At its inception, the average family business is owned and managed by members of a single family. As the company grows, outsiders may be brought in as directors and managers, but ownership remains with the family.
As the operation grows even further and requires additional financial resources, outsiders may be invited to invest, and the family takes the first steps towards dilution of its 100% ownership.
We now have a business more accurately described as ‘family controlled’, rather than ‘family owned’, but it’s still very much ‘in the family’.
As time passes, further outsider investment may take place until less than 50% of the business is owned by family members.
While the family has now lost control of the company, it will typically retain a significant proportion of the shares and continue to influence the fortunes of the business.
Through each of these business stages, the values, traditions and behaviour of the founding family will affect the success of the business.
If family members share a common vision, speak with one voice and have harmonious, respectful relationships with each other and outsiders, they set the stage for success.
On the other hand, if they have widely differing personal values and business visions, send mixed messages, and have unresolved conflicts among themselves,
they set the stage for the business to fail.
And make no mistake, with emotion usually very close to the surface, compounded by family members’ dependence on the business for their personal futures, conflict is inevitable.
This is why it is crucial to get family members talking to each other as early as possible about the business. If they can communicate openly they are far more likely to understand each other and work out their differences.
But this will not happen without the right structures! Business governance is a regular topic of discussion in family business circles, but how can this ever succeed if family members don’t practise good family governance first?
The instrument commonly used to achieve this is the family council or forum. It’s a mechanism to get family members around the table and communicating openly. Apart from providing an opportunity for everyone to have their say, it should be used to achieve the following three goals:
- Educate family members about the business and the challenges it faces;
- Help family members develop an appreciation of their responsibility to the people who depend on the business for a livelihood;
- Build a common family vision.
The family council can be structured in a number of ways, but it’s often a good idea to use a professional facilitator to help set it up, define its role and determine how it will operate.
Basic organisational matters such as who is eligible to attend, how decisions are made and so forth will also need to be decided.
One of the council’s first tasks should be to draw up a ‘family constitution’, clarifying how issues affecting the family and business will be handled. These should include:
- Family business finances and investments;
- Share ownership and how dividends are declared and allocated;
- Succession plans;
- Matters that will not be discussed;
- Appointment and succession of trustees and directors, and the exit of beneficiaries;
- Training/education of family members;
- Family members’ involvement in outside businesses;
- Employment philosophy and remuneration of family members, and criteria for employment in the business.
Experience has shown that the earlier a family communication structure is set up, the better it is for the business and family.