Some of the key questions and concerns that come up include:
- How do I exit the business?
- How can I avoid selling the business and instead, keep it in the family?
- How do I transition the business to a new leader?
- How do I keep the next generation of leaders engaged and aligned?
Founders, often the family patriarch or matriarch, have built their business from the ground up – and now they face the complexities of making sure not only that their vision continues, but also that the family remains aligned.
Why Governance Matters
Family business governance helps to ensure that as your business evolves, so does the family’s alignment with the company’s goals.
This becomes even more important as both the business and the family grow. Over time, a simple husband-and-wife team may expand into a multi-generational family business, with children and grandchildren taking on different roles.
Most company founders want to exit the business at some point, but they also want to keep future generations engaged with their core values. And they want to make sure there‘s harmony within the family as the business leadership and ownership transitions.
Defining Strategic Roles for Family Members
What does each family member bring to your business?
Mature family businesses often follow a strategic approach, categorizing family members based on their value to the organization. These categories include the following:
- Shareholder capital: Family members who have built wealth in their own careers may contribute capital.
- Business network: Family members with industry expertise or a strong network can help drive growth by leveraging relationships and expanding business opportunities.
- Leadership experience: Those who have experience in leadership or managing other businesses can provide insights into managing the company’s top executives.
- Personal network: Some family members have extensive personal networks that can help recruit talent, forge commercial relationships, or influence regulators.
These defined roles for each family member can then help you determine the structure and type of governance that will best serve your business.
4 Types of Family Business Meetings
As a family business matures, so does the need for formal structures to effectively govern it. Four types of routine meetings that help to create a strong framework include:
- Board meetings: These are often fiduciary meetings that include both family members and independent directors. The board’s primary role is to protect the interests of shareholders. These meetings usually occur quarterly and involve decision-making about the strategic direction of the business.
- Shareholder meetings: Shareholders, who may include family and non-family members, own equity in the business. Their role primarily revolves around electing the board of directors, a responsibility critical to ensuring that sound leadership is in place. Shareholder meetings generally happen annually.
- Family council meetings: These meetings typically are held once a year and are open to all family members, including younger generations and spouses. Family council meetings focus on educating family members about the business, promoting a shared understanding of family values, and discussing responsibilities associated with being a shareholder.
- Special family meetings: These are called as needed to address specific events, such as emergencies or significant life changes. Often led by a family leader, these meetings create a forum to address urgent concerns that affect the family or business.
The Importance of Advisory Boards and Independent Directors
As a business moves through its life cycle, the board’s role also evolves. In the early stages, businesses often can lean on informal advisory boards to give guidance on product development, fundraising, or market entry. These informal boards are flexible and help entrepreneurs stay agile.
However, as the business grows, a more formalized board can help keep the leadership team accountable to its strategic objectives. This board meets several times a year and provides insights and recommendations without the legal authority of a fiduciary board.
Eventually, many family businesses establish a fiduciary board, which holds legal responsibility and makes decisions on important business matters, including CEO oversight, compensation, and succession planning. Fiduciary boards are typically composed of a mix of qualified family members and independent directors, whose broader expertise can be valuable in maintaining the business’ long-term success.
Lastly, research consistently shows that bringing independent directors onto family business boards makes governance more effective.
Independent directors offer fresh perspectives and subject matter expertise that complement family members’ existing knowledge. By including qualified independent board members, family businesses can enhance decision-making and create a more robust governance structure.
Original article by Rob Ferguson Ferguson Alliance