Governance in Family Business: Putting the Pieces the RIGHT Way

Editor's Note: Take a look at our featured best practice, Family Business: Governance (22-slide PowerPoint presentation). Governance of Family Businesses must include the concerns of the numerous and diverse third generation. Establishing a set of councils and boards is essential in addressing critical transition issues. With a Governance Model, Family Businesses can address acute short-term challenges and prepare [read more]

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Governance of Family Businesses must include the concerns of the numerous and diverse third generation. Establishing a set of Councils and Boards is essential in addressing critical transition issues. With a Governance Model, Family Businesses can address acute short-term challenges and prepare the business for subsequent generations.

Starting the change process can be difficult. Ideally, aunts and uncles will call the cousins together and say,

“What has worked so well for us and makes us proud of what we have achieved will not work for you. You must go out and find your own model.”

When siblings are wise enough to give such a mandate, the cousin generation has a greater chance of enlisting support from the earlier generation and being successful. However, many sibling groups avoid or delay dealing with the issue, leaving it up to the cousins to organize themselves. In most cases, highly educated and qualified cousins leave the business once they find the barriers to establishing Governance Structures so high.

Given the way that Family Businesses tend to become more complex over time, it is often up to the third-generation owners to redefine the role of the family and set the direction of the business. Setting up an effective Governance Model puts the Family Business on a new trajectory for success.

The 7 Core Elements of the Governance Model

1. Shareholders’ Assembly – The Shareholders’ Assembly is primarily responsible for dealing with classical legal functions

2. Family Assembly – The Family Assembly instills family values in the next generation and make sure that responsible shareholders are raised.

3.  Shareholders’ Council – The Shareholders’ Council is the most important link to the company. It is responsible for regulating relationships among family shareholders and between shareholders and the business.

4.  Holding Board – The Holding Board is the link between Management and the Shareholders’ Council. It is responsible for the overall performance of the group and its CEO.

5. Family Council – It is the Family Council’s mission to transfer values and traditions across generations. It serves as an important communications bridge between the business and the individual family members.

6. Investment Office – The Investment Office is responsible for managing the family assets other than the core business. It provides a sense of security to those distant from the business and that their interests are being considered.

7. Foundation – The Foundation is the one responsible for the family’s social and charitable investments. It nurtures consensus from generation to generation on the direction of their philanthropic activities.

Taking that Giant Step to Governance

Kickstarting the change process can be a challenging part of the sibling-to-cousins transition. There are cases that exist where highly educated and qualified cousins find the barriers to establishing Governance structures so high that they leave the business.

In making sure that the Family Business can keep the Governance up and running, it must be able to master two critical steps to Governance.

One of the two steps is developing a clear idea both of the status quo and of the desired destination. What are our goals? Are there existing gaps in the structure? What are our priorities? These must be clear before we can ever start the Family Business Governance running.

Missing on this step (and the second step as well) will lead Family Business to a difficult turn and very bumpy road to success.

Interested in gaining more understanding of Family Business: Governance? You can learn more and download an editable PowerPoint about Family Business: Governance here on the Flevy documents marketplace.

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