Lawrence Nicholson | Family business governance is critical
Good governance is critical for effective generational transition and sustainability of family-owned businesses, FOBs, and goes beyond boards of directors and advisory boards.
There is the need to adopt a family governance framework to address the ad hoc, disorganised and informal approach to governance observed in many FOBs
The framework refers to joint decision-making among family members, structures and processes that families use to guide their relationships within the business, and shared values among families. Its components include family constitution, family meeting, family council, family assembly and family office; and it addresses issues such as employment of family members, succession planning, employment of in-laws, share distribution among siblings, and selling of ownership interests.
Left unresolved, these issues can lead to the demise of FOBs.
A family business constitution is a written document that sets out family vision, mission, core values and policies which regulate family members’ relationship with the business. Also referred to as ‘family creed’, ‘family protocol’ and ‘statement of family principles’, the family constitution gives a clear outline of a set of principles by which family members are committed. While it is not usually legally binding, it is not unheard of to have the intervention of the courts to resolve issues and differences.
Policies covered by the family constitution include guidelines for family assembly and family council; roles, scope of authority and responsibility of family members; rules governing family members’ employment, transfer of shares and leadership succession.
It is recommended that the family constitution be written at the start-up, or close to the start-up, of the business. Unfortunately, many times the family constitution is written in a piecemeal manner to address issues as they arise. Writing a family constitution takes time and can be contentious, so patience is needed.
The family assembly, also called ‘family forum’, is a formal gathering to discuss business and family issues. It is opened to all family members or as many as agreed, or as set out in the family constitution. At the ‘founder’s stage’, with few family members, this forum is called a family meeting.
The family meeting is informal, allows the founder to communicate family values, and provides an opportunity to generate ideas for business development and serves as the foundation for succession planning. It evolves into the family assembly as the family members increase through the addition of children, cousins and other family members. This is referred as the ‘sibling and cousin stage’.
The purpose of the family assembly is to bring family members together to reflect and be informed of issues relating to family and business. The forum provides the opportunity for family members to add their voices to issues related to family and business.
Issues discussed in this forum include approval of change to core values and vision, rights and responsibilities of family members, approval of family employment and compensation policies, selection/election of family council members, and selection/election of different committees, such as the education committee. Family assemblies are usually once or twice per year.
The family council, also called the ‘family supervisory board’, ‘inner council’ and ‘family executive committee’, is a working and governing group of family members selected or elected to discuss and make decisions on family and business issues.
The family council addresses more meaningful and detailed discussions than can be accommodated in the family assembly. It serves as the primary link between the family and senior management and/or board. Its roles include discussing and recommending persons to sit on the board, drafting/revising family positions on vision, mission, core values and policies relating to family employment, compensation, and family shareholdings.
Before these matters are addressed, the family council must wade through personal family conflicts, since these can impede fruitful discussions on other matters. In helping to address family conflicts, it is common to have an external facilitator or family business counsellor to guide the process. The family council should be held to a manageable size, not exceeding nine members.
Good governance in FOBs is critical. This is echoed by Michelle Chong, CEO of Honey Bun Limited: “Governance becomes even more important when it is a family business, as rules that govern the business must include the rules of the family in the business. If the business is run at a corporate level, there is so much less opportunity for misunderstanding, which help to maintain harmony in the family.”
Let’s heed the call for good governance in FOBs.
Lawrence Nicholson, PhD, is a senior lecturer at UWI Mona School of Business & Management, author of Understanding the Caribbean Enterprise: Insights from MSMEs and Family-Owned Businesses, and a director of the RJRGLEANER Communications Group.