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Build continuity by formalizing family governance

Blurred boundaries are a common phenomenon in family businesses

Have you spent holiday dinners talking about inventory, margins and marketing with family members who aren't involved in daily operations of the family business?
And how often have you thought noninvolved shareholders overstepped boundaries in trying to influence those operations?
Blurred boundaries are a common phenomenon in family businesses. While usually not a problem in the early years, when all decision-making authority rests clearly in the hands of the founders, the need for a family governance structure that separates the roles, responsibilities and rights of all involved becomes a success factor as the business and family both grow.
In fact, research shows family governance was one of three characteristics found in successful family businesses more than 100 years old, along with having a board of directors and a strategic plan.
"Those are three structural pieces you can put in place that definitely lend continuity," said Carol Ryan, vice president of the Family Business Consulting Group (efamilybusiness.com). "We find them over and over again in multi-generational organizations."
For small businesses, establishing a family governance structure can be as basic as holding regular family meetings to share information and discuss salient issues. If the family is too large for all to be involved, a family council can be established. Either option provides a structure for conversation, education and decision making.
"Greed, entitlement and jealousy are the three things that kill family businesses, so you have to have what I call a legitimate structure for these kinds of discussions to occur. That to me is the basis of governance," said Leslie Dashew, president of The Human Side of Enterprise and a partner in the Aspen Family Business Group (lesliedashew.com).

Define, discuss, decide
Some founders wait until they are thinking about succession planning or bringing extended family members into the business to set up a family governance structure, but as with most milestones, planning for them ahead of time makes life easier.
If you have no family governance structure in place, Ryan recommends starting out very informally with family meetings two or three times a year.
One of the first decisions to be made, of course, is who should attend. Both Ryan and Dashew recommend opening it up to all family members who have a past, current or future interest in the business, including in-laws.
"Transparency is always better than secrecy," Ryan said. "People make their own rules so if you say no in-laws, then no in-laws; but you will probably do better by casting a wider net."
Dashew suggests the family start by drafting a family constitution which spells out agreement and methods of governance, such as, how the family will resolve an issue when they can't come to consensus.
For example, a recent client of Dashew's, a family that includes third-generation cousins, created clear rules for decision making when setting up a family council.
"They chose that all family members over 18 would be part of the family council, that all members and their spouses were invited to participate and that everyone at the meeting would have a vote," Dashew said. "If a decision could not be made by consensus, then the beneficiaries over 18 would have the right to decide by super majority vote."
The family meeting should be conducted as a regular business meeting with a facilitator, agenda and record-keeping. If major issues are to be discussed, the meeting organizer (a task that can be rotated among family members) should send out relevant information before the meeting so attendees come prepared.
A family member can also serve as the facilitator, especially when the agenda focuses primarily on updates for shareholders who are not involved in the daily operations. However, when discussing family employment policies, succession planning and other major topics, hiring an outside consultant allows all family members to be participants. An outsider also can help keep the meeting on track during the discussion of potentially controversial topics.

Beyond family
For family businesses with a board of directors, the family member serving as CEO is the liaison between the board and the family governance structure.
Although most small businesses don't have a board of directors, Ryan and Dashew agree a board can provide a vital outside perspective to keep the family business relevant. Another option is a board of advisors who don't have fiduciary responsibility but who can add a perspective not tied to the family's point of view.
Whether or not the family wants to work with a board, setting up family governance remains a critical step in the continuity of the family business.
"It's key for people to understand that there are risks if you don't have rules for shared decision making," Dashew said. "Because god-forbid that something happens and the next generation isn't prepared. You risk losing the asset that the first generation worked so hard to build."

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