Family business governance is a topic that covers two broad areas; governance of the family and governance of the business. Even if the entrepreneurial model works well for the initial stages of a family business, when the company expands, it requires to adopt a more formal model.
The Three-Circle Model of the Family Business System introduced by the Harvard Business School is widely accepted as a framework that focuses on the survival of a family business. It represents three interdependent systems in a family business; Family, Ownership and Business.
Most of the families find the need to discuss the family business issues (e.g.: family fairness, succession issues, etc.) in a formal manner. The most appropriate venues for this are identified as Family Councils, Family Retreats and Family Meetings.
Family Council is an organized, self-governed group that considers the complex issues faced by a business, especially, the policy and planning issues. It aims at facilitating the growth and common values of a family business. This is operated separately from the board of directors. It has no connection with the company’s shareholder meetings. The functions of the Family Council include:
- Determining how the family members are entering the business
- Ensuring family fairness
- Documenting family history
Family Meetings are formal meetings that provide the family members the details about the status of the family and its business. This is a platform to constructively discuss the issues in both the family and the business.
Family Retreats are conducted as few days away at off-site locations. ‘Retreat’ comes from a Latin verb, which means “to pull-back.” This creates an atmosphere for the family members to detox themselves, be more spacious and be inspired. This also allows to get a time-out from all the distractions and concentrate on the problems in the family and the business.
Other than the above, the Board of Advisors and Professional Management are two ways to improve the performance and the status of a family business.
Board of Advisors
At the initial stages of a business, the owner might handle all aspects of the company. However, as it develops, it is important to apply the expert knowledge / opinion. The Board of Advisors is a way of doing that. Most of the family business owners consider this as an ideal step of the company’s evolution and growth.
Sometimes, family members who are ranked top at the company hierarchy might not be qualified, knowledgeable or might not even be interested in business discussions. This brings the importance of hiring professionals who bring their educational and professional expertise to work. They are helpful in increasing the overall performance of the company and also a great way of managing the bridge between each member of the business. This role is known as “bridge-management.”
The process of creating a strong family governance criteria requires a lot of patience and perseverance but it produces a rewarding outcome for both the family and the business in the long run. For more information on Family governance, refer IFC Family Business Governance Handbook.