Family governance for family businesses

As new generations of family emerge the number of family members involved in the business, either directly or indirectly, can substantially increase. This can raise many questions, including:

• Who will be the next CEO of the business and how will he or she be selected?
• Are family members automatically entitled to be employed by the family business?
• What remuneration should they get?
• Should dividends be paid to family members who own shares but do not work in the business?
• How much time commitment is needed from family members in the business?
• Is there a common consensus as to the direction of the business and is this understood by all?
• Should there be professional management in addition to family members?
• Should there be non-executive directors? Should the business be sold at some point in the future?
• What happens to the shares of family members who get divorced?

If these questions are left unanswered, the resulting uncertainty can create significant tensions within the family which, with time, might prove to be very damaging both to the business and to inter-family relations. Different members of the family will be looking for different things from the business – depending on whether they are directors, employees and/or shareholders – and this needs to be understood and recognised.

So, is there a way of avoiding some of these problems? The good news is that a family constitution or “charter” can do a lot to help. These are agreements reached by the family and set out the grounds rules for the relationship between the family and the company. They are increasingly being adopted by well-run family businesses and can cover both the issues raised above and also aspects such as:

• How the family wishes the business to be run
• The family’s goals and the long-term strategy of the business
• How and when family members are to be employed and on what terms
• The rules around passing shares to the next generation
• The culture of the business
• The family’s dealings with and communications with the business and its management
• Whether spouses and/or non-family members can hold shares

It is worth bearing in mind that it is not a document written in stone so it can (and should) evolve with time, as the family and business develops. It does, though, need to be sufficiently robust to deal with most issues which are likely to occur.

There is quite a lot of work involved in getting to an agreed family constitution. It is important that family members have the opportunity to contribute their individual views and that the outcome reflects the family’s collective viewpoint. This may involve a series of meetings with individual family members as well as with the family as a whole.

As well as the constitutional document itself, the family may decide it would be sensible to set up some new family structures such as a Family Council, a Shareholders’ Council or a Family Office. The first of these would be empowered to make decisions on behalf of the family in connection with the business or wider family affairs. The second would be a narrower body and empowering those family members who were shareholders to have their say in the running of the company. 

A Family Office could have a strategic and administrative function for the whole family and is usually staffed by professionals; it is likely to have a much broader role in helping family members with their finances and affairs. Family Offices also sometimes look after other investments held within the family and advise on, and manage, these.

We have significant experience in this field and if you would like help or advice in connection with a family constitution please do not hesitate to contact either me or any other member of the team.