Time to professionalise family business governance

We know of successful business families who manage to keep the family cohesive and grow a thriving business, going from strength to strength in building the family legacy and united by a common vision.

There are others, however, who bear the scars of internal disputes, arising from fallouts between generations, breakdowns in communication or a lack of transparency.

Some of the business family clients we work with believe that relying on the trust, savvy and goodwill of family members is never enough.

What is the secret to some families’ success? For most, it points to having a good family governance framework which evolves through generations and adapts to changing circumstances.

Drawing up a framework early can make the boardroom a positive force for effective stewardship, management and decision-making, avoiding the above pitfalls.

Navigating around the complex dynamics of family relations is challenging in itself. But when a hard-earned business empire becomes a dominant and wealth-creating influence across generations, family dynamics spiral to a new level of complexity.

The key is to recognise differences, prepare and plan early.

Growing awareness of family governance

For a lot of business families, they are used to thinking strategically about the business itself and their investments.

But when it comes to inter-generational wealth transfer or leadership succession, they find themselves in unfamiliar territory. Besides, family dynamics and emotions come into the picture.

Fortunately, there is now growing awareness and more business families in the UK and Europe are starting to pay attention to this.

Addressing differences

When control and management shifts from the founding patriarch or matriarch to the next generation, a consistent decision-making process is necessary to ensure the transition is carried out seamlessly and harmoniously.

As families grow, there are more interested parties wanting to be heard. Greater transparency and consensus building are needed on matters as simple as dividend policy. For example, views will differ between passive and active shareholders on whether to reinvest or realise the returns.

A sound governance framework helps address these concerns and reconcile differences, so that family disagreements will not turn into conflicts, and distract people from focusing on the business.

Recently, we worked with a client where the founder decided to divide up control among his children and their spouses as they entered the business, vesting them with decision-making powers in different capacities.

Recognising the potential for conflict and to avoid pillars of power from forming, we developed a governance process describing when majority or unanimity was required for key decisions such as senior management remuneration, business acquisition or disposal.

Separating ownership and management

A good framework should set expectations and clearly define ownership or stewardship roles, separating these from the day-to-day management and running of the family business where feasible.

Instead of the CEO having to worry about family matters, he can focus on pursuing business growth while designating other family members or trusted third-party advisers to manage the concerns and differences of the family involved in the business.

As part of the framework, we often recommend forming committees among family members to understand the competing needs across generations and facilitate resolution or consensus.

Handing over to next generation

Non-family advisers, who are less emotionally invested, are also valued for their objectivity in balancing the needs of the family and business, and mentoring the next generation to lead the business. They sometimes step in to manage the transition and provide valuable guidance until the younger generation is ready.

A prominent family we know well tells us how their children, after working in the corporate sector for a number of years, eventually returned to the family fold with a greater sense of duty and commitment because they made up their own minds about it.  

No one-size-fits-all solution

When drawing up the family governance blueprint and putting in place rules for collective decision-making, it is important to build in recourse such as mediation or dispute resolution if things end up in gridlock.

Structures such as trusts may be useful in protecting assets and allowing for orderly succession planning across jurisdictions. Family offices can be appointed to professionally manage the wealth and investment portfolios as well as attend to tax, estate and accounting matters on behalf of the family.

There is no one-size-fits-all solution as each family is unique, but the time has come to professionalise the way family governance and succession planning objectives are carried out. It is no different from how the family business is run with a long-term strategy and plan in mind.

By Stephen Skelly, Regional Head of Private Wealth Solutions, EMEA, HSBC Private Bank