07 May Family Business Governance
Is the Family Ready with Family Governance Guidelines in case of any Uncertainties?
Family governance is most fundamental, and if you are in family business, you need to have a processes and procedures of governance to help families make effective decisions. This evolves over time and not come as a magic. The family members need to come together and huddle on this topic to get everyone on the same page. The family, which owns and runs the businesses have overlap of influence on different areas: Business Ownership and Management, If these influences are not controlled of managed, this would become a potential area of conflict.
The governance process is to ensure the family harmony. It gives an equal opportunity to all family members who involve in business to debate and execute the decision made. It helps in long-term success. What’s more, the path toward effective family governance is rarely a straight line. Good family decision making evolves over time. It ebbs and flows as families grow, priorities shift, and dynamics change.
Governance acts as an essential guard against family vulnerabilities brought out by those shifting dynamics. Families without an adequate governance structure risk letting decisions be driven by personal conflicts or short-sighted thinking. Governance gives families an articulated approach to processing change, airing grievances and agreeing on what to do next.
Most families adopt and evolve a dedicated governance structure over the years and generations, with key triggers prompting an increased focus on how families come together and make shared decisions. Families often take steps to formalize governance structures around significant transitions – for example, the sale of a business or other liquidity event or shifts in family leadership as new generations enter the fold. These inflection points also serve as reflection points. They’re a chance to institute a better way to make decisions going forward.
With this context in mind, here are some established best practices for families to consider as they evolve and formalize their family governance practices, as well as conversation starters family members can use to explore their governance needs and priorities.
- Figure Out Where You Are
If good family governance is always evolving, it’s best to establish a baseline for how family decision making works currently. Spend time thinking about the shared and individual decisions the family and its members have made to date. Reflect on how issues were raised, who took part in the decision-making process, and the role family dynamics played.
In many cases, families have an unspoken governance structure – a matriarch who connects with family members individually to build consensus, for example, or a sibling rivalry that dominates the conversation. Taking the time to understand past decisions, or default practices is an essential first step in refining the governance process going forward.
- What was the last significant decision the family made?
- Who were the key players in that process?
- Define Your Family Values and Mission
“When your values are clear to you, making decisions becomes easier.”
This Roy E. Disney quote underscores the impact family values and mission have on effective governance. Families who have spent time reflecting and formalizing their values and mission are better able to make shared decisions. Their beliefs act as a framework for how their family will operate and the legacy it will impart. Every decision can be viewed through the lens of shared values or an articulated mission statement.
But they must truly be shared. All family members must feel a connection to and ownership of the family’s mission, vision, and values. A disconnect here can create ripples that end up creating disagreements in family decisions. Defining and embracing family values is critical to building an effective governance structure.
- Describe our family mission in eight words or less.
- Do all family members feel ownership in our mission, vision, and values?
- Envision a Meaningful Legacy
In Keith Whitaker and Tom McCullough’s “Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask,” James Grubman writes that wealthy families can learn much from the Roman god Janus. Janus is the god of beginnings, transitions, and passages. January, the start of each new year, is named after him. Janus teaches that families can gain great value by honoring their shared history and focusing on new beginnings for the future. In many ways, this approach is the essence of continuing a meaningful legacy.
Governance has a tremendous impact on legacy, and most family decisions should be made with future generations in mind. They should be considered in the context of how it will shift and shape family leaders’ legacy and the precedents they will set. Maintaining that perspective in developing governance practices is critical to considering the legacy impact of decisions.
- What do you want your kids to say about you when you’re gone?
- What are the priorities you want future generations to carry out?
- Establish the Right Governance Structure…for Your Family
As families reflect on the actual structure of their governance system or lack thereof, it’s important to ensure that it satisfies your current and future needs. In “Borrowed from Your Grandchildren: The Evolution of 100-Year Family Enterprises,” Dennis Jaffe details how governance structures evolve as families grow. For virtually all families, the first step in formalized governance is to hold family meetings. By the second generation, nearly a third of families establish a family council or family assembly, and by generations three and four, seven in 10 successful families have created a family constitution, according to Jaffe’s research.
Each family’s specific governance structures will vary, but these high-level statistics can serve as a valuable benchmark for families evaluating their current decision-making frameworks. For families with limited formal governance structures, the addition of the second generation of decision makers often triggers a need for change. For more established families, new decision-making challenges may indicate an obsolete governance process.
- Is our current governance structure serving our family’s needs?
- What role does ownership and age play in our family’s governance?
- Review Family Roles and Responsibilities
Family governance often involves lots of individuals outside the family. It’s important to define the roles different family members will have, as well as the roles of non-family employees, advisors, and other key partners. A functional governance structure must accommodate for shifts in responsibility and involvement in the family enterprise, and the way decisions are made.
Whatever role family members and others play, family leaders will benefit from ensuring that the next generations of family members feel prepared and empowered to succeed in these roles. People who are put in positions without the necessary skills, education, or authority can be a threat to good family governance, family prosperity, and unity.
- How would you write the job description and required qualifications for different individuals?
- Would you say that the current governing members have a clearly defined role and meet those qualifications?
- Prune the Family Tree When Necessary
Kids are always negotiating. As any parent can attest, children drive a hard bargain. Vegetables come with the promise of dessert. Brushing their teeth pushes bedtime just a little bit later.
As adults, we forget that negotiation is part of life. People are going to disagree. They’re going to have different priorities. Good governance isn’t about glossing over those disagreements; it’s about finding productive ways to work through them. As families and governance structures evolve, redefining individual roles within the family becomes increasingly important. In some cases, that may mean dividing the family to more effectively manage conflict and create a more resilient family structure going forward. Build and refine the process for family members as they increase or decrease their involvement, including exiting the family structure altogether.
- What are the conversations and decisions our family is avoiding right now?
- What are the critical decisions our family needs to make together? What are the decisions our family no longer needs to make together?
Conclusion – Good Governance Provides Clarity and Evolves with the Family
Like a family itself, effective governance is always evolving. Families must remain vigilant in ensuring the decisions they make are consistent with their values and legacy and the way they make those decisions offers a robust framework that leads to better multi-generational outcomes and gives the right individuals a voice.