Beyond the Boardroom: Navigating The Family Governance

What's the Problem?

At some point, all business families will inevitably grapple with critical questions:

• What is the purpose of our family as economic unit doing business and social activities together?

• What is our vision for the future?

• On which decisions does the family have a say?

• Where are these decisions made? 

These questions underscore the necessity of designing an effective family governance system to channel the voices of all family members and involve them in appropriate decision-making forums. The ability to execute these tasks efficiently and effectively is crucial for long-term success.

The What And Why Of Family Governance

Family governance is a system of structures, mechanisms, agreements, policies and processes that guide a business family in making choices to support the family’s well-being, ensure its effective functioning, and manage its relationship with the business.

A rudimentary form of family governance is always present.

In the first generation, although governance is seldom high on the agenda, it often manifests as informal conversations rather than structured family gatherings. These interactions are often autocratic in nature due to the presence of a lone family leader who tends to guide the conversation or impose their will on immediate family members, rather than fostering a constructive and open dialogue across generations. As the challenge of succession approaches and the family leader ages, the need to schedule more structured meetings and discuss solutions arises.

When the second generation takes over leadership roles, family governance activities intensify and a request for holding structured family meetings emerges. They are generally called to develop processes for sharing power among siblings, preventing sibling rivalry, learning to collaborate in making decisions, or facing the challenge of succession. 

From the third generation onwards, the family governance system generally evolves into a more formal and sophisticated design to face rising family complexity, which is driven by multiple forces like family expansion, the coexistence of multi-generational members, fragmentation into family branches or groups, and the rise of a next generation less engaged in family and business affairs. At this point of the journey, efforts are directed towards enhancing communication and coordination, establishing role specialization and fostering integration.

Having said that, the most significant benefits that family governance can bring can be summarized as follows:

• Building a stronger family.

• Building a stronger business.

• Planning for the future.

• Opening up the succession process

• Recognizing Conflicts.

It is worth noting that family governance is designed to cater to all family members, not just family shareholders. This means that both current and future owners play a role in this system. Although family members may have different degrees of ownership and influence over decisions, each one should possess a voice in family governance processes. All perspectives must be heard, aligned and integrated properly.

Designing Your Own Family Governance 

Although there is no one-size-fits-all model to family governance, there are two fundamental approaches to establishing family governance, and they depend on the developmental stage of the business family. 

For families still in the first or second generation, or with limited size and complexity, the suggested approach is what can be termed the ‘standard’ approach, which includes crucial building blocks such as family meetings and family policies. For families that have reached the third and subsequent generations and are composed of a larger number of family members, the suggested approach is the ‘advanced’ one. 

Standard Approach 

The standard approach revolves around organizing periodic family meetings and drafting of family policies, such as a family employment one. 

Family meetings are gatherings that bring the family together to share goals and decisions, discuss common problems, learn about the business and preserve family identity, values and traditions. 

In the earliest or founding stage of the business, family meetings usually involve only the nuclear family, with the parent usually setting the agenda. This agenda may centre on family participation in the business, succession planning and leadership transition.

In the sibling phase, the focus of these meetings shifts to team building, helping family members establish common goals and emphasizing mutual interests. Emotions tend to become more pronounced as various ideas and feelings surface.

In the later stages of the business, if the number of family members remains manageable (up to 15–20 members), families may continue organizing family meetings. Otherwise, the family should adopt a more advanced approach to family governance, as described in the next section.

It is crucial to note that family meetings serve a purpose distinct from those of boards of directors or management committee meetings. They are convened to address either family matters or business matters that affect the dynamics between the family and the business. It would be a significant mistake to misuse this platform for making business decisions, especially those related to day-to-day management.

Advanced Approach 

In business families with more than 15 to 20 adults, it becomes challenging to conduct in-depth discussions and create plans and policies for the family during meetings with such broad and diverse attendance. 

As the family’s complexity increases, better coordination becomes essential. This can be achieved by separating family membership from family leadership and establishing distinct governance bodies for both groups. Additionally, a family agreement should be implemented to ensure the family remains aligned and united.

As a result, all family members can meet as a family assembly, while family leadership is delegated to a family council, a representative body acting on behalf of the entire family and serving as the strategic and organizational planning arm of the family.

The family assembly typically consists of all adult family members (usually including in-laws) who wish to participate in family activities and agree to delegate leadership responsibility to the family council. Most families also decide to invite children to the family assembly at around age 16 to begin learning about the business and developing relationships with their siblings and cousins.

Activities of the family assembly include learning about the business through presentations by family and non-family managers, discussing (not deciding) the company’s direction and being educated about the company’s activities or important skills like reading financial statements. It is also a forum for updates on changes in the family, such as important events and accomplishments, and in ownership.

The family council, an organization parallel to the business’s board of directors, is the executive leadership group of the family. It focuses on family development and continuity by organizing and overseeing family activities to build trust and foster a sense of unity and shared purpose. The main responsibilities of the council may include:

• Building and maintaining an understanding of the family’s vision and values.

• Helping the family reach decisions and speak with one voice about its goals.

• Adopting family policies.

• Promoting an understanding of the family business, including strategy, performance and future plans.

• Educating family members on the business and preparing them to be responsible owners.

• Serving as a forum for addressing family conflicts or disagreements.

Every time an activity of the family council crosses paths with the business domain, for example, when issuing a policy on family employment, it is essential for the family council to seek advice from the board and obtain its approval before officially approving any policy. A family council is not a business decision entity.

Finally, a family council cannot work without a protocol and working guidelines. This is why a family council charter or family constitution is part of any advanced family governance architecture. 

A family council charter is a document that includes the purpose, roles, responsibilities and high-level goals of the council. A family constitution—or family charter or family protocol—is a broader agreement in the form of a statement of intent that regulates members’ relationships with the business and spells out the family’s values, purpose, vision, role expectations, principles, procedures, activities and decision-making processes that regulate all family activities and the use of family resources, including the family council.

Call to action

The process of designing or revisiting a governance system requires time and is best undertaken with the guidance of trusted advisors who bring the necessary expertise and neutrality to find appropriate solutions. Engaging in this process is valuable in itself, as it creates space for the family to address issues typically considered taboo and swept under the rug.

Author: Paolo Morosetti