Family Governance

A Process that Never Ends

Family business. Is there anything tougher? Every family-owned business needs a framework or forum for owners and family members to discuss their vision, values, goals, needs, expectations, and more. A good ownership group can be an outstanding asset for a family business, but how do you create that?

While every family’s story is unique, the issues facing family-owned businesses and their different generations generally have many common similarities. Strategies for addressing the assortment of challenges can be as varied as the number of families, while the process for updating these should be continuous for all families and every generation.

Sometimes these businesses may be owned and operated inside a family office. When this is the case, it is very likely that a governance structure of some sort has been established. A family office will often have processes to help family members with a range of needs, including investing, wealth management, tax and estate planning, education, and philanthropy. Family office, or not, all family-owned businesses need to create a foundation of governance for the second generation (G2) and beyond.

Whether already in place, time to review and update, or needing to establish, sound governance for any family business has three pillars:

1. A strong family committed to continuing the legacy. The need for unity and a shared vision is essential.

2. Creation of governing documents. Many dread this process, but it can be quite enlightening and is an effective path to establishing a structure for governance.

3. Transparent process for making decisions. This will be strengthened through practiced, regular communication that allows for all voices to be heard.

Family

Through the generations, it will take an ongoing and continual effort to bring unity to the larger family. One step in the right direction is for families to work together to define the vision for their organization, shaped by their values, in order to determine the nature of the business going forward. Do we want to continue the business? Do we want to expand? Do we want to sell, diversify our investments? Do we want to encourage family participation or just work with non-family executives? The family will also need to discuss goals for their business, including areas such as:

• Types of growth - local, regional, national, or international; own, franchise, or license; funding; infrastructure

• Various risks - current, and future; best for family vs. best for business; what level is acceptable, or unacceptable

• Uses for profits - targets, and expectations; goals for minimum distributions; uses of excess

• Control and liquidity - valuation, frequency, transition, voting, and trusts; mindfulness that from G2 and beyond, remaining a part of the family business is a choice, and an exit should be allowed for those who wish to pursue other interests

Of course, these are all interrelated, so it is important to realize that wanting more of some may mean taking less of others. Additionally, the answers for one generation will probably not be the same for a different generation. Not working to optimize the collective strength of the family, and/or not attempting to achieve family unity is not a good option, and will certainly end with less than desirable results for all.

Documents

The three most common governing documents are the mission statement, a constitution, and bylaws. Many companies will begin with a mission statement, and will adopt bylaws during their startup. Both of these are widely understood, and their usefulness is accepted and acknowledged. Inside a family business, they serve the same purpose and are just as critical.

A family constitution may be less familiar to some, but can be a document just as important as the other two. A family constitution is an operational document, created with and agreed to by the whole family. At a minimum, it should define the roles, expectations, rights, and responsibilities for each family member in order to express the foundational rules and regulations for the business. It is to be viewed as a dynamic document that will be updated periodically to adapt as a family grows and their needs change.

Decisions

In all families, over time conflicts will arise. While these cannot be avoided or prevented, families can equip themselves to be better prepared for addressing them by having a process in place for making decisions that is simple and clear to everyone. Many will have a “family assembly”, which essentially is an annual gathering of all family, including spouses, often someplace fun. Though more than just a social gathering, there usually are opportunities to learn about the family’s history, hold educational sessions, review the business, hear questions and concerns, make decisions, and elect members to the family council. It also serves as a tremendous way to build relationships and family ties.

Family councils often provide the most effective forum for education, managing communication with the family, and reporting family values to the company’s Board of Directors. A family council is elected to represent the family, and will usually meet several times a year to oversee and organize family activities. Some family councils will setup committees that may, for example, coordinate family undertakings, create agendas for family assemblies, propose policies, establish guidelines on distributions, develop family educational opportunities, and the like.

A company’s Board of Directors also play a different, but important role for the family and their company. The Board is responsible for oversight of the business, hiring the CEO and evaluating her/his performance, and providing strategic direction. Often, certain family members will sit on the Board, but it is best practice to include nonfamily, independent directors. Boards will have their own governance policies and procedures, and need to have a clear understanding of their role to avoid infringing into family matters.

For families not yet ready for a Board of Directors but interested in educating younger generations eager to learn and who want to find a way to become involved, they may consider a Junior Board. It should be a serious opportunity that comes with great responsibilities, where members can be elected or removed. An alternative can be an Advisory Board. While Advisory Boards typically include outside professionals capable of providing unbiased guidance, a hybrid structure could also include family. Both a Junior Board and an Advisory Board should help provide future candidates for the Board of Directors.

Ongoing

Collaboration and support do not just happen, even in the best of families, especially between different branches and among relatives across generations. Success will not be swift, or easily measured. The process can be most difficult for the founder/wealth creator accustomed to operating independently, and can also feel uncomfortable for generations accustomed to inactivity. However, with your support, if you can generate some enthusiasm for the process and achieve commitment and engagement from the different branches in your family and the current owners to work toward these common goals, it likely will become one of your greatest achievements – perhaps, even, your greatest legacy – and be well worth your time and effort.

Thoughts on next steps:

1. Start where you are. You will have time later to worry about how, and where to grow. Don’t force it. It needs to fit your family. It doesn’t have to be complicated, so keep it simple. The key is to start, and where you are today is the best place to begin.

2. Engage an independent advisor. While your family is unique, and has an amazing story and history, families are families and many face similar challenges. Having someone with specialized experience, knowledge, and independent thinking can be a valuable partner.

3. Establish a forum for discussions. There is a role for everyone. Encourage honest conversations, without judgment. It’s not a marathon, but a relay where one generation will pass the baton to the next. Know that in the end you will be stronger together, and more will participate if they feel they can be heard.

4. Include everyone that wants to be involved. From G2 and beyond, remaining engaged in the family business is a choice. Work with those who are willing, and allow those who want out a strategy for exiting. (They can leave the business, but they aren’t leaving the family.)

5. Be clear. Decisions will have to be made, and it is unlikely any decision will be made that is agreed to by everyone. Listen, include, and make sure all understand how decisions will be made.

6. Commit to the process. It may be like a roller coaster ride, with all the ups and downs, twists and turns. It is a continuous process, that must be repeated over and over as the family grows and their needs change. It will take time and great effort, but sticking to the process will lead to progress.

James Baughman is the Founder and President of CJN Advisors, LLC, a firm that provides board, management, and business advisory services for family businesses. Baughman has extensive experience in leadership and governance, with a proven ability to find creative solutions and deliver strategic results.