Family Governance means an ongoing process that introduces transparency, accountability and inclusiveness in the way a family operates internally and in relationship to its business. It helps in maintaining equilibrium between stakeholder needs, ownership, business requirements and very importantly family dynamics.
The Governance process effects this equilibrium in two ways. First is by ensuring that certain elements such as communication and decision making, family and business visions, succession planning, sustainable and continued family income, etc. are in place.
Second is by preventing misfortune like lower income per member, uncertain & unsecured future, neglecting stakeholder needs, chances of conflicts, botched succession, etc.
In the current article, we shall talk about the big “How” that besets many business families: how to initiate Family governance.
Initiating the Family Governance process could be done in five stages which are explained below:
1. Starting the conversation: If one is convinced that family Governance is the way ahead, then one should start this conversation with other family members as well. This will involve creating awareness about the need of Family Governance, benefits and the process. Second part will be to drive confidence in them that this is the way ahead and they need to be on board for this to proceed. Convincing family members could be the most difficult part and may require help from the experts.
2. Developing an understanding of the current situation: First important step towards introducing something new is always to have a detailed analysis of the present. one will need to think about basics such as family members, business, ownership structures, relation within and between these three, family vision and family values. It gives one the much-needed clarity of thoughts which is mostly not there because of personal involvement.
3. Deciding upon areas that require Governance: While, Governance as a concept might seem to be an elixir for business families, it is not that easy when it comes to the practical part of organizing it. There are multiple areas in which the business family could apply Governance. Often a family needs to consider which areas would it want to prioritise or begin with. Decisions depend upon the need of governance in that area, its impact and investment in terms of time, energy and money.
As they say, a good beginning is half the battle won, thus families need to be wise about selecting the areas to begin with to apply Governance. This will result in effective organization of the whole process.
A family could begin by looking at family members’ involvement in business; efficiency of communication within family and with business; or how the decision – making works.
Gradually, the family could move to more complex areas such as ownership patterns, role and responsibilities of working members organization of board, interrelationship between family, ownership structure and business management especially the financial aspects, issues pertaining to common assets.
There are multiple areas that could require Governance, and a family may need external help to navigate through the decisions to prioritise and focus on certain of these.
4. Establishing formal Structures to drive Governance: Just as any other form of governance, Family Governance also requires certain structure to make it operational and effective. These structures could be Family Council, Family Forum, Family business Forum, Family Assemblies, Committees, etc.
For example, a large joint family in the midst of professionalising its family business, with 2 uncles from the second generation and four cousins from the third generation working in the business may decide to have a Family Council consisting of senior members to decide on crucial family and business, a Family Business Forum for the cousins involved in the business for day to day business matters and a Family Assembly for all family members for cohesiveness. A family business with two siblings in the first generation running it, would require a very different formal organisation.
These structures are primarily meant to streamline communication, crystallise responsibility and enhance accountability, expedite decision making, address aspirations and concerns of different family members, all of which go a long way in keeping the family together.
Since these structures act as a family’s pivot to the business side, it is crucial to get this formal structuring right for all family stakeholders whether involved in the business or not.
5. Developing Policies and Procedures: With a common objective and formal communication structures in place, and areas where governance needs to be emphasised are identified, the next step would be to set policies and procedures that are founded upon the family values. The success of these processes and policies would depend on the extent of involvement and buy-in reached at by the family members.
Although, not initially, but eventually documentation is a vital part of organization of governance. Documentation considering legal, tax and global aspects likely to affect the family is necessary to ensure that not only internal conflicts are avoided but external conflicts too may not arise out of regulatory or compliance issues, and the structure remains feasible to implement.
Also Read: Family Business