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Why family businesses might consider putting governance structures in place

By Stephen Cowburn

The buzzword of recent years is professionalising the management of family businesses.  Not only does this mean appointing talent at the top of the organisation be it management or having a NED to advise and seek counsel from, it also means confronting the way families manage the business.

Family businesses represent the merging of two systems – those of the business and the family. The drivers of the two systems are different. Business is about taking risks as opportunities present themselves. Families operate differently – often it is about maintaining harmony and so being risk averse. Problems occur when the two systems collide.  This is where governance structures come in – to assist families manage the predictable problems.

Some predictable problems l have come across are succession, dealing with conflict between family members, dealing with underperformance by a family member, employing family members (or not) in the business.

One aspect of a governance structure is the creation of a family council.  In the early days this may be an annual event where the MD (father or mother) tells the family about the business – what it does, how it is doing, its plans for the future. In practical terms this is about managing expectations regarding dividend payments and may even be a subtle PR campaign to encourage children and other relatives to consider joining the family business.

Over time the family council is likely to evolve once the reason for the family business has been established.  If the purpose of the family business is to build a legacy company for the next generation to own and possibly manage, having a family council as a forum for family members to ask questions, make comments and generally open up the lines of communication enables the family to unite behind common ideals to present to the MD for him/her to take to the Board.

Not having this forum can mean that individual family members may put conflicting views to the MD or worse go direct to the Board to comment on dividend policy or investment plans or family appointments so confusing ownership and management and potentially causing division in the Board.

Another key aspect of governance is having a family constitution which states the policies on how the family is going to interact with the business and deal with the predictable problems inherent in family involvement in business.

Family constitutions may have some generic headings but the benefit of them is the process the family goes through in identifying the problem and then codifying an approach that works for them. Some of the predictable problems have been mentioned above.  The key here is to create space to discuss these situations before they happen and get the family to codify their preferred response.

So, for example, the family constitution might spell out how succession is going to be dealt with.  It might state that the preference is to appoint a family member.  The process for interviewing and assessing candidates may be spelt out. More importantly however is spelling out how the situation will be managed if there is no family candidate or the family candidate is not felt to have the appropriate skills for the business at the time. As a result of discussion the family constitution might go on to add that external candidates may then be considered in such a situation perhaps on a short term interim basis or more permanently.  Detail about remuneration and equity may also be enshrined in the document.

The important point is that there are no right answers, it is what works for the family. Talking through predictable problems as a family binds the family closer together and enables different views to be heard and discussed. What sounds right for the family now, may well change in the future.  Family constitutions are live documents and should be reviewed every few years to ensure they still reflect the family’s wishes.  The review might be part of the role of the family council.

As families expand, there is greater scope for a difference of views particularly on the purpose of the business.  Is it a regular dividend provider or is serious investment required to realign it to the changing needs of the market. As a family shareholder’s personal situation alters, expectations may change as to what the business can do for them. For example, will it provide me with a job to provide an income following redundancy?

Having governance structures in place allow the family to think about the business and its relationship with the business without interfering in the day to day management. They also provide a mechanism for dealing with diversity of views and expectations. They start the process of professionalising the family’s relationship with the business.

For a confidential discussion on how governance structures might help your family business, please contact Stephen Cowburn or use the contact link below.

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