• Company employees draft the annual operating plan for approval by the board of directors. Nonoperating family owners aren’t involved.

• The family (or family council) defines the family employment policy for discussion with the board of directors, and the policy is reviewed every five years. Company employees are not involved.

 

  Although not everyone in a family has an interest in governance, with the privilege of ownership comes the corresponding responsibility. The learning curve for family governance can be steep, and experienced leaders often take for granted the volume of knowledge accumulated over time. To address this, many families include education and training for the rising generation in their governance design so they gain confidence and feel prepared for the responsibilities of ownership. Good governance will outline what’s required to participate in the family business, which helps family members decide whether they even want to participate.

  Conversely, with the responsibility of governance comes the corresponding privilege. In addition to decision authority that comes with various leadership positions, governance roles are sometimes paid positions and rotate between family members.

  Governance design should change over time to meet the changing needs of the family and/or the business. For the entrepreneurial generation, governance is usually “whatever Mom or Dad says.” In the next generation, siblings share decisions, and by G3, when cousins and multiple generations are involved, complexity grows, and decisions can become knotty, making governance more important than in earlier generations.

  One caveat about governance: governance is “necessary but not sufficient” in that it provides meaningful support for families with a healthy culture, but good structure cannot salvage a family suffering from high dysfunction. As highly esteemed family business consultant Matthew Wesley says (riffing off Peter Drucker’s quote), “Culture eats structure for breakfast.” Investing in a healthy culture means both development of individuals and the group.

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COMMON GOVERNANCE TERMINOLOGY

  For readers who are unfamiliar with some of the family business governance terminology, here’s a brief definition of terms:

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IN THE DOMAIN OF FAMILY GOVERNANCE

  Governance in the family domain defines the shared purpose of the family business: why be in business together? This is an important foundation because, without buy-in to this shared purpose, subsequent decisions about the family and/or business lack a “true north” to guide decision-making. It’s the family’s responsibility to define and uphold its shared purpose, values, mission, and vision for the business so the business operators are clear on the family’s expectations.

  Widening the lens beyond family business, family governance is also relevant for family enterprises—families who have sold their business and are stewarding shared assets together for current and future generations. The scope of responsibility often broadens to include family investments, philanthropy, tax and estate planning, trusts, financial planning, etc.

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Family Meeting (or Family Assembly)

  Often an annual meeting, the family assembly gathers all members and generations of the family together, regardless of who owns shares. Sometimes, the meetings are split into two age groups. The “adult” meetings focus on learning about the family business, general business skill-building, broader family member updates, and changes in ownership. The “children” meetings focus on developing relationships between siblings and cousins, along with some higher-level learning about the business and any stewardship responsibilities that they may grow into in the future.

  The family assembly gives all family members a platform to voice their opinions, grooms the rising generation for future leadership opportunities and/or a board position, and fosters intergenerational connections. When the family has grown too large to make efficient and productive decisions, the family assembly forms a family council, which functions as the family assembly’s executive committee.

 

Family Council

  The family council, a representative subset of the family assembly, is the setting for determining the rights, responsibilities, and privileges of ownership. It provides a forum for difficult family discussions, regulates family activity within the business and plans, and prepares for future leadership and ownership succession. Responsibilities may include:

• Crafting and maintaining the family constitution and family charter

• Planning family meetings

• Strengthening loyalty and trust within the family

• Celebrating family traditions and achievements

• Strengthening communication between the family and the business

• Crafting and maintaining policies related to family employment, business education, conflict resolution, dividends, philanthropy, family bank, family communication protocols, and/or qualifications for the board of directors and family council participation.

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  The family council usually meets a few times per year. It has representation from each branch of a family, as well as from all living generations, so it accurately reflects the composition of the full family. Council meetings are typically held in a professional manner, with clear agendas, meeting minutes, and recording history. Because trust can be so tenuous in a family business, open communication and appropriate transparency is essential.

  The roles within the family council, such as family council leader and various committee chairs, provide family members with an opportunity to be family leaders without necessarily being employed by the family business. Sometimes, these leadership positions are paid positions (they can become time-consuming!), and they often rotate within the family.

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Family Constitution

  The family constitution is the written documentation of the family’s shared purpose, mission, vision, and values, and it outlines how the family will make important decisions. It is typically amended by the family council, subject to approval from the family assembly. Because of the overlapping impact on the business, the constitution is sometimes drafted in consultation with the company board. The family constitution includes the family council charter (see below), which documents the family council’s governance agreements. Although not a perfect analog, the family constitution can be to the family what bylaws can be to the company’s board.

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Family Charter

  The family charter captures the family’s agreements in the form of policies. To ensure clarity on the process, many family councils create a family charter that documents the governance agreements— the who, what, when, where, and how decisions will be made within the family council. This includes who votes, what threshold must be met for a decision to pass, where and how often policies can be changed, etc. The charter may also include guidelines on codes of conduct, family employment policy, operations, funding, budgets, family accountability, and role descriptions. Examples include the family employment policy, which outlines the conditions under which family members work in the business, and the vacation home policy, which outlines how family members agree to share vacation home(s).

 

Family Office

  The family office is an administrative and investment center, overseen by the family council, that typically houses the family philanthropy, family bank (loans and investments in family member ventures), trusts, taxes, insurance, estate planning administration, and other administrative functions that serve the needs of the family (such as maintaining family vacation homes and other shared assets). To prepare for sudden or planned generational transfers of ownership, the family office usually ensures that family members have written estate plans, and the business has emergency and long-term succession plans in place.

  The family office often employs nonfamily members and maintains relationships with the family’s external advisers, such as attorneys, accountants, coaches, financial advisers, psychologists, concierge medicine centers, drug/alcohol rehab centers, and assisted living facilities. Because single-family offices can be expensive to maintain, many families choose to leverage the services of multifamily offices that specialize in efficiently serving the needs of many families concurrently.

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IN THE DOMAIN OF BUSINESS GOVERNANCE

  As family businesses mature, so does their corporate governance. In the founder stage, decisions tend to be unilateral and informal. As ownership becomes more distributed, oversight typically evolves into a family-only board, an advisory board, and eventually a fiduciary board with formal legal responsibilities.

  The purpose of the family business board is to represent the interests of the shareholders (usually the family owners) who set direction on risk/leverage tolerance, significant merger/acquisition/ divestiture activity, board composition, expected investment returns, share dilution, and core values.

  The board holds management accountable for developing and delivering on a strategy that supports the vision, mission, and values set forth by the shareholders. It sets business policy, ensures proper succession planning, monitors family involvement, evaluates liquidity alternatives, sets CEO compensation, and assesses CEO (and sometimes executive team) performance. The ideal board stays strategic, not operational.

  Because there can be some overlap between the family and ownership governance responsibilities, good coordination and communication support collaborative decision-making across governance domains.

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Advisory & Fiduciary Boards

  Advisory boards and fiduciary boards differ in significant ways. Advisory boards give advice that the management team is not obligated to take. Often supplementing the leadership team’s skills and knowledge, advisory board members do not have any fiduciary responsibility and are not authorized to request information from management. They see only what management chooses to share, and they have no formal mechanism for holding management accountable.

  Fiduciary boards have legal responsibilities, and management is obligated to adhere to the decisions formally adopted by the fiduciary board. Responsible for representing all shareholders, board members accept a duty of loyalty, care, confidentiality, good faith, and prudence. They must disclose conflicts of interest. They have the authority to fire the CEO, and when needed, fiduciary boards develop subcommittees such as finance and audit, compensation, and nominating and governance for focused attention.

  Advisory boards are often an interim step between a family-only board and a full fiduciary board with independent-majority members. The advisory board helps the family see the value of shifting control outside of the family and—in the process—builds trust that the fiduciary board’s duty is to serve shareholding family members. Family leaders who cede power to independent third parties can enable accountability, improve trust, and augment credibility within a family.

 

Board Member Selection

  Selecting independent third parties is a governance challenge in itself. Trust is built when board members are truly independent—and trust is at risk when board members are perceived as cronies of one or more factions within a family. The less entangled the board member, the more independent she/he is perceived to be.

  Independent board members are asked to bring unbiased, objective perspectives. The right mix of independent board members brings fresh strategy, broadened industry networks, cross-industry best practices, and challenging questions. Selecting which family members serve on the board can raise tensions, and educating family members about their fiduciary responsibilities takes time. Some family members serving on fiduciary boards mistakenly serve their own interests instead of representing the interests of all shareholders, which puts them at risk of violating their fiduciary duties. Serving on a fiduciary board is a substantial responsibility.

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IN THE DOMAIN OF OWNERSHIP GOVERNANCE

  When ownership is not entirely contained within the family, separate ownership governance can exist. Unless managed within the family domain, the ownership domain governs what business to be in, the expectations for return on capital, shareholder risk tolerance, stipulations in buy-sell agreements, shareholder meetings, and expectations for shareholder liquidity needs. It may also establish the ownership criteria for family members, maintain a shareholder agreement in support of succession objectives, and provide a forum for discussing wills and estate planning.