12 Nov 2001  Research & Ideas

The Three Components of Family Governance

Having described the framework of family business governance and the governance of the business, John Davis discusses the most challenging of the family business governance topics—governance of the family itself.

 

There are three components to family governance:

  • Periodic (typically annual) assemblies of the family; all families in business can benefit from this activity.
  • Family council meetings for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business-family communication and bond.
  • A family constitution—the family's policies and guiding vision and values that regulate members' relationship with the business. This written document can be short or long, detailed or simple, but every family in business benefits from this kind of statement.

The rare family in business may have a more elaborate family governance structure, with a separate meeting for family-owner-managers or a separate council for family shareholders or periodic meetings between shareholders, the board, and management. I prefer the simplest structure that does the job and the three components above are all most families in business need.

Properly composed and managed, a family assembly and family council help:

  • Develop clarity on roles, rights, and responsibilities for family members.
  • Encourage family members, family employees, and family owners to act responsibly toward the business and the family.
  • Regulate appropriate family and owner inclusion in business discussions.

The family assembly typically meets annually, lasts one to two days, and includes all adult family members (yes, including in-laws). Families need to decide at what age children should attend these meetings. One family says that children should attend when they are able to feed themselves; most families start bringing the younger generation into meetings at around age 16. For the young children, families should still consider organizing some group activities where the children can begin to learn about the business and develop relationships with their siblings and cousins.

Basic Governance Structures of the Family Business System
Figure 1: Basic Governance
Structures of the
Family Business System

Family assembly activities include learning about the business through presentations by family and non-family managers, discussing (not deciding) the direction of the company, being educated about what the company does or about important skills like reading financial statements. It is also a good forum to get updated on changes in the family such as important events and accomplishments, and on changes in ownership. For example, have any shares changed hands since the last meeting? Are there new tax laws shareholders need to be aware of?

If your family has fifteen or fewer adults, you may be able to have in-depth discussions and create plans and policies in the family assembly meeting. When the family grows beyond this size certainly, families generally benefit from having a family council. The family council can perform all of the following duties:

  • Plan family assembly meetings, which otherwise the CEO usually has to arrange.
  • Discusses current business, ownership, and family issues and direction and keep the family informed about these.
  • Help the family reach decisions and speak with one voice about its goals.
  • Keep the board of directors informed about family views about the company and maintain a dialogue with the board about key business policies and plans.
  • Develop plans and policies, in conjunction with the board, that regulate family activity with the business.
  • Guard against family interference with the business while seeing that the family's key goals are satisfied.
  • Develop loyal, informed, contributing family shareholders.
  • Scout the family for business talent.
  • Create educational events or otherwise encourage the education of family members about the business.
  • Plan family social gatherings and rituals and help to create healthy, harmonious family relationships.

Any family council that accomplishes these tasks strengthens a family's relationship with its business and its discipline and is a valuable resource for management and the board.

The family council can be composed in several ways, the typical way being one member elected per family branch. One should try to compose the family council so that it "looks" like the family, having adequate representation of all generations, both genders, in-laws, actives and passive owners, hometown and geographically distant relatives. The family council typically meets a few times each year for one or two days each time. Most families reimburse family council members for their expenses but do not offer any compensation for their service. Other families feel at least a modest compensation is warranted and earned.

Families in business need to nurture members' feelings of trust and pride concerning the family and business as well as build a sense of teamwork to keep a family committed and disciplined in its relationship to the business. It is wise, therefore, in the family council and family assembly to emphasize consensus decisions around family goals and policies, openness to various viewpoints, as well as significant transparency in company operations, decision making, and ownership holdings. If the family is reluctant to engage in the discussions it needs to have in the family council or assembly—out of concern about potential family conflict, not understanding what these groups should do or just being shy in these meetings—hire a facilitator to help organize the meetings. Good structures that do not address the right topics are a costly waste of time.

I want to point out again that a family council or family assembly complements rather than replaces the board of directors. The family council sets policy for the family and recommends policy that concerns the family to the board, such as around family employment in the business. The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business.

The board and family council should coordinate their work and not overstep each other's domains. Coordination may take the simple form of having the council and board update each other periodically on their important objectives, having an annual joint planning session, or having a board member sit on the council or vice versa. Again, I opt for the least complicated solution to achieve adequate communication and coordination between these two groups.

The family constitution articulates a family's vision for itself and the business, its core values and the policies and guidelines that maintain family discipline. Among the policies a family council might create include:

  • Employment standards for the next generation.
  • Career development policies for family employees.
  • Family compensation.
  • Succession process, including retirement ages.
  • Ownership, including buy-sell agreements.
  • Dividends.

Because each of these topics, except ownership, are clearly business policy areas, the family council would consult with the board and get the board's endorsement of the policy before it becomes official. Typically, the family council also gets the approval of the family assembly before issuing a policy for the family.

The coordination of the family council and family assembly with management and the board on some key plans affecting family companies is shown in Table 1.

Table 1
Structures and Plans to Govern a Family Business System
STRUCTURE
PLAN CEO TOP
MANAGEMENT
BOARD OF
DIRECTORS
FAMILY COUNCIL &
FAMILY ASSEMBLY
1. Strategic Plan Initiates and
approves
Generates Consults and
approves
Consults and
supports
2. Family
Constitution
Participates in
Family Council
Coucils
and supports
Consults and
approves only
business policies
Generates
3. Succession Plan Generates Consults and
supports
Consults and
approves
Consults and
supports
4. Family Business
Leader's
Retirement Plan
Generates Aware Aware Consults and
supports
5. Family Business
Leader's Estate
Plan
Generates Aware Consults Consults and
supports

Treating the family in a more formal, organizational way can feel a bit strange at first. It may take a year or two for the family to grow into this more structured way of interacting. But the value of this process is demonstrated in the strides so many families have made with these structures. They have learned that in discussing issues that can be sensitive and raise complicated feelings, a little structure is a family's best friend.

This article is Part Three of a three-piece series. Part One appeared in September 2001 and Part Two appeared in October 2001

Read more about the HBS Families in Business program.