What is ‘family governance’?
Getting to the heart of a much-used term
‘Family governance’, refers to the structures and processes families use to organise themselves and guide their relationship with their enterprise. When well-designed (and properly implemented), family governance can help set boundaries, create clarity, and result in greater harmony between family members, a more focused business, and easier transitions between generations. However, in order to be effective, family governance must reflect the particular culture, dynamic and objectives of the family in question.
When families work together, (be it in a business, investment portfolio or philanthropic enterprise), the combination of a long term view coupled with a strong foundation of trust can be a fantastic source of competitive advantage. However, family enterprises also face unique challenges, and leaving questions such as the following unanswered can destabilise even the most successful family enterprises:
- How can I work with my brothers and sisters when we are all so different?
- Will dad ever retire?
- What should the role of shareholders be who do not work in the business?
- How will my children become prepared to oversee their investments and advisors?
- Who should be the next leader of the business? Does it need to be a family member?
- How can we avoid family business conflict?
- How can we continue to adapt and innovate whilst preserving our family values?
Consequently, getting ‘family governance’ right, ie getting the way in which a family works together and make decisions about their assets right, is crucially important. By providing clarity over things like decision-making, responsibilities, ownership privileges, and involvement in the enterprise, family governance aims to reduce the potential for conflict and poor decision-making, and allows families to flourish, making the most of their ‘family-ness’.
Approaches to family governance all too often involve the implementation of ‘off-the-shelf’ structures however, with little regard given to the specifics of the family situation at play. This may create more harm than good, as rigid rules and designs unfit for purpose mask the issues that remain beneath. Accordingly, it is imperative that family governance is sensitive to the dynamic, culture and objectives of the family in question, and is designed in harmony with the family’s unique situation and needs.
- Make it purposeful; effective family governance should be designed with reference to the vision of the family. Governance should not be created for its own sake – it is a stepping stone to achieving the family’s objectives and goals (e.g. keeping the business in the family for generations to come, making a difference in a certain community).
- Take it slow; improving family governance should be a case of ‘evolution’ rather than ‘revolution’. There is a limit to the pace of change a family can take, as individuals will have to spend time reviewing, reflecting on, and changing their habits and behaviours. This takes time.
- Keep it simple; the best governance system is the one that works, not necessarily the most complex. Introducing a multitude of new boards, councils and committees can lead to family members becoming overwhelmed and planned changes not being implemented.
- Make it fit; family governance should reflect the needs of the family that sits at the heart of it. What is right for a nuclear family will be very different from what is right for a large, multi-generational one. By the same measure, even two very similar families may still have different needs, due to a different family culture or vision.
- Do it together; the process of designing and implementing family governance should be inclusive. The whole family needs to be involved and engaged in the process in order to ensure that it facilitates family alignment behind a common purpose, the best platform for family and financial success.
- Give it time; deciding to make changes is only a start. Improving family governance needs continued energy, commitment and dedication to make sure that decisions are properly implemented and the desired changes achieved. The success of family governance project is all in how it works in practice.
- Be flexible; even the most well-intentioned plans sometimes need changing, and we suggest families should ‘live with’ their new governance arrangements for a year to see if any amendments are needed. Once agreed, we also suggest families come together every five years or so to conduct a governance ‘review’ to ensure that it still supports their vision and goals and is appropriate for the environment they are operating in.
The difficulties that arise when combining family and business can be so complex that it is unsurprising that successful families around world put significant energy and commitment into getting their family governance right.
Approaching family governance in the right way is critical however. With an inclusive approach starting with your objectives as a family, you can create a strong platform for family and enterprise success that is right for you.
Our expert says…
‘It’s a really damaging misconception that having ‘good’ family governance means having lots of rigid structures and formal rules. This unfortunately means that many families end up putting systems in place that simply aren’t right for them. In fact, informal systems often work just as well as formal ones – if they are what’s right for the family’s needs.
Overall, the key lies in having a clearly defined vision and set of objectives. It is only once a family decides where it wants to be that the supporting structures can be put in place to help it get there’
Alexandra Sharpe, Partner, Family Enterprise Consulting
See family governance in action in our case studies:
Succession planning in a UK farming family
Effective governance in a 3rd generation UK retail family enterprise
Next-generation learning and development in a multi-generational international business family
Find out more
To learn more about family governance, get in touch with our Family Enterprise Consulting team.
For further insights, read our weekly Family Enterprise blog.