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One of the most valuable qualities that family businesses share is intimacy – that is why family and corporate governance is so important.
Not only do the team members know each other- they care about each other. They know the life story, the setbacks, the triumphs and the heartbreaks. It’s this solid connection that can make a family business unstoppable.
That being said, that very same quality can also lead to challenges! It’s not uncommon for that high level of familiarity to also factor into issues with communication and leadership.
Imagine for a moment that a youngest sibling has always been viewed as “the baby” of the family, but today she’s completed her MBA and is by far the best equipped to take the helm of the family enterprise. The parents and siblings will need to remove their “family” hats and replace them with their “business” hats in order to make the best decision. Knowing when to wear each hat could mean the difference between success and failure as the business transitions into the next generation.
In this sense, it’s critical that family businesses invest in two streams of management and organization: Family governance and corporate governance. In today’s post, we’ll be taking a look at why family and corporate governance are equally important in determining sustainability and future growth.
Family governance
“This is how we interact”
Family governance refers to the way in which a family works together and makes decisions regarding the business. Family governance works to increase clarity in issues like ownership, involvement in the business, and decision-making protocols.
The idea here is to establish a well-organized infrastructure that will provide family members with a clear understanding of what their unique role is, and an opportunity to share their insight, suggestions, and concerns via frequent meetings and formal documents. Like anything else in life, it’s not a precise science, and often decisions must be made in response to circumstances that are not pre-determined. But having this infrastructure in place makes communication and collaboration possible over the long-term.
In general, family governance has three facets:
Family assembly
Typically, families will meet on an annual basis in order to revisit and when necessary, revise governance issues. This gives each family member an opportunity to make their voice heard. The assembly is a gathering of the entire family– everyone who is touched by the business. That can mean in-laws, and even children depending on the rules in place around the minimum age of attendance.
During these meetings, presentations are given regarding how the business works and the direction of the business. Similar to a meeting of corporate shareholders, these meetings often focus on business results and serve as an opportunity to share important information regarding any changes to leadership, auspicious achievements, and upcoming events.
Family council
The family council is the group responsible for creating the rules, doing the planning, and ensuring that family communication remains strong. This group meets more regularly. One of the most common methods of establishing the council is to elect one member for each branch of the family. Ideally, this group would have representation from every generation and gender, have both active and passive members, and both local and geographically diverse individuals. The idea here is to ensure that all policies are created with an understanding of everyone’s needs and concerns.
Some of the most important responsibilities of the family council are:
– Inform the board of directors about the family’s views on certain topics
– Develop policies regarding the family’s interaction with the business.
– Ensure that the family’s goals are achieved while also ensuring that family members do not interfere outside their roles
– Emphasizing consensus around decisions
Family constitution
This is a formal document that outlines the family’s values and vision for how they interact with the business. These guidelines maintain family discipline and set out clear expectations for how each family member is involved.
The family constitution should be composed of some of the following:
– Ownership and buy-sell agreements
– Succession planning
– Compensation
– Standards of employment
– Policies regarding career development and education
In essence, family governance creates a structure through which the family makes themselves heard, and a vehicle through which those opinions can be communicated to the board of directors.
Corporate governance
“This is how the business is managed”
Many families will also utilize the support of family business professionals in growing and managing the business. Having the perspective, skill, and expertise of third-party professionals can propel a family business into the next level of success with impressive efficacy. The role of corporate governance is to ensure that the business is run with discipline, and that decisions are unbiased and based on international best practices.
Corporate governance is typically made up of the following components:
Board of directors
This board is comprised of individuals who have proven competence in the role. These individuals contribute quality advice that enhances the fiscal stability of the company. These decisions include selecting the CEO, hiring them and firing them, and establishing their compensation. The board also must sign off on the President’s strategy for business success.
Chairman of the board
Within a family business, the role of the Chairman of the board is often filled by a shareholder. The Chairman oversees management’s execution of its responsibilities.
Audit committee
This committee is meant to reduce the risk of fraudulent reporting. The group is responsible for monitoring the financial reporting process.
Compensation committee
The compensation committee is responsible for reviewing and approving the salaries of key executives such as the CEO, making sure that their compensation is aligned with industry best practices.
Nominating committee
The nominating committee reviews the skills of potential board members, and assesses for the performance of all members of the board.
Corporate governance committee
The governance committee stays up to date on industry trends in governance and encourages the adoption of new practices when necessary in order to maintain optimal functioning of the board and its members.
President / CEO
Accountable to the board of directors, the President works with other corporate executives to craft the formal strategy to achieve the goals set out by the family council and board of directors, and assembles the team who will execute it. The President’s efficacy is evaluated based on their ability to achieve ROI on the established priorities and to maintain and grow profitability.
CFO
This individual oversees all the financial activities of the family business. This may include the preparing financial reports, attending to cash management, sharing the general financial outlook, and also forecasting for future growth.
As we previously discussed in the Zeifmans Family Business Handbook, there are 4 main pillars of corporate governance:
Management
Establishing reporting lines, performance expectations, and regular third party reviews of management.
Control
Clearly defined rules surrounding how decisions are made should be effectively communicated through shareholders’ agreements and business policy documents.
Compensation
Employees need to receive compensation at fair market value. The key is having a structure in place, while still allowing for some fluidity in specific situations.
Equity
How the business is funded, how and when profits are distributed, and how or when ownership interests can be transferred or sold should have documented rules and regulations.
Protecting and increasing the profitability of your family business requires a level of high-touch proficiency. That’s where we can help. Backed by decades of experience assisting successful family businesses, we have a unique understanding of what it takes to achieve and exceed financial goals in both day-to-day and long-term applications. That’s because we’re a family business ourselves- now with second and third generation family members as firm partners.
To learn more about how our team can guide your family business and assist with your family and corporate governance, reach out to us today.
Supplemental insights
Ownership transition strategies: 4 factors to bridge the generation gap
6 key facets to a successful family enterprise
The Zeifmans Family Business Handbook
Planning Your Legacy: A guide to preserving and growing your wealth
