a family beat this proverb of failure?

We will address proactive ways to beat this proverb. We will look at how a family can create a strong governance system, and the benefits that will give to the family members. We will start by defining what is family governance, and what are the best practices for strong family governance. Then we will go through the practical steps that a family can take to create the strong family governance system. This will include a Family Council, a Family Constitution and continuing Family Gatherings.

What is family governance?

How can families continue their wealth and their family businesses for many generations? The answer is to create a strong family governance system.

→Family governance is “how a family makes decisions as a family.”

What model of decision making should a family use?

There are many models of how decisions are made (dictatorship, consensus, democracy, throwing dice, etc.). Some models are more effective than others. We will compare two models often found in family groups.

Model examples
The Founder makes all the decisions model:
  • Decisions might be made by the Founder only, who feels that he or she is entitled to make all important decisions. Other family members might not even be aware of those decisions, and none would have their opinion included.
  • The risk in this system is that when the Founder is no longer present, the younger generations are likely to revolt and to reject the controls of the Founder. (In some cases they would not even be aware of the wishes of the Founder).
  • This is also a time when many sibling rivalry issues come out into the open.
  • Regrettably this often leads to litigation and negative publicity, with a likely result to be failure to keep together the family and its wealth or business.
The entire family participates model:

The entire family participates in an agreed decision making process (family governance).

  • Decisions are made in a way that the family has decided together.
  • Each family member participates in creating his/her decision-making system.
  • The agreed governance system is put in writing.
  • All family members have agreed to follow the governance system.
  • Family members all have the opportunity to remain involved and cooperative.
  • No litigation happens or is threatened.

If we compare the family group to a country, we would compare a country that uses a citizen voting system. Members vote to elect those who will represent them. Those who are elected are accountable and can be replaced in future elections.

How do countries make decisions?

If we compare a family group to a country, we can look at the governance model in any country. Using the “Founder makes all decisions” model, we would compare a country that uses a Dictator system of governance. As seen recently in the Arab Spring, the citizens are likely to revolt in a Dictator model.

→Participating in governance is a basic human right. Families work the same way.

What are the key features of a good family governance system?

Best practices from countries and best practices from public, listed companies can provide guidance for family businesses and families with substantial wealth. These include the following:

  • Transparency. Transparency means that the information is shared with all the members; there are no “secret” decisions. Information is always available, and is always truthful. Proceedings in the Congress, or Parliament, or Diet are open to the public, sometimes by live television coverage. Freedom of the press adds additional assurance that information is widely available. →Today twitter helps too!
  • Accountability. Accountability means that promises are kept; including promises made during campaigns. Any member can ask for information about the goals and progress on the goals. In listed companies, the C-suite executives are accountable to the Board and the Board is accountable to the shareholders/owners.
  • Participation. Third in importance is a feature that is not mentioned often in governments or in listed company best practices. Participation is extremely important in family governance. Participation means that each family member feels included in the governance process. Many people question whether or not a family governance system is legally binding on everyone. The answer is that when each family member contributed to creating the system, each family member is motivated to follow it. 

    How to set up a proper Family Governance system

    The outside advisor is likely to begin with getting to know each family member:

    • Interviews. Individual interviews take place, to provide an opportunity to share their individual views and concerns. An initial question is which family members to include in the interviews (children? Spouses?). Family members need to make those decisions. In the interviews family members often want to share a history of “grievances” which help give background, but are not usually the focus of the ongoing work. (This step, by the way, is an important part of “participation.”)
    • Report from the interviews. After having all of the interviews the outside advisor might put together a written (diplomatic) summary of the content of the interviews (This step, by the way, is part of “transparency”). It is important to show that each person was heard, but to keep the focus on common issues that would benefit from family attention, discussion and decision-making. It is also important to respect the confidentiality of each person’s comments, especially on difficult issues. The report should be shared with each family member who was interviewed (part of “transparency”).
    • Issues from the Interviews. The issues that come out of the individual interviews can be used as the Agenda items for the family meetings. The family meetings might be a smaller group of the family members, or the entire large group may be at the initial meetings. Some families mark the toughest issues as special “white elephant” issues, to be addressed in separate sessions, with an outside advisor (in some countries they are “pink elephants”.)
    • Creating a Family Council. One of the first steps for the family group is to decide who will be the representative group (the “Family Council”) to represent the rest of the group. This smaller group will be “accountable” to the larger group. It should be an “elected” group. Following “best practices” from governments and from listed companies, the members should be elected and have predetermined terms of office.
    • Family Council Meetings. Next is for the Family Council to begin its meetings. The meeting procedures need to be established. How often should the Family Council meet? (quarterly? monthly?) Where should it meet? (an office, a home, off-site etc.) Should there be an Agenda sent around in advance of the meeting? How much notice should be given about the date? Is it “required” to attend the meeting? (is there a penalty for failure to attend?) Can someone who cannot attend give a proxy to someone else? Must there be a minimum number (a quorum) in order to have a meeting?
    • Running the Family Council Meetings. Who will run the Family Council meetings? When creating the new system of family decision-making it is important not to follow the old method of decision-making. For example, if there was a Founder model (who made all the decisions) then the Founder should not be in charge of the discussions to create a new system. This is a role that should be filled by the outside advisor. This frees up each individual, including the Founder, to participate in the discussions. The outside advisor may suggest some rules of protocol to follow during the meetings (such as: no interruptions, sincere statements, respect for differences in opinion, turns for each member to participate, etc.)
    • Voting Rights. Families are often concerned at the beginning with the control issue of voting rights. They may spend some time deciding which category of the family tree would have how many votes, and also on the issue of how many votes would be needed for which type of issue. In practice, however, it usually happens that there are never any reasons to take a vote: a good meeting ends up working by consensus.
    • Written minutes from the Family Council meetings. Many families tend to forget exactly what they may have decided during the meetings. The outside advisor can put together clear and detailed written minutes of each Family Council meeting. These minutes would be circulated to all members of the Family Council, for review, corrections, and approval. (This written record allows for future “accountability”.)
    • Continuing the Family Council meetings. As an on-going process it is very important to continue to have the family council meetings. The discussions in the meetings, regardless of the nature of the actual topic being discussed, give great behavior practice to a family. The skill of discussing and resolving issues during relatively peaceful times will be a valuable shared skills in a future time of crisis.