Board Matters Quarterly, September 2013

Governance plans for family businesses

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According to Family Enterprise USA, family-owned businesses generate 57% of US gross domestic product and employ 63% of the nation’s workforce.

For many family business owners, their businesses are their lives. They are fully and personally invested in its success and, like public company management or boards, they are concerned about regulation, compliance and taxes. Family business owners are also focused on personal wealth, succession planning and family dynamics.

One way to ease these concerns is by establishing a family business governance plan that can set expectations and outline procedures to help maintain the business, enable ongoing success and support the financial well-being of the family.

A plan can outline specific requirements, experience or training for family members seeking to step into executive positions.

Developing a governance plan

A family governance plan — or family constitution — is a framework that aligns the family interests with the business strategy.

Clearly documented procedures and non-binding, written operational agreements should be included in any governance plan, along with a detailed communication strategy that keeps the family informed about the business.

For some family businesses, conflict can disrupt progress and have a negative effect on the bottom line. So a family governance plan should clearly document a preferred approach for handling conflict resolution.

The plan can also provide detailed guidance for managing internal processes and contingency plans in case of an emergency or crisis.

Planning for future generations

A significant concern for many family business owners is the transition of the business to the next generation. A governance plan should detail the succession intentions.

A founder might want to see that certain roles and responsibilities are always filled by a family member. However, a plan can outline specific requirements, experience or training for family members seeking to step into executive positions.

Some plans require members to work externally before joining the family business. The plan can also include restrictions on the way a family member can work in the business and set forth how his or her performance should be evaluated.  

Companies must clearly define the participation of family members and consider the treatment of spouses, children and grandchildren. The plan should also contemplate possible divorce or prenuptial agreements.

The plan should set guidelines for income distribution and define who gets what, when and how. In addition, it must establish stringent governance on how shares can be sold, both inside and outside the family, if applicable. This approach will limit risk and make it possible to raise capital for the business or release cash for family members.

A well-developed governance plan is even more important during and after a generational transition.

Leading practices

As an owner, you may want to consult a spouse, trusted advisor or the board to assist in developing the governance plan, and keep the following in mind:

  • Include your philosophy of how you foresee the plan working
  • Design a family mission statement to set the direction for the business
  • Develop the plan when family members are amicable
  • Educate the next generation and instill responsibility; make sure that your children understand the business
  • Develop a plan with flexibility that considers the addition of future generations to the business
  • Review the plan every three to five years or when there is a life event, significant growth, divestiture or change in family dynamic
  • Communicate with your family about your expectations early and regularly so there is the greatest transparency among family members

The benefits of a good governance plan are many. Governance fosters a culture of mutual trust, provides guidance for operating the business, sets the direction for managing financial assets to ensure future wealth, and sustains the success of the family business for future generations.