Strong governance structures can help the family business be a part of the ongoing family legacy. Here’s what to know.
At some point, owners of a family business may face an important question: How can they preserve the family business for the benefit of future generations?
Take this hypothetical example: Helen and Jane are sisters who run a business founded by their father. The business has grown immensely over the years thanks to their leadership, and they have been able to provide hefty distributions to their siblings as the business flourished.
Today, Helen and Jane are considering retirement, and they’re wondering how to position the business for future success. Their siblings have not been involved other than being shareholders, and only one of the grandchildren seems interested in the business. So what’s the next step?
A possible answer: working with the family to create a governance structure to keep the business aligned to their family’s values and set a path toward future success.
“Governance is a decision-making road map,” says Mariana Martinez, senior lead family dynamics consultant at Wells Fargo Bank, N.A. “It represents a true gift for the new generations who are committed to preserving the family legacy.”
Here, Martinez explores the key considerations around family business governance to show how it could be a fit for your family.
What are the benefits of family business governance?
Family business governance provides a guide for decision-making, which means it can help new generations of stakeholders as they adapt to changing conditions within the family, the business, and the ownership group. When done well, governance provides direction and outlines values and policies that business leadership — present and future — can adhere to.
The process of outlining and creating a formal family business governance plan is usually led by a family business consultant with expertise in the process. It may also involve other members of your support team — such as advisors and lawyers — to provide input and details for the framework as it is created.
Family business governance systems: Family, ownership, and business
For Helen and Jane, the governance process involved establishing three distinct governance groups, which all work together to align the business’s success to the family’s values, wishes, and needs.
- Family governance promotes family alignment around the business and strengthens family culture. To accomplish this, Helen and Jane brought adult family members together to form a family council. This council defined the families’ shared values and documented an agreed-upon vision and mission for the family. That mission included the intention of remaining in business together and ensuring the business’s success for future generations. The family council also elaborated a series of policies and initiatives — for example, a family member employment policy and a financial skills development program for the next generation.
- Ownership governance focuses on ensuring that the business is in alignment with the owners’ values, vision, and goals. In Helen and Jane’s case, this meant that the sibling group, all being owners, needed to educate themselves on the responsibilities of non-operating owners, as they would not have direct involvement in the day-to-day business operation but would have a role in the overall direction of the enterprise.
- Business governance regulates the operation of the business and establishes the practices and policies to run the business while balancing the interests of the company’s many stakeholders. As operating managers, Helen and Jane were a part of this structure and invited non-family members to be part of an emerging board of directors, which was in continued contact with the family council and the owner’s council.
When to consider family business governance
“The fundamental question when initiating the journey toward family governance is, ‘Do we want to stay together?’ Meaning, do you want to continue the business as a family business?” Martinez says. “If the answer is yes, the next question is, ‘What are the rules that will govern us?’” Ultimately, you’ll want to consider creating documents that can serve as guides or that can provide guardrails for future conduct and decisions. “Family governance is represented in agreements captured in a family charter or family constitution,” Martinez says.
If you’re thinking about your business remaining in your family or starting to see leadership or ownership potential in the next generation, then it’s likely time to start laying the groundwork, much like Helen and Jane did. The size and configuration of the business and family will dictate the complexity of the governance involved and the time required to develop a thorough governance plan. While a family business in its third generation may require more substantial governance planning than a business transitioning from the founder to the next generation, the governance structure can grow and expand as needs arise.
4 important takeaways for family business governance
- The sooner business owners and family members start planning, the better. It can sometimes take years for the full governance plan to come together.
- Revisit and adjust documents on a regular basis — perhaps annually or biannually. This is not a “set it and forget it” plan. Sometimes you will need to pivot and revise to address changing conditions.
- Focus on the process as well as the outcome. The conversations that help build governance plans are all important — do not rush the steps. Take as much time as needed to help get the plan right.
- Don’t go it alone. A professional team can help guide you through this process. Your advisor can help you get the process in motion.
Governance can be the key to a family business’s sustainability. “Family business governance might seem like a more complicated route than identifying one person to succeed the founder,” says Martinez. “But in the long run, it helps build a robustness that no one individual’s effort can provide.”