Why Governance is the Backbone of a Successful Family Business

Leading a family business requires individuals to wear multiple hats. You can be a leader, sibling, shareholder, and peacemaker all at the same time. Without a proper governance structure, these roles become blurred and increasingly more difficult to separate. 

Family business governance is the processes in place to govern decisions made around the family, the business, and the intersection of the two. The purpose of a family business governance structure is not about control – it focuses on creating clarity and fairness in your decision-making process. Through this, businesses establish a foundation for sustainability and innovation. 

Why does Governance Matter?

The importance of governance in family businesses lies in its ability to separate the family from the business, and vice versa. It lays out clear guidelines that pave the way for thoughtful and decisive decision-making. Creating a well-structured framework can help in the following areas:

1. Separate emotional decisions from strategic decisions. One of the most unique challenges that family business leaders face is separating emotional and strategic decisions. What happens when a tough decision affects an employee – for example, your son-in-law? A well-defined governance structure supports an objective, balanced-decision making process that promises the health of the business, not just the needs of the family.
2. Support sustainable growth. How can family businesses scale without structure? Governance helps eliminate bottlenecks and reduce confusion, especially during periods of transition or growth.
3. Manage multi-generational involvement. Transgenerational family businesses can face unique challenges due to the increasing number of stakeholders by the 3rd, 4th, or 5th generation. Even a second-generation family business may involve many owners. Proper governance gives family members a forum to be involved, voice their opinions, and prepare the next generation of leaders – if they choose to be.
4. Prevent or resolve family conflict. We’ve all seen family conflict spill into the business. Having a structure in place for addressing conflict, such as a family council, creates a safe space for these conversations to be had before they escalate. Governance emphasizes the difference between “family problems” and “business problems”, which reduces stress on employees and protects the health of the business.
5. Plan leadership transitions effectively. Succession is a cornerstone issue for transgenerational family business. A strong governance structure lays the groundwork for a succession plan. It often outlines how a new leader will be chosen, trained, and supported, minimizing disruption during transition and ensures business continuity.

What Tools are Typically Used in a Family Business Governance Structure?

Governance has little value without the tools in place to support it, and their use depends on the size, complexity and goals of the organization. Here are some key mechanisms that we use when working with family businesses:

1. Family Board. The family board is a smaller group made up of key decision makers in the family. This board typically meets quarterly or semi-annually to manage the interface between the family and the business. Ideas and decisions made here will often filter down to the family council for broader discussion.
2. Family Council. The family council is composed exclusively of family members – both active and non-active. The council meets periodically (typically annually or semi-annually) and is designed to discuss pertinent information to the family business, such as: business discussions, education, strategic planning, among others.
3. Shareholder Meetings. These are formal gatherings of the owners. Typically held quarterly, semi-annually, or annually, shareholder meetings are focused on matters related to ownership, dividends, voting rights, or any other major decisions that affect their ownership of the business.
4. Advisory Board. The advisory board introduces external perspectives. The board is typically a mix of outside advisors and trusted insiders that meets a few times a year. Typically, the advisory board is designed to provide an objective and outside perspective. Meetings are more flexible than more formal board meetings and can focus on strategy, opportunities, or challenges that the family is facing.
5. Family Forum. The family forum is an open event for the extended family, including spouses, children, and non-owners. It focuses on education and communication, promoting transparency  and unity across multiple generations.
6. Next Generation Initiatives. These programs are designed to engage younger family members (typically between the ages of ~10-30), and introduces them to the family business. Activities may include internships, part-time work, and education. This builds a foundation for future leadership roles if they choose that path.

Let’s Build a Governance Model that Works Specifically for your Family Business

A strong business governance model isn’t just for large corporations. In fact, the importance of implementing a governance model into your family business cannot be overstated. For some, it can be the difference between successfully becoming a transgenerational family business or failing to prepare the next generation of leaders.

At BCR, we design governance models that reflect your values and meet the specific needs of your organization. If you are ready to start thinking about adding more structure into your family business – we are here to help! Let’s talk governance.

By Cameron Gorski, Associate Consultant, Business Consulting Resources