Some Families Have It Right
Family businesses that survive through multiple generations of ownership tend to have some mix of good governance for both family and business matters. Good governance means clarifying each family member’s roles and actively managing the expectations for the business. When both things are governed well, it creates a solid foundation for transitioning the business to the next generation.
Below, we explore several best practices that may help clients improve their family governance.
• Draft a mission statement. The first step in creating a cohesive vision for the business is articulating the family’s values and goals in the form of a mission statement. This will encourage families to evaluate the basic (but sometimes difficult) questions, such as why they have a business in the first place and what they’re hoping to accomplish. This written document should be reaffirmed with each new generation.
• Establish a legal framework. A formal legal document should be put in place outlining policies and procedures for the employment of family members. This could include compensation, distributions, ownership transfers and more. These policies should be agreed upon by the family and there should be clear instructions for how these policies will be reviewed and updated.
• Speak with a unified voice to the board. In order to speak with a unified family voice and point of view to the company’s board of directors, it’s beneficial to provide a forum for family members to discuss their issues—in a family assembly or council, for example. These vehicles for open dialogue can help ensure safe and productive communication among family members to address disagreements before they grow into full-blown conflicts.
• Prepare the next generation. Educating the next generation about the family business should begin as early as possible. This may be done through age-appropriate workshops, seminars or mentoring programs. Another option is a junior council allowing younger family members to learn about the family’s history, values and the business itself.
In addition to sound family governance, effective business governance is an equally critical component of the company and its successful operation. As family businesses evolve, they often develop more sophisticated boards and shift responsibility away from family toward more independent parties. This can be a helpful step in managing a business transition, as independent directors can balance the interests of different family members.
Establishing an effective governance system takes time and patience. While governance structures aren’t one-size-fits-all for every family or company, putting these structures in place can significantly increase a family’s chance of beating the succession odds. Business owners thinking about succession should be sure to consider the intrafamily relationships at play and the potential benefits of a family business consultant who can help put effective governance measures in place.
Donna Trammell is director of family wealth stewardship at Bessemer Trust.