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Building family governance in your family business

by Maybeth Shaw, BDO Northern Ireland

Recently, we have witnessed the formal announcement of the Government’s intention to trigger the UK’s exit from the EU by March 2017. We think that means you need to build family governance in your family business.

The announcement was met with mixed economic reaction with the weakening of the pound, but the stock market strengthening from the increased certainty, at least in terms of the formal timetable, for Brexit.

It is evident that strong government, and indeed strong governance, will be required to steer the country through the turbulent economic and political tides of Article 50 of the Lisbon Treaty.

The need for clear strategic direction, as well as the internal processes that support this, will be important not only in terms of the Government and its strategy for the country, but also, for businesses up and down the country, which will need strong leadership and governance to mitigate any fallout from Brexit.

In working with family owned businesses, we have come to realise that they have to learn to successfully manage two facets of governance:

  • (a) Corporate governance, covering the direction of business operations; and
  • (b) Family governance, providing a framework of rules that define family members’ roles and responsibilities, and how the family interacts with the business.

This duality is complicated because in most family businesses, individuals will often have several roles. It is often not possible – or indeed desirable – to eliminate all personal interests or conflicts of interest, but family governance systems make it easier to identify and address these with reasonable objectivity.

Our experience in working with family businesses has shown that family governance needs to evolve to take account of developments, within both the business and the family circle.

Family firms become more complex over time as the business expands, the family grows and ownership dilutes.

What used to work for an entrepreneur and their nuclear family – i.e. informal governance based on understandings and assumptions – is less likely to serve the interests of a group of second-generation siblings (and their spouses).

As a result, it makes sense to organise governance early, while the family enterprise is young and the family group relatively small – and at a time when family relations are peaceful, while big issues like succession remain a distant prospect.

The aim is to generally change from a system of informality to an environment where there are rules, procedures and structures in place.

At BDO, we have also come to appreciate that a strong sense of shared purpose among owners and the wider family is a source of competitive advantage for family businesses.
Each family needs to work through how this sense of belonging and teamwork will be reflected in their family governance system. However, it is clear that there is no “one size fits all” and no two families or businesses are completely alike.

Family governance systems work best when they are tailor-made – shaped by the age, size and culture of the business, the family’s degree of involvement, and the personal dynamics amongst family members.

A formal framework and written rules of governance make it less likely that personality issues will divide the family and interfere in the business.

Through the mechanisms of family governance, families aim to build trust, ensure clarity and manage stakeholder expectations.

We have found a number of family governance documents and structures that can go some way towards supporting this goal.

These can include:
A family constitution documenting

  • the family’s vision and objectives for the  business;
  • key policies – for example, those relating  to family members’ employment, management succession, and the ownership and transfer of shares;
  • a code of conduct governing how family members should treat each other; and
  • the role of family governance bodies and their relationship with corporate entities like the board of directors.

A shareholders’ agreement

Often codifying certain provisions of the family constitution, such as listing the types of decisions that owners are entitled to make (as opposed to the board), rules on share transfers and how shares are to be valued.

Family governance bodies

Including a family assembly, open to all family members, and a family council, formed of chosen representatives of the family. The council will typically set policies to balance family and business, and will act as the conduit between shareholders and the board of directors. These bodies provide family members with a forum for discussion and help them develop a co-ordinated family approach.

Family council committees

Working to foster family education, information, communications and social cohesion.

A family office

Providing centralised wealth management services to the family, acting as an investment, liquidity management and administrative centre.

We have seen the benefits of these formal structures in practice with several of our family owned business clients.

It is clear that they can prove invaluable in keeping the needs of the family and the business separate while also helping foster internal processes that aid in the future running of the company.

It will be important that businesses review their internal governance procedures and ensure that these are robust enough to cover both the strategic direction of the business, particularly in the current uncertain economic climate, and the expectations and ever changing needs of the family circle.