Reviewing Family Business governance
11th March 2020
One of the great strengths of family businesses is their ability to adapt and take decisions quickly. It is notable, however, that this is often combined with an inbuilt conservatism in terms of changes to their own organisation. There are good reasons for this. Firstly there will be a natural desire to preserve culture which could easily be lost. Equally, changing the structure and governance of the business can pose difficult questions, for example:
- who will make key decisions?
- will anyone feel marginalised?
- what role should non-family members play in managing the business?
- what should family business governance look like?
Just as important, it is hard to find time to step back from day to day issues and think about the bigger picture.
However, as the business’ and the family’s circumstances change, governance arrangements which have served well for many years may become unfitted to the reality of those circumstances.
A review of the structures for controlling the business can simplify governance, re-establish clear roles and help the business thrive. Put another way, effective governance can add value whereas an absence of good governance will undermine it.
Business governance vs family governance
There is plenty of guidance on governance for non-family businesses, but the governance needs of a family businesses are more complex because business issues need to be balanced with family issues. In a family business involving a number of family shareholders (and probably different generations within the family) it pays to consider governance structures for the family as well as for the business. The aim of these is to provide structure to the relationship (1) between family members themselves and (2) between family members and the business, and to provide a forum to discuss these.
A formal system of family governance can seem restrictive but it can bring huge benefits. At its best, a good system of family governance can help in promoting good communication, avoiding conflicts, ensuring fairness, removing resentment around issues such as dividends and remuneration and ensuring that the next generation are encouraged to get involved. Just as importantly, effective family governance sets out clearly how the family communicates with the business, enabling the business to run effectively without the distraction of lobbying from family members. In larger family businesses, a formal structure can also be helpful in explaining to inexperienced or distant family members how the business operates and their place in it.
The appropriate form of family governance will be individual in each case. There is no ‘one size fits all’ although there are some standard ‘components’ which can be combined together. In general, the requirements are likely to be more complex for an older family business (with more shareholders) but it may, paradoxically be trickier to devise a governance template for a younger business where there is less precedent.
Components of any governance system for a business family might include:
- family charter/constitution: this is a non-binding document in which the family set out their common vision for the long term future of the business and the family’s relationship with it. The contents are entirely individual to the family/business in question but it is likely to cover the family’s views on the future direction of the business, the aims of the family (eg supporting the local community, charitable giving), succession, ownership, remuneration, decision-making and educating the next generation.
Developing a family charter can be a lengthy process because the draft document needs discussion and reflection. Once complete, the charter should be reviewed at regular intervals to ensure that it continues to reflect the family’s views.
- shareholders’ agreement/ articles of association: while a charter imposes a moral obligation on family members to stick to what has been agreed, it is generally not legally binding. For many families it is also important to record some provisions in a document which is legally binding. The most important aspect to be covered, generally, is a restriction on transferring shares, to ensure that shares in the business remain owned by the family and cannot, for example, be transferred on divorce.
- family assembly: this is a forum for all family members to receive information about the business, meet regularly and get to know each other. The activities, shape and size of the assembly will vary but assemblies are particularly important where the number of family shareholders has become so large that they no longer know each other well.
- family council: in larger family businesses, the council speaks for the family to the board of the company and ensures clear communication between the family and the business.
A review of any business’ governance will look at a number of factors including board composition, board effectiveness, clarity of roles and how decisions are made. There are plenty of useful guidelines to assist with reviewing business governance. The aim is to establish a logical organisational structure which enables the business to run efficiently.
For family businesses, there may be particular questions around board composition and the extent to which non-family directors are appointed. The key is to focus on the effectiveness of the board. It is generally agreed that a non-executive director (NED) who is not a family member can bring a valuable new perspective to the board, but this will not always be the case. In many cases non-family NEDs may appointed who are too close to one member of the family or who lack sufficient training and therefore do not bring the independence for which they were appointed.
A review of business and family governance arrangements can be undertaken at any time, but there are various events which will frequently trigger a review.
- Business growth/change: As the business grows, it is important for its governance system to develop with it. Whether the business has grown organically or by acquisition it may make sense to rationalise operations to bring similar elements of the business together or to review management functions to create a clearer reporting structure. This can reduce costs and can also help to give outside parties (including lenders and new senior managers) greater clarity about the business.
- Family changes: Where the ownership structure of a family business changes it makes sense to review how decisions are taken. This is particularly the case where the shareholder base is expanding because it can quickly become impractical to coordinate the decision making process with a large number of stakeholders.
- Succession: this is a key point in the life of any family business and needs to be carefully managed to allow the younger generation to step in while the older generation retain an interest and a role in the business.
Businesses (and families) grow and change. Structures need to be appropriate to the size and complexity of the family and the business. For these reasons it pays, from time to time, to re-examine governance and consider whether the governance structure of any family business is fit for purpose.
Jim Aveline and Douglas Streatfeild – James are members of the family business team at Burges Salmon LLP