September/October 2016 Openers

Ask the Experts: How should we budget for family governance?

What is the best way to determine an appropriate amount that a multigenerational family-owned business should spend annually on family governance, leadership development, education, communication and engagement?

What is the best way to determine an appropriate annual investment for family meetings and other social activities to foster good relationships and cohesiveness?

What is the most advantageous way to fund these expenditures—as a reduction of dividends, by the company from corporate profits or cash flow, or through some other means?

Advisers' and family members' replies:

In our study of more than 70 large, global 100-year business families (reported in several working papers, including "Good Fortune" and "Releasing the Potential of the Rising Generation"), we found that one of the most striking aspects of these families is that they invest in the development of governance and next-generation engagement.

In a large family, moving to include 20 or more family members, the commitment can be quite extensive. Meetings, consultants, family retreats, educational programs and communication platforms can add up to a huge expense. Each of these families has in effect made the choice: We have a profitable business and family resources, and we want to invest them in the development of family cohesion and development.

While the expense ultimately comes from the family resources, the mechanism for doing that varies. If the family has a family office, the cost often is part of its annual budget. If the family has a privately held family business, the cost can come from the profits, or it can even be allocated as a business expense. However, if there are non-family owners (or if the business is owned by two unrelated families), the family cannot take the expense directly from the company; it must be taken from the profits. The cost of family governance et al. is a family investment in the future, similar to a family business decision to reinvest some of its profits in the company to support future growth and sustainability. The family discusses the matter and makes a shared decision to reinvest in this way.

That said, every family has a different legal and organizational structure for holding family assets. One family, for example, had multiple individual trusts that were administered by a family trust company; they took the cost of governance out of multiple trusts. This is a decision based on rules and how wealth is structured, rather than on any family intention.

The principle involved is clear—the family has made a choice to invest in its future by funding the support and development of a connected, engaged and skilled family, and they make this commitment before distributing funds to individuals.

How much will this entail? When all of the desired activities are added up, some family members might experience sticker shock. The test of their intention then comes with funding the budget. Because family members have different goals for their governance, engagement, communication and education programs (and, of course, families can encompass vastly different numbers of people), there is no way to prescribe an amount. But it is higher than most people imagine.

In the most successful families, a family council or similar group must create a budget that is submitted to the family board, and then make sure that the funds allocated are spent wisely. Considering the size of the budget, the family should decide on each item. This ensures that there is participation when events are planned. It also ensures that family members understand there is a cost to what they are doing, and that they have to commit to each other to receive the benefit they desire.

Dennis T. Jaffe, Ph.D.

Wise Counsel Research

When Jim Warjone, our third-generation CEO, chose to begin our family governance program, he explained to the board and to the family: "Investing in your investors is a wise business decision." His words form the cultural basis of Port Blakely's decision to fund investor activities as we currently do. Our present CEO, Rene Ancinas, stated, "It is less about ‘costs' and more about investing in cohesion and strongly aligned ownership."

Our nine-member family council holds four weekend meetings a year in addition to the three-day annual meeting. The family council budget is quite easy: We have no income, only outflow! However, such a trite statement does not explain the substantial positive impact that developing an educated and emotionally connected family has on the business. How does one measure those outcomes? For us, family governance has resulted in greater stability of the business and deepening relationships among the board, management, employees and family members.

At present, our annual budget covers the costs for nine council members, a non-family liaison (our human resource vice president) and our CEO. The latter two employees are non-voting company representatives. In the 16 years our family council has existed, the budget and allocations have varied. Ordinarily, the budget for the family council is a very minor percentage of the company's gross income, roughly equivalent to the company's annual charitable giving budget.

Our annual budget is broken into six categories: (a) Management Services, which includes meeting fees and annual stipends; (b) Travel and Meetings, which also includes the expenses for four council members to attend Transitions West as part of leadership development; (c) Meals and Entertainment, which does not mean fun and games, but rather allows us to take occasional forest tours or to visit places connected in some way with the business or the family; (d) Professional Services, such as training by hired consultants in whatever way may be helpful or needed; (e) Recognition Gifts for members at the end of their service on the council; and (f) Office Supplies and Website Maintenance, though a lot of website work is now accomplished by the family council's communications committee.

Our budget is all part of the company's budget for investor relations. It comes neither from the dividend program nor from the redemption program, but rather from cash flow. Again, this funding practice goes back to the undercurrent philosophy, "Investing in your investors is a wise business decision," especially when those investors are your relatives!

This investor-focused culture is also behind the company's practice of paying for all family members to attend the annual meeting. We define "family" to include all descendants, adoptees and married-ins (including domestic partners and engaged ones). Costs for annual meeting attendance, including most social activities, are paid by the company and are not included in the family council budget. However, as CEO Rene Ancinas pointed out, "During difficult economic times, and at the family council's recommendation, the company has tapered back the annual meeting and family council activities as a sign of solidarity with the company. While this may not have a large material effect on finances from an overall company standpoint, the demonstration of support for the company goes a long way to send a message to everyone that the family wants to exhibit responsible ownership in all its many facets."

Charlotte E. Lamp, Ph.D.

Shareholder, Port Blakely Companies

Founder, Rockwood Consulting LLC

While having a rule of thumb, such as a percentage of profits, would be helpful in determining a family budget, the driving factors are too complex to define a simple metric. When setting a budget, a family must take into consideration its culture, climate and goals.

How does your family feel about spending money on nice trips? Do you value investment in education? Should service to the family (such as family council members) be paid or volunteer positions? Answers to questions like these can help you determine your family's culture.

Similarly, climate affects financial allocations. If the economy is suffering or your business is facing a downturn, it may be a time to rein in expenses. Even if funds are available for a lavish family vacation in a slow economy, the signal sent to employees who are facing layoffs, hiring freezes or suspension of raises may be inappropriate.

Ultimately, the primary driver of budget should be the family's goals, such as:

• Next-generation leadership development.

• Investment in family relationships.

• Development of family policies or governance structures.

• Definition of ownership vision and financial objectives.

• Improvement in communication infrastructure (e.g., website, news­letter).

• Educating the family about ownership roles and responsibilities.

Goals should be filtered through the lenses of culture and climate to determine an appropriate budget. There are cost options for achieving goals, such as inexpensive webinars vs. contracting speakers for a family event or holding a family meeting at corporate headquarters vs. a high-end resort.

As families get larger, family meetings also have an impact on the budget. We find that families who meet twice a year are more cohesive than those who meet less often. Ideally, one shareholder meeting is held at headquarters with presentations by management and the other meeting focuses on building family relationships. Some families hold their family-focused meeting at a resort location annually, while others save up for a destination trip every few years. Beyond location, the cost depends on the geographic dispersion of family members, extracurricular activities and whether the family pays for its travel to meetings.

In addition to family meetings, budget categories can include:

• Communication (newsletter, website).

• Seminars/education (family business conferences, paid webinar series).

• Consulting resources (meeting facilitation, assistance in family policy/governance development).

• Compensation (family council members, family council assistance).

The budget process should start by defining goals and then establishing budget categories. Draft a budget, evaluate based on affordability and adjust accordingly. This final step requires consideration of the various sources of funding. Most families pay for family meetings out of business profits, but you should consult with your accountant about allocating family expenses to the business. Typically these expenses can come under the heading of shareholder relations. Some allocate a percentage of dividends to pay for family expenses—the downside being that these expenses are paid after taxes. Some families establish trusts or contribute to a family pool to fund family engagement.

Regardless of your culture, climate and goals, developing a budget forces the family to reflect on its objectives and appreciate the investment made in the family. Similarly, it encourages management to reflect on the importance of maintaining a strong shareholder base and the investment required to achieve cohesion. Investing in family sends an important signal that the business is committed to its owners and vice versa.

Jennifer Pendergast

Senior Consultant

The Family Business Consulting Group

How much should a family business spend on family? Many families that I work with struggle with this question. My rule of thumb is that a company should be prepared to spend as much on the family as they do on their corporate board for two simple reasons:

First, the biggest risk that a family business faces is the family itself. If you ask the management team of a family business to name the biggest risks that the company faces, they will cite market pressure, competitors, etc. Most of these risks will manifest themselves slowly over time. The risk of the family can escalate to a point of causing significant damage to the business in a matter of weeks through a well-timed lawsuit or a family blowup.

Second, a family business's biggest asset is the family. Family provides patient capital, they act as stewards and they make values-based decisions about how to care for employees. Research by Ernst and Young ("In harmony: Family business cohesion and profitability. Initial findings from the global survey of the world's largest family businesses") found that families who are highly cohesive increase their Return on Equity by 35%. These companies also brand their businesses as family businesses; they focus on growth and sustainability.

What should a family do to mitigate the risk and maximize the benefit of being family owned?

• Focus on transparency about the business and its operations. This is the context for why the family is still working together; the family should understand what is going on.

• Ensure that the family council is doing meaningful work in order to help the family serve as good stewards of the business.

• Create an inclusive and transparent decision-making process regarding family governance and conflict management.

• Focus on building working relationships with all family members. Friendships and close family bonds will often come after the family has learned to work together.

• Make time for family socializing every time the family gets together for the business.

• Ensure that the youngest generation is getting acclimated to the business and family early.

Building a highly cohesive family that is adding value to the business requires a significant investment. Here is what I recommend the company and family should pay for:

• Travel and hotel for all family members, including the youngest generation.

• Youngest-generation babysitter, outdoor educator, activities, resources, tours and educational events.

• Meals.

• Meeting rooms.

• Family council chair compensation.

• Development and education expenses to ensure the current and next generations are capable of leading and stewarding the business and board.

The business and family can, and perhaps should, share the cost of the family council. How the family and business divide the mix is unique to each family, but there is one thing they all have in common: They all believe the work of the family council is vitally important for the overall success of the company.

Meghan Juday

Family Council Chair and Director, IDEAL Industries

Advisory Board Member, Initiative for Family Business and Entrepreneurship, St. Joseph's University

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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