Boards and constitutions put family members in their place

Putting in place formal governance structures in a family business can make all the difference when things inevitably become complicated.

While governance of the business is recognised as crucial to its sustainability, the need for governance of the family is less clear. As families-in-business grow, the needs and expectations of both the business and the family will inevitably change and, consequently, the family dynamics generally become more complicated.

Members of various branches of the family grow up under different roofs with varying understandings of where the business came from and what guiding values are important. The dominant decision maker – perhaps the founding entrepreneur – is no longer present and so decision making is often shared. Skills and expertise required for the business in the future may have implications for current or “Next gen” family members. Many family businesses simply don’t make it to the next generation because of failure to plan for and manage the interaction of the business and the owning family.

Why formalise family governance? 

The family’s contribution to decision making for the business is an interesting one – you would rightly think that the family business board is the appropriate entity to make decisions about the family business.  In addition, there may well be family members in either executive director or non executive director roles who can contribute views from the family’s perspective.

However, where families have grown and where there are multiple branches of the family, shareholdings will be more dispersed.  While it comes as a surprise to some, just because you have shares doesn’t mean you can rock up to a board meeting to give your views!

Family Council

One vehicle to formalise the gaining of family opinion on business direction is to form a ‘family council’ or ‘family forum’ where family members gather for regular updates about the business (other than the annual general meeting), discuss their views, and learn to appreciate each others’ perspectives.  There is sometimes a representative of that council/forum on the board or at least a formal channel for their views to be communicated to the board.

If a family council and/or a shareholder agreement seem too daunting for the younger and smaller family businesses, an informal advisory board may be set up where a selected group of advisors meet with key family owners to work on the business and provide that objective input needed to take the family business forward. In addition, regular meetings can be called for the purpose of keeping the wider family up-to-date with the business progress and thereby sustain their ongoing support for those working in the business day by day.

Family Constitution

Another important component of family governance is the development of a family charter or constitution which essentially documents pre-agreed rules as to how the family will participate in the management, control and ownership of the business. It will include guidelines on some of the following issues:

  • How important is it for the business to remain in the family?
  • What vision does the family share for the business to continue?
  • How both the management and ownership succession may be handled – all things being equal, does the family want a family member appointed to the senior most role? Or, will the ‘best person’ for the job be recruited?
  • What qualifications are expected for younger members prior to joining the business?
  • What ethical guidelines are important in running the business?
  • How to deal with shareholders wishing to sell their shares?
  • Where do we want philanthropic contributions to be directed?

While each of these are important questions to resolve, it is often the process of getting together for discussions that has the most positive effect – the more family members can appreciate each others perspectives without assuming that ‘just because we are family we will think alike’, the more likely they are to work effectively together. Such discussions will also help to reduce conflict between family members before that conflict becomes dysfunctional and has detrimental effects on the family business.

Robust discussions are important to fuel innovation and to stimulate opportunities for growth – these discussions can lead to the positive outcomes of conflict. If conflict is left unacknowledged it may become dysfunctional with dire consequences for both individual family members and the family as a whole.

Setting up a family council or forum, establishing a charter for the larger family business, or having regular meeting for the smaller ones is part of the professionalisation of the family business. Such professionalisation will help take the emotion out of interactions and thereby facilitate objective decision-making for the growth and development of both individual family members and the family business as a whole.

Dr Jill Thomas and Dr Chris Graves are the co-founders of the Family Business Education and Research Group and are senior lecturers in The University of Adelaide Business School.