A good governance structure for your family owned business is a system that helps your family organize how it communicates and makes decisions affecting the management and ownership of the business as well as the wellbeing of your family's members.
These decisions affect the different types of capital that make up the current and future wealth of your family. It is therefore absolutely essential to have a good governance system in place to manage and transition family capital.
Family wealth is not limited to financial capital. In Family Wealth: Keeping it in the Family, James Hughes Jr., a pioneer in the thinking around family business governance, included human, intellectual, social, and spiritual capitals as being equally important to family wealth. A good governance structure is one that puts in place a system to address the full range of family wealth. Time and professional support are necessary to develop one.
Let’s break this down…
A way to understand family business governance is to appreciate the 1982 Davis-Taiguri 3-Circle diagram, which illustrates the three interdependent sub-systems that make up a family owned business.
Each sub-system should have its own forum to make decisions on behalf of members in that system. In addition, the three sub-systems should have a way of communicating with each other. This is because changes in one sub-system are likely to have implications for the other two. Keeping all systems working in sync is like a juggling act. As the sub-systems evolve, good governance can be thought of as a continuous process that adapts to change over time.
In the table below, you can see that every sub-system has a purpose, stakeholders and a forum through which the vision, mission, guiding values and goals for preservation and growth are spelled out. There should be clear alignment across the three sub-systems.
The vision, mission, values, and goals that your family develops for itself and your business will be unique and will reflect what you commit to creating together.
Why should you work with a family business consultant to develop a good governance structure?
You should work with a family business consultant that can think systemically. Let's look at why, in the context of some some challenges you might already be facing.
The family system is emotional and it is difficult to have a meeting of minds in an emotionally charged environment. Managing conflicts and historical differences is essential if your family”s members are expected to work together. Imagine the next level of complexity when your children’s children become co-owners! This is why bringing in a consultant with the expertise of working with family members is invaluable.
The ownership system is also complex and requires an understanding of wealth management structures that are suitable for wealth creation, wealth enhancement, and wealth preservation. Some questions you might have are: should you establish a family office? Should you create a trust or maintain shareholding? How do you select trustees? You may have family members that do not have a seat on the board and are shareholders. How do you make sure that decisions made by the board are communicated to them? How can the board be held accountable to shareholders?
In the business sub-system, you may not have guidelines on how employment decisions are made when it comes to family members. If a family member is coming into to the business, do they have the necessary skills for the role? If not, how is the process of leadership development managed in a way that they get the necessary training or mentorship? Is there an executive compensation plan in place, so that family members employed by the business do not feel entitled to ownership at the expense of other family members because they have worked in the business?
These are all complex questions that affect the business and the socio-emotional wealth of the family and require professional intervention and guidance. Assuming that family members can deal with these issues alone is risky and likely to enhance conflicts because of the different interests held by family members. We are human after all!
What is the glue that holds family business governance together?
The process by which governance is handled is what makes all the difference. It is possible to have the best governance structures in place, but without key positive behavioural aspects, good governance may reduced to lip service.
For effective decision-making in the various forums discussed above, it is necessary to have consensus, participation, inclusiveness, and openness. For results to be felt and measured, there must be accountability, commitment, transparency, and policies that enable governance by outlining roles, responsibilities, and processes. More than anything, these are the values that will yield good governance.
Governance in a family business is an ongoing process and with good governance, the growth, preservation, and transition of wealth from generation to generation is far more likely to succeed.
How can Be Bold help you?
At Be Bold, our consulting process is designed to work with your family business to map out the governance systems you require, given the stage of ownership your family business is in and the issues that your family is facing. We empower you to address power struggles and communication challenges that you may be facing, in order to establish consensus on the values that will guide your governance journey and bring alignment to the family, business, and ownership sub-systems.
© 2023 Wanja Yvonne Janice Maria Michuki, Be Bold Consulting & Advisory Ltd.