Family Business Governance

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 05, 2024

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What Is Family Business Governance?

Family business governance refers to the systems, structures, and processes by which family-owned businesses are managed and controlled.

It aims to strike a balance between the interests of the family and the business, ensuring the long-term success and sustainability of the enterprise.

Effective governance can help prevent conflicts, facilitate smooth transitions, and foster a strong foundation for continued growth.

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Taylor Kovar, CFP®

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I'm Taylor Kovar, a Certified Financial Planner (CFP), specializing in helping business owners with strategic financial planning.

I focus on creating clear succession plans, forming family councils for open communication, and drafting shareholder agreements to prevent disputes. These steps help ensure smooth leadership transitions and maintain family unity while supporting the business's success. Looking to strengthen your family business for future generations? Let's work together on a governance plan that nurtures your legacy and supports growth.

Contact me at (936) 899 - 5629 or [email protected] to discuss how we can achieve your financial objectives.

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Key Components of Family Business Governance

Family Constitution

A family constitution is a formal document that outlines the values, principles, and policies guiding the family's business involvement.

It is a foundation for decision-making and provides a clear roadmap for the family's roles and responsibilities.

The constitution should be developed collaboratively, with input from all family members, to foster a sense of shared ownership and commitment.

Board of Directors

The board of directors is responsible for the strategic oversight and direction of the business. In a family-owned enterprise, the board should include a mix of family members, independent directors, and non-family executives.

The presence of independent directors can help mitigate potential conflicts of interest, bring in fresh perspectives, and ensure that decisions are made in the business's best interest.

Family Council

A family council is a formal body representing the family's interests in the business. It provides a platform for communication, decision-making, and conflict resolution among family members.

The family council can help maintain family harmony, preserve the family's values and culture, and facilitate the integration of new family members into the business.

Shareholder Agreements

Shareholder agreements govern the relationship between the family shareholders and the business. They define the rights and obligations of shareholders, including provisions related to the ownership transfer, voting rights, dividend policies, and conflict resolution.

These agreements can help prevent disputes and ensure a smooth transition of ownership when the time comes.

Succession Planning

Succession planning is the process of identifying and preparing the next generation of leaders to take over the family business.

It involves the development of a clear and comprehensive plan that outlines the timeline, criteria for successor selection, and training and development programs.

Succession planning is crucial for ensuring the continuity and long-term success of the family enterprise.

Key Components of Family Business Governance

How to Establish Family Business Governance

Identify Core Values and Mission

The first step in establishing family business governance is to identify the core values and mission that underpin the family's involvement in the business.

These values and mission should be clearly articulated and shared among all family members, providing a common vision and purpose for their collective efforts.

Develop a Family Constitution

To create a family constitution, family members should come together to discuss their goals, aspirations, and expectations for the business.

The constitution should include sections on the family's values and mission, the roles and responsibilities of family members, governance structures, and policies related to decision-making, communication, and conflict resolution.

Once completed, the family should formally adopt the constitution and review it periodically to ensure its continued relevance and effectiveness.

Form a Board of Directors

Composition and Qualifications

The composition of the board of directors should reflect a balance between family members, independent directors, and non-family executives.

Family members who serve on the board should possess relevant skills, experience, and a commitment to the success of the business. Independent directors should be selected based on their expertise, integrity, and ability to provide objective advice.

Roles and Responsibilities

The board of directors is responsible for setting the strategic direction of the business, monitoring performance, and ensuring that the company adheres to relevant laws and regulations.

The board should also provide guidance and support to the management team, evaluate the effectiveness of governance structures, and address any potential conflicts of interest that may arise.

Board Committees

To facilitate the efficient functioning of the board, various committees can be established to focus on specific areas, such as finance, audit, strategy, and governance.

These committees should be comprised of a mix of family and independent directors with clearly defined roles and responsibilities.

Create a Family Council

Purpose and Objectives

The primary purpose of a family council is to serve as a forum for communication, decision-making, and conflict resolution among family members.

Its objectives include preserving family values and culture, facilitating the integration of new family members, and promoting family unity and harmony.

Membership and Structure

The family council should be inclusive, with representation from all branches of the family. Its structure may vary depending on the size and complexity of the family, but it should include a chairperson, secretary, and other roles as needed.

The council should meet regularly, with a predetermined agenda and clear procedures for decision-making.

Meeting Frequency and Agenda

Family council meetings should be held on a regular basis, with the frequency determined by the needs of the family and the business.

The agenda for each meeting should be prepared in advance, focusing on key issues that require discussion, decision-making, or input from family members.

Draft Shareholder Agreements

Ownership Structure and Transfer

Shareholder agreements should clearly outline the ownership structure of the family business, including provisions related to the transfer of shares between family members and restrictions on the sale of shares to external parties.

These provisions help maintain family control and ensure a smooth transition of ownership when needed.

Conflict Resolution

Shareholder agreements should also include mechanisms for conflict resolution, such as mediation, arbitration, or other forms of dispute resolution.

This can help prevent disputes from escalating and damaging both the family and the business.

Dividend Policies

Dividend policies should be clearly defined in the shareholder agreement, specifying the criteria for dividend distribution, the frequency of payments, and any restrictions on dividend payouts.

This can help ensure that the financial interests of all shareholders are protected and managed fairly.

How to Establish Family Business Governance

Family Business Governance and Succession Planning

Importance of Succession Planning

Succession planning is crucial for a family business's continuity and long-term success. It helps to minimize the risk of a leadership vacuum, ensure a smooth transition of management, and maintain the stability and reputation of the business.

Identifying Potential Successors

The process of identifying potential successors should be objective, transparent, and based on predetermined criteria, such as skills, experience, education, and leadership qualities.

Family members should be encouraged to pursue their interests and develop their abilities, allowing the most suitable candidates to emerge as potential successors.

Training and Development

Once potential successors have been identified, they should undergo a comprehensive training and development program to prepare them for future roles.

This may include job rotations, mentoring, formal education, and exposure to different aspects of the business.

Transition Process and Timeline

A clear transition plan should be established, outlining the timeline for the succession process, the roles and responsibilities of the incumbent and successor, and the mechanisms for monitoring and evaluating the transition.

This plan should be communicated to all stakeholders to ensure their understanding and support.

Monitoring and Evaluating Family Business Governance Performance

Key Performance Indicators

Key performance indicators (KPIs) should be established to assess the effectiveness of family business governance.

These KPIs may include financial performance, operational efficiency, employee satisfaction, and adherence to governance policies and procedures.

Periodic Reviews

Regular reviews of the governance structures and processes should be conducted to identify areas for improvement and ensure that they remain relevant and effective.

These reviews should involve input from all stakeholders, including family members, board members, and management.

External Assessments and Benchmarking

External assessments, such as audits or third-party evaluations, can provide valuable insights into the effectiveness of the family business governance structures.

By benchmarking the performance of the business against industry peers and best practices, areas of strength and potential improvement can be identified.

Managing Conflicts and Disputes in Family Business Governance

Importance of Communication

Open and transparent communication is essential for preventing and resolving conflicts within a family business. Regular meetings, both formal and informal, should be held to encourage the exchange of ideas, concerns, and aspirations among family members.

Conflict Resolution Mechanisms

Establishing clear conflict resolution mechanisms within the family constitution, board of directors, and shareholder agreements can help address disputes promptly and effectively.

These mechanisms may include mediation, arbitration, or other forms of dispute resolution, depending on the nature and severity of the conflict.

Professional Mediation and Arbitration

In some cases, it may be necessary to engage professional mediators or arbitrators to help resolve conflicts within the family business.

These external experts can provide unbiased guidance and facilitate constructive dialogue, helping the family reach mutually acceptable solutions.

Adapting Governance to Changing Family Dynamics

Growth and Diversification

As the family business grows and diversifies, the governance structures and processes may need to evolve to accommodate these changes.

This may involve the creation of new board committees, the establishment of a subsidiary or holding company structures, or the revision of policies and procedures.

Incorporating New Family Members

As new family members join the business, the governance structures should be adjusted to ensure their integration and representation.

This may involve updating the family constitution, expanding the family council, or providing training and development programs for new members.

Adjusting Governance Structures and Processes

Continuous improvement and adaptation are key to the long-term success of family business governance.

Regular reviews and assessments should be conducted to identify areas for improvement, address changing family dynamics, and ensure that the governance structures and processes remain relevant and effective.

Final Thoughts

Strong family business governance is essential for the long-term success and sustainability of the family enterprise.

By establishing clear and effective governance structures, family businesses can maintain family harmony, ensure smooth transitions of leadership, and foster a solid foundation for continued growth.

It is important to continuously improve and adapt these structures in response to changing family dynamics and business needs, ensuring the ongoing success and longevity of the family business.

If you need guidance in implementing or improving your family business governance, consider seeking the help of a professional financial advisor specializing in family businesses.

They can provide valuable insights, support, and expertise to help you navigate the complexities of governance and secure the future of your family enterprise.

Family Business Governance FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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