Family Business Governance: A Primer

Your guide to Family Business Governance: the key to long-term success for family businesses, and how it benefits your business and family dynamics.

Key Takeaways:

• Family Business Governance refers to the rules, practices and processes that govern decisions made around the family, the business and where they intersect. Establishing effective governance can help family businesses navigate the challenges unique to family businesses and thrive for generations.
• When tailored to the needs of the business and the family a strong governance structure leads to improved communication and a sustainable, multi-generational framework for decision making.
• Commit to exploring and discussing governance issues and strategies with business and family leadership and consider working with experienced advisory to develop a customized Family Business Governance structure.

Family Business Governance provides a roadmap for making key business decisions and keeping family members on the same page.

Successful family-owned businesses know longevity and prosperity take work. It often requires a unique combination of financial acumen and an effective decision making process centered by a defined governance structure. This article will discuss some key of strong governance and how governance can help family businesses achieve goals and last for generations.

What is Family Business Governance?

Family Business Governance (FBG) can be described as a strategic, decision making process that guides family-owned enterprises on a journey of sustained growth and prosperity. It is a structured process for decision-making that can facilitate ongoing productivity, promote harmony and uphold business and family values. At its core, FBG is a process model that harmonizes business decisions with familial consensus, a key to perpetuating family business prosperity and unity across generations.

A strong governance framework can provide significant benefits and help family businesses achieve key business and family objectives.

Benefits of Family Business Governance

Without a robust governance structure, family businesses can be at risk of short-lived success, often not surviving past the founder. Governance can help mitigate this risk by establishing a process for clear decision-making, encouraging effective communication and fostering a culture of preparedness. The following highlights select benefits:

• Consistent Decision Making Process: Provides a model for making decisions that can significantly impact issues including business operations, communication on key issues, talent procurement and business transition/succession planning.
• Alignment of Goals: Facilitates the alignment of business operations with family values and goals. Effective governance serves both the business and the family and can be instrumental in the promotion of family culture.
• Clear Ownership Transition Strategy: Governance can help craft a clear ownership transition strategy that aligns family interests with the interests of the business.
• Increased Harmony: By fostering clear communication and transparency, FBG increases harmony and positive relationships among family and non-family members involved in the business.
• Expectation Management: Effective governance can set policy to manage expectations of important issues including employment, compensation, reporting and performance.
• Increased Participation: Governance can foster a forum for introducing new ideas and increasing participation in important discussions that leads to a strengthening of family unity and a reduction in confrontation and discord.
  

By implementing a governance structure, family-owned businesses can enjoy many benefits that contribute to a healthier business environment and more harmonious family relationship.

Achieving Business and Family Objectives

Identifying, prioritizing, and achieving objectives is often a daunting task for family businesses. A robust governance structure can help achieve goal sets by providing a clear rulebook for decision making and establishing company policy. FBG can help achieve a wide range of objectives including:

Business Objectives:

• Identify, train and assess family member talent for company positions and leadership roles.
• Facilitate conversations about key business issues including operations, performance and strategy.
• Create effective governing bodies including Board of Directors and Advisory Boards that set strategic agenda for enhancing business performance and growth.
• Develop consistent compensation, distribution and performance management policies.
• Create an open forum for family members to discuss business strategy and ideas.
• Enable family members to deliver a consistent message on the company’s vision, mission and purpose.
• Ensure company knowledge is passed on to succeeding generations of leadership and ownership.

Family Objectives:

• Create a forum for channeling family ideas, issues and concerns to the business and vice versa.
• Develop policy for the management, preservation and transfer of family wealth.
• Develop environments conducive for “round table” strategy discussions including family retreats and councils.
• Develop a defined process for dispute resolution and information sharing.

Key Elements of Successful Family Business Governance Structure

There are important characteristics consistently a part of well-defined governance structures including:

1. Balance: Successful governance balances the needs, views and experience of current ownership with those of future generations of ownership.
2. Flexibility: Successful governance evolves and adapts to the ever-changing family, ownership group and key management dynamic.
3. Buy-In: A lack of buy-in from all family members can undermine the effectiveness of an FBG model. Document buy-in from all involved as well as the ongoing effectiveness of structure functions.
4. Expectation Management: Ensure all participants understand the time commitments typically needed to build and maintain successful governance and that it is an evolving process. This will greatly help manage expectations and increase the probability of success.

No One-Size-Fits-All Solution

There is no template for the perfect family-business governance structure. Every family is different; every family business is different. The right FBG structure will be the one that works for both the family and the business. Start with a commitment to discuss, and reach consensus on, objectives, goals, and needs. Take into account the needs of the business as well as each individual involved. Partner with experienced advisory to ensure best practices and to avoid complication and potential pitfalls. A governance guidebook born from this exercise will help ensure shared long-term vision, sustained business profitability, strengthened family harmony and provide a set of guidelines that give family businesses the best chances of generational success.

Ready to Move Forward?

At Comerica, we have more than 175 years of experience helping families plan for long-term success. Our trusted advisors can help you walk through the governance process and build a dynamic model. Contact your Comerica Relationship Manager or request to speak with a Comerica professional today.

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