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What is Governance in a Family Business?

What is Governance in a Family Business?

This is the first in a series of articles on governance in a family business. Look for future articles to dive in a little deeper on important governance topics such as compensating, hiring and managing family members as well as governance structures.

Family businesses are a foundation of the United States’ business community and even play a critical role in the success of the global economy. A family business faces the same day-to-day management issues as any publicly-owned company, but they also have to manage the added layer of emotional ties that go along with a family-owned company.

When the same people who manage the company also live together or celebrate major holidays together, the odds of emotional conflict are considerably higher. Is your family business prepared to manage the termination of an employee by his/her own sibling? Will the family members understand when a niece or nephew are chosen for a position and not the son or daughter? A strong governance structure will help you manage situations like this as they arise.

Utilizing tools and implementing strategies that families can use to make handling situations more professional will go a long way in dealing with these family and business conflicts such as:

  1. Create expectations about how employment will be handled for family members. These expectations govern anything from entrance to the business, to advancement within the company, and what happens if you have to fire a family member.
  2. Set clear expectations up front about required qualifications, work experience, and track record of success in order to advance within the company.
  3. Enlist an objective committee to evaluate performance.

For example, when having to fire a family employee, make sure you let that family member know the family business wants him/her to be successful. Using both family emotional data as well as objective data will ease the blow. Telling the family employee ‘I love you, care for you, and support you’ as well as pointing out the business side of ‘your track record and performance doesn’t warrant you continuing in this job’ will help the family member understand it from both sides.

As I wrote in a recent article, there is a lot riding on the successful transition of leadership to the next generation. Current research shows 66% of family enterprises will not survive in-tact into the 2nd generation of leadership and of that, less than 15% survive into the 3rd generation largely due to loosely defined leadership roles.

3CircleModelNot only is it important to have clearly defined leadership roles and responsibilities communicated and in place, but also to have a solid family governance system. It is actually becoming a trend and in many cases it is the next generation family members who are realizing the value that governance brings to the future of the company.

There are several different types of governance structures to consider, such as:

Family Council – a family council may be convened to help bridge the gap between the younger and older generations’ vision for the company. The council refers to a group of family members (can include those who are active in the family business and also those who are not active employees in the business) which represents the family, deciding issues that overlap the family and the business such as employment of family members, ownership by family members, voting rights, and ownership and valuation of shares.

Fiduciary Board of Directors – a fiduciary board of directors is made up of elected or appointed members who are charged with overseeing the overall activities of a company. There will be bylaws that the board of directors must follow that spell out the responsibilities of each member. Also, if the company is a publicly traded entity, it is legally required to form a board of directors with voting rights and the responsibilities are much more complex and are legally binding.

Advisory Board of Directors – an advisory board of directors is more of an informal committee of members selected by the executive team or the board of directors. They will provide valuable assistance to the company in such areas as employment, finance, sales and strategic planning, but they have no fiduciary responsibilities or voting rights and the executive team is not legally obligated to take the advice of their advisory board.

One of the most important facets of a successful family business is to have a solid family governance structure in place. Unfortunately, there are many families who have either never thought about the potential issues or think they will be able to fix disagreements that may arise by trying to solve the issue on the fly. If you want your children, grandchildren and even great-grandchildren to successfully carry on your family legacy, then you must think strategically about how the family can work together as true partners.

If you need help implementing a governance structure tailored to the unique needs of your family business, please contact the Gustafson Group at 612-239-7833 or eric@thegustafsongroup.com.  Together we will work to ensure you enjoy both a great business AND a wonderful Thanksgiving with your family.

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About the Author

Eric Gustafson delivers results. Over the past two decades, Eric has quietly become a go-to authority for helping owners to elevate their small businesses in the Twin Cities… Read full bio >

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