Did you know that about 43% of family businesses don’t have a succession plan? Still, many families are reluctant to address the topic of family governance. It includes setting up structures for both the family and the business. In the formative years of the family business, many of them take on the characteristic of the founding family or founder. As the family grows, a foundation is needed to discuss family issues that involve more than one generation – issues such as family shared goals, family business leadership transition, and shared assets.
What is Family Governance?
Family governance can be defined as a system that’s designed to help families work together. It also provides a forum to address their matters. Some of the problems that can be tackled through this kind of system are:
- Define and preserve family values
- Preserve family history
- Build family unity
- Resolve family conflicts and address family politics
- Define and work towards philanthropic objectives
- Preserve and manage family wealth.
Every family develops their governance system, and no two systems are identical. Family governance is a system that needs to change and expand over time, and it usually includes at least four elements: a mission statement, a council, an assembly, and a constitution.
Why Do Families Need Family Governance?
If the family has shared assets, such as private equity holdings, private business interests, and real estate, family governance is crucial. The assets require family members and future generations to live and work in harmony. For example, if the family business founders want to pass their commercial real estate (in the form of a business entity) to their children, they need an agreement that governs their ownership interests.
Families that survive the formative, need to do three critical things:
- Structure for Consistency with Goals
If a family addresses their governance issues, there may be a risk of needing to make a considerable change in their business management. A governance structure determines who, what, and how, and without it, it’s easy for a family business to fail due to ownership issues and internal conflicts. On the other hand, when family and business are divided, with defined roles of who does what and how , there is more consistency to achieve their joint goals.
- Reduce Conflict Among Members
Family governance serves as a forum for discussing issues in business. Lack of a family forum is often an issue that arises in many family businesses. With formal structures, such as family councils, boards, and forums, the members get an organized and safe way of mitigating conflict.
- Set Clear Expectations on Roles
The key to the success of a family business is to establish systems to hold each to specific standards. Expectations need to be set up front. Formal governance can help reduce financial and family issues by separating business ownership from management functions.
Plans change. When you make your new governance arrangements, live with them for a year to see whether changes should be made. It is critical to approach family governance the right way because it allows you to create a stable base for your family and enterprise success.