Governance means to smoothen the operations of the individual and the system as a whole for good.
Well-designed Governance structures reduce the internal challenges within the family and enable the family business to transform into a multigenerational legacy by choice.
Governance establishes processes whereby strategic goals, family wealth, and accountability are benchmarked and monitored and the key relationships are strengthened
Any business which is well governed can easily navigate itself to achieve the best business objectives of profit maximization through a well-crafted and executed strategy, job creation, employee development and recognition, expansion, and capacity building.
Governance addresses all stakeholders, shareholders, employees, customers, suppliers, and the community with equal weightage.
Families in business have large capital investments, a high scope of getting themselves employed in the business, social dignity in the community, etc. Therefore, they have a powerful motivation to govern themselves in the right way.
Many business-owning families get pulled into illogical and irrational decision-making, family communication, and succession planning which can bring the shared interests to a halt or even destroy them.
Effective Governance builds core competence in the family business.
Good governance integrates and synchronizes family unity, emotional bonds, and the professionally run family-owned enterprise.
Effective Family Business Governance requires:
which are essential to protect the purpose and interests of the family and the business.
Key responsibilities for managing day-to-day business include:
Key responsibilities include:
Key responsibilities include:
Each dimension needs to undergo a formal process of designing, agreement, execution, and monitoring to avoid possible destruction in the future.
While taking decisions, it is important to choose whether family first or business first. It’s important to focus on both aspects as they are dependent, yet exclusive.
Both need equal attention and are crucial for long-term prosperity. Effective governance balances both disciplines.
Family and Business need their own separate governance mechanisms for ensuring effectiveness.
Family governance is addressed by family meetings or family councils.
Business governance is addressed through a visionary Board of Directors. The BOD must comprise of have experienced and qualified independent directors for better performance and growth.
The following 5 steps must be followed for generating orders in the family business:
The role of the FAMILY in a Family Business
The family conducts meetings and through a structured process discusses and determines its values and goals and articulated them in written policies (called the Family Constitution).
The role of the Board of Directors in a Family Business
The BOD is the bridge between the family and the business. It advises on key decisions and ensures the preparation of Strategic Action Plans and then reviews the progress and monitors the agreed outcomes.
The Management is responsible for the day-to-day operations of the business and implementing the action plans in line with the strategies agreed upon with the Board.
The roles of the Family, Board of Directors, and Management though quite distinct, are complimentary and mutually supportive. The Board and the Family must understand their boundaries.
During family meetings or family councils, family concerns are discussed to avoid conflicts that can lead to unresolvable disputes.
employment for family members and non-family managers in the business; compensation for family members in business; business philosophy; family code of conduct; resolving internal conflicts; estate planning; family ownership; retirement plan and financial security for business leaders, succession in leadership, and ownership.
articulating and documenting family values and principles; encouraging cohesiveness and the spirit of working together; discussing and creating a family vision, mission, and value statement; family philosophy for doing business; documenting roles of family members in the business.
enabling the family to understand the business dynamics, learn and communicate decisions
understanding the rights and responsibilities of shareholders; clarifying business goals; deciding the structure and selection of the board; defining policies for share ownership and transfer; creating principles for capital allocation; dividend declaration, reinvestment, assessing the risk of investments and returns
creating platforms of participation; participating in family meetings; having shared interests
having family presence and roles in civic and political life; carrying out philanthropic activities as per agreed principles; setting guidelines for being visible in the community
having good equations with the outside world
understanding professional management; capacity and capability building; educating the next generation; effectively playing the roles in business or family; developing leadership skills; maintaining the culture, tradition, history, and the family archives
celebrations that lay foundations for future endeavors; family retreats; sharing the rewards and recognitions
which is experienced, qualified, and active in working effectively with family business leaders to synchronize the expectations of the family and deliverables by the executive committee managing the business.
The family should be able to transition itself to a professionally managed, experienced, qualified, and experienced Board who are outside directors.
The functions of the board:
Evaluating and selecting independent directors; reviewing corporate mission and philosophy; reviewing board mission statement; Reviewing the organization culture; understanding expectations of the family members; educating and encouraging the family to have effective governance measures
Review business goals with timelines; review auditor’s reports; review and approve budgets; review financial ratios and management accounts; Review Strategy and Strategic Action Plans; Approve Capital Expenditure with respect to Budget and strategy; Approve Long term loans; Review Cash flow and approve dividends; Approve family investments; Review and improve all agreed business policies
Review and advise the CEO on organization performance matters; recruitment of suitable senior executives; assist in creating a culture of continual learning, sharing, and strategic thinking
identify possible management succession; grooming succession and manage the transition across generations
assist the family in effective governance measures; discussions and conclusions on complex business matters; monitoring shareholder liquidity plans; communication and sharing business performance within active and non-active family members
The board helps the family reach a consensus on business issues by shaping an outcome by weighing the business performance and trade-offs. Through the board, the family is able to have a shared vision, goals, and value systems.
Effective Family Business governance ensures family and business are independent and assists in smooth decision-making by resolving family conflicts if any.
Each and every family business is unique in its own way. Adopting family business governance ensures that the decisions are taken for the best of the family and the business and thereby the purpose and goals of the family business are achieved with peace. Not to forget, that family business continuity is ascertained for generations.
Family Council
The FAMILY COUNCIL is composed of the male members and their spouses, tasked with developing healthy and effective relationships among family members, by ensuring effective communication among them.
The primary responsibility of the council is to develop responsible business stewardship among shareholders by increasing communication between the working and non-working family members and strengthening shareholder governance.
The council must meet at least once a quarter to architect and revise the family policies. The Family Council also appoints family advisors and organizes family retreats for fostering family values, traditions, and rituals.
Founders Business Office
This office provides the family with all the services for the execution of the constitution including management of the family fund and individual members’ assets.
Family Business Forum
The Family Business Forum is a bridge between the business and the family. It represents the family’s interests in the business, reviews business performance, and determines the direction and future plans.
Entry to the forum is typically open for all above the agreed age and working in the business. FBF should meet once in two months to encourage family directors to discuss business matters.
FBF must discuss family finances, business strategy, new business opportunities, ownership concerns and remuneration of family workers working in the business, professional development, and grooming requirements of the next generation. Dividend distribution is another major agenda for discussion during the meetings.
Non-Business Family Forum
The Non-Business Family Forum is an entity that is managed and run by the women of the family. The objective is to strengthen the emotional solidarity and interpersonal relationships between the family members.
The family members meet at least once a quarter, with a pre-established agenda, take decisions on a consensus basis, and are well-informed about business activities.
Family Values
The Family Constitution indicates family values. Some of them such as trust and faith, humility, managing differences, etc. form core values and are not open to compromise. Principles like family togetherness, respect for differences, face-to-face communication for resolving issues, no triangulation, readiness to listen, forgiveness, prohibiting family matters to be dragged into the court or being leaked to the media, and collectively agreed upon and respected by all.
Family Code of Conduct
The family code of conduct specifies principles and procedures for resolving the differences between family members, protecting the family name, listening to and respecting others’ opinions, maintaining relationships with media and financial institutions, pursuing other business interests, and considering venturing into politics.
The code of conduct specifies the process for managing and resolution of differences. The involved members need to have a face-to-face discussion and try to resolve the differences within 72 hours of their arising. If they are not able to resolve this, then an internal/external facilitator assists them in face-to-face communication and resolving the issue. If disagreements still persist, then the decision of the business leader is final and abiding.
There are specific codes of conduct for family meetings with regard to punctuality, confidentiality, avoiding direct personal criticism, and respect. Violations can lead to a token financial penalty. Meetings can be recorded for posterity
Family Fund
The family fund is funded by the allocation of a certain % of the dividend distribution from the holding company and income from certain family assets.
A financial fund (in the form of a trust) is established to maintain financial equity among family members. The fund is aimed at meeting essential security and development needs with separate sub-funds for each
Share Ownership & Dividends
The family can choose to keep the holding company private, under family control or go public through an IPO or even look for an equity partner. Separate trusts can be created for different family business branches, each holding a certain % of shares of the holding company, bound by a shareholding agreement. Norms of the sale for shares within or outside the family can be agreed upon. The constitution can also provide guidelines for valuation, the flexibility of timing, installment payment, interest on the unpaid balance, and loans from the family fund to purchase shares.
Family Retreats & Family Assembly
Family assemblies can be held once or twice annually, to be attended by all family members including spouses and children with the objective of having togetherness by celebrating festivals, occasions, and achievements.
In family businesses, structural risk arising due to family complexity and or business complexity can be eliminated by creating effective Governance structures as above.
Family Constitution is the hub, which keeps all the spokes of the family and business perfectly aligned to keep the family business running.
ADDVALUE is one of the leading Family Business Advisors assisting family businesses to document their Family constitution, under the guidance of expert Family Business Coaches.
It is a written agreement, a commitment by the family members for securing and perpetuating the family and the business!!
The family constitution is a slow process that needs to be internalized and followed as religious scripture.
