Each business family has its own culture, strengths, idiosyncrasies, points of contention and shared history. That’s why each family must do its own work to develop policies and processes — a structure built on the foundation of someone else’s family values probably won’t work for your family.
Even so, there are certain essential principles that generally apply to multigenerational business families who aspire to be conscientious stewards of their entrepreneurial legacy.
Understanding these principles can help clarify several aspects of family business governance — why it’s needed and what practices tend to work well.
1. It’s easier to handle sticky situations in a high-trust culture. High trust — both within the family and between family stakeholders and non-family executives — increases the likelihood that business decisions will be made in the best interests of all shareholders. While some families are naturally trusting, others must work to build trust.
2. Family governance is hard work — but you need to do it. Few people look forward to discussing tough topics, but those issues must be put on the table at family meetings. If they aren’t, there’s little chance that they will be resolved. Many families have found professional facilitators to be helpful in starting these conversations and keeping them on track. Ultimately, however, it’s the family members who must work together to achieve a resolution. If the family doesn’t participate collectively, the results of the process are likely to be ignored.
3. “Best practices” may not be the best options for your family. Some structures or processes implemented by other families may not work well for yours. You might be able to modify a strategy to make it work within the context of your family culture. But sometimes your family might need to invent its own solution from scratch.
4. The process of working through issues is as important as the result. Merely sitting down together to discuss potential solutions is significant progress in itself. The shared experience of working together builds trust. Even if an issue is settled in a way that’s not to everyone’s liking, people will feel better about the result if they feel their voices were heard and the decision-making process was fair.
5. A good place to start is by focusing on what family members have in common. Many families begin their governance journey by creating a list of shared family values and family mission and vision statements. This exercise emphasizes unity and reinforces positive feelings about family membership. When disagreements bubble up in the future or questions arise about the right thing to do, reviewing the family values often provides clarity. Some families begin every family meeting by reviewing their family values.
6. Investing in governance and family member development pays long-term dividends. There are costs associated with governance. Expenses can include consultants’ fees, family members’ travel reimbursement, facilities rental for family gatherings, admission to educational programs and compensation for board members. Wise families consider their governance budget as an essential investment in their business — especially after weighing it against the cost of not doing this work.
7. Several family business challenges can be predicted. It’s best to get out in front of them. Family business disagreements generally are sparked by growth or change in the family or the business (for example, the increased number of stakeholders in later generations or the need to invest profits to expand or diversify the family firm). Proactive families anticipate such changes and create strategies to manage the associated challenges before they arise.
8. A consultant can help you resolve your issues — but make sure you hire the right one. Check references to determine how many family business clients at your generational stage the consultant has helped, and how familiar the person is with family business systems, governance structures and documents. It’s also important to assess whether the consultant understands your family values and is able to create an atmosphere where all family members feel comfortable speaking about difficult issues. Can the consultant relate well to all members of the family, regardless of age, gender, marital status, etc.? Is the consulting firm trying to sell you a product — and, if so, is it a product that can actually help you?
9. The third generation is generally a pivotal one in the evolution of a business family. In Generation 3, most family trees have sprouted branches. The households may be geographically dispersed, likely with different numbers of children and different income levels. They may not share the same political or religious beliefs. Since the family no longer sits at the same dinner table, those outside the family firm don’t get news about it on a nightly basis. At this stage, conscious effort may be required to unite family members in support of the family business — or even just to make sure the cousins, who are or will be business partners, get to know each other.
10. Unwritten rules and unenforced policies put pressure on the family. Many families first realize they need governance when their rising-generation members begin to come of age and express interest in entering the business. Creating a family employment policy will manage expectations about qualifications for joining the family firm and clarify that family members are not guaranteed jobs in the company. This tends to spark the family’s realization that other documented agreements are needed, as well.
11. Family governance documents should not just sit on a shelf. A family constitution (usually encompassing values and mission statements, policies and procedures, charters for family governance bodies, and job descriptions for key governance positions) should be considered a living document. In order to fulfill its purpose in guiding the family, the constitution should be referred to frequently. Although a family constitution is not legally binding, the goal is for family members to consider themselves morally bound to its provisions. The constitution and other key family documents, such as the shareholder agreement, should be reviewed periodically to see if they require alteration because of changes in family circumstances. During this review period, the family should also determine whether additional policies are needed.
12. Communication and transparency are essential in multigenerational business families. Putting a priority on “investor relations” builds trust between the family shareholders and the business leaders. Shareholders who are denied access to information about financial results or key business developments tend to be less committed than informed owners. There should, however, be an understanding that certain information must remain confidential. It’s also important for family members to feel free to express their concerns. Lines of communication should be established so that family members go through a liaison, such as the family council chair, rather than contacting management directly. Larger families also need a way to communicate family news, like a newsletter or family internet portal. That keeps family members connected and united.
13. Family members must be educated about the family’s business legacy. Educated family members become committed stewards of the family enterprise. Family education programs can be created by the family council or developed with the help of a consultant. The most comprehensive programs include curricula for children of all ages, young adults, and married-ins or significant others. Topics include a history of the family in business, the family values, philanthropy, financial basics such as how to read a balance sheet, and information related to the family business and its industry. Educational programming has another benefit, too — it brings cousins together in a business context.
14. There are many ways for family members to contribute and lead. Family business leadership opportunities aren’t limited to the C suite. Roles beyond the business could include family council members, meeting planners, newsletter writers, family education curriculum developers and organizers of philanthropic activities. Those who excel in such roles might be interested in a development path that could culminate in taking on a key position such as family council chair or family business board member.
15. The “benevolent dictator” model doesn’t work well in large families. In the founder and second generations, the founding patriarch or matriarch makes all the decisions. When family business ownership is spread among multiple households, family members generally begin to clamor for a more inclusive approach to decision making. Also at this stage, more work is required to keep family members educated and informed about the business. At this point, families often form a family council to coordinate tasks and give more people an opportunity to participate. In the fourth generation and beyond (depending on the size of the family), it might be expedient to create an additional governance body, often called an owners council, to deal exclusively with issues pertaining to shareholders of the business.
16. Income disparity among households is a reality in multigenerational families. At some point in the life cycle of a family firm — often at the outset, but sometimes not until the third generation — business leaders will realize that welcoming every family member into the business and paying them all the same salary isn’t practical. Families need to understand the difference between what is “fair” and what is “equal” and engage in frank discussions on this topic, if necessary. Establishing a dividend policy can provide needed liquidity for shareholders while preventing excessive strain on the business.
17. “Professionalizing the family business” doesn’t mean separating the family from the business. While it may be wise to hire non-family executives to manage the business and independent directors to provide strategic oversight, the family must not remove itself entirely from the business. Family members must be developed as engaged, responsible owners and stewards of the business who serve as partners with the board and management. If the family does not step up to assume its role, the business will suffer.
18. The best way to find out what family members are thinking is to ask them. Consider surveying the family to identify areas of concern or get their views on recent programs or activities. Invite dissenters to comment before final decisions are made; better yet, welcome them into the group that makes the decision. Include next-generation family members on the committee developing NextGen educational programs and social activities.
19. The need for formal succession planning should be obvious, but many family businesses neglect it. A succession plan should be documented — including a timeframe for developing the future leader and an emergency plan in case disaster strikes before the successor is ready. It’s important for the plan to be communicated in advance to the family and other key stakeholders. Multiple studies have found a significant percentage of family firms falling short in this area. Succession is a multi-stage process, so ample lead time must be built into the plan. An effective independent board will hold the CEO accountable for succession planning and make sure the process is on track.
20. The leadership needs of the business in the future will be different from its leadership needs today. In the next generation, the business will likely have grown. Technological advancements and changes in the competitive marketplace will have sparked new customer expectations. The family will also have expanded, with a different set of family dynamics. The next CEO must have the right skills and the right leadership style to guide the business in this future landscape. Succession planning should involve an assessment of future needs, not a search for someone whose strengths mirror those of the current leader.
21. The family must reach agreement on risk tolerance. Family business owners tend to have a conservative attitude toward debt, but borrowing can help a business capitalize on opportunities. The family must work together to determine how much risk they’re willing to assume and how they feel about taking on a partner (for example, a private equity investor or a family office investing directly in the company).
22. Solid family and business governance are essential prerequisites to hiring a non-family CEO. Talented executives seek assurance that they’ll be given the freedom and support they need to do the job. Family firms with an independent board, a high-functioning family council and strong family policies are more attractive to top candidates than family companies without this infrastructure in place. The family should be able to speak with one voice when communicating to the non-family executive, and boundaries must be respected.
23. Long-term continuity of a family enterprise often requires divestitures and creation of new businesses. Most families who have been in business together for 100 years or more have sold or closed underperforming business units and started new businesses. Research has found that the key to family enterprise sustainability is the family, not the business. The hallmarks of long-term viability are the ability to innovate, to adapt to changing markets and to make tough decisions in the best interest of the enterprise. Many family enterprises have been sustained long after the closure or sale of the legacy business.
24. An independent board with the right members is a tremendous asset to a family business. Independent members of a company’s board of directors or board of advisers bring an objective, third-party perspective and proven business experience to a family firm. They can take the heat off the CEO in family compensation decisions, assure the family that management is being held accountable and provide crucial feedback on strategy. The most effective independent board members are truly independent — not the CEO’s cronies or people who provide professional services to the company. They should have the right skills to provide strategic oversight and help the family business reach the next level of growth. And, importantly, they must understand and fit in with the family culture.
25. “Pruning the family tree” is a wise strategic move in some cases. Family shareholders who want to redeem their shares and exit the business should feel free to do so. Family governance will not function smoothly if a faction of the family doesn’t want to participate. An exit may result in fewer family disagreements and a smoother path to business growth. Having a buy-sell agreement that establishes a mechanism for the sale and purchase of shares will reduce the likelihood of conflict over the valuation.
26. Family dynamics play just as much of a role in philanthropy as they do in the family business. People often say it’s more fun to give money away than it is to earn it, but in reality, it can be just as challenging. Philosophical differences in a diverse multigenerational family can lead to heated discussions over which causes to support. Family members who aspire to jobs in the family foundation or seats on the foundation board must be qualified for those roles; problems will arise if the family views its foundation as a place to employ underperformers.
27. Family meetings must include opportunities for fun and bonding. If your family gatherings focus entirely on business and education, interest in attending will decline. Fun activities — a family softball or soccer game, group tours, trips to the lake — will enable cousins to get to know each other and create the “glue” that keeps the family together. Many families hold family assembly meetings (gatherings of the whole family) in fun locations. Some also build in time for the extended family to participate in a charitable activity together.
28. Some problems may need to be left for the next generation to resolve. Some controlling senior-generation members insist so strongly on maintaining the status quo (or continuing their family feud) that contentious issues must be tabled until the next generation takes the reins. Many families have had breakthroughs when a NextGen steps up with a strategy to escape from the dysfunctional dynamic.
29. Sharing your stories with other family business owners can be revelatory. Owners of private family companies are understandably reluctant to discuss family issues in public. While that strategy may keep their name out of the newspapers, it also leads to a feeling of isolation. It’s very likely that another family has confronted an issue similar to yours and found a resolution that might also work for you, perhaps with modifications. There are many opportunities for family business owners to get together in a confidential setting. Taking a risk may have a high payoff.
30. It’s possible to have a family business without any family members working in the business. If the next generation isn’t interested in spending their careers in the family firm but feel strongly connected to the business and are willing to put in the work to create solid family and business governance, the business could continue as a family-owned, professionally run enterprise.
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