Family Business Governance Model: What you need to consider?
Good corporate governance is important for the success of any business. It is even more important when that business is a family business. The strategies put in place for communication, decision-making and reporting to stakeholders will need to evolve over time and consider the differing objectives of active and non-active family members across different generations. Here, Angeliki Kotsidou looks at the key things you should keep in mind when setting up or reviewing the constitution of a family business.
Differentiate between the family business and the family office
Family businesses exist to build wealth for the benefit of the founders and subsequent generations. The founders will want to extract value to fund their lifestyle while also putting in place a succession plan which considers ownership and management of the business going forwards. This can be dealt with in the constitution of the company which sets out the rules for how the company is run and how the financial benefit is shared around. This will likely evolve over time to take into account the growth of the business and the needs of the family.
Family offices exist to manage the wealth which has been accumulated by the family business for the benefit of the family. Clearly, there needs to be some wealth to manage in the first place, and any formal management of family affairs will likely be light touch at first and will crystallize over time as the wealth grows and the requirements of the family become more complex. The key here is to think of the governance model as a fluid, changeable mechanism for running the affairs of the family. It can and should evolve over time as the business grows, the wealth accumulates, and the needs and desires of the family become more complex.
Off the shelf or bespoke management
Family offices often start from humble beginnings (even when your name is Rockefeller). An individual is employed by the family to take care of business administration and any ancillary needs of the family such as organising payroll for staff of the business and travel arrangements for the family members.
As the assets grow and the needs of the family develop, this can be broadened into a network of outsourced third-party providers who are authorised to consult with each other regarding the family and whose joint efforts are coordinated by one individual on behalf of the family. This network may include financial planners, investment managers, insurance specialists, lawyers, and tax planners amongst others.
Once the assets reach a certain level these arrangements can be formalised into a full-service company whose sole purpose is to manage all these different facets under one roof. The question then becomes one of value-added vs cost. There are economies of scale to be found in pooling together with other families to form multi-family offices. However, there is a corresponding lack of control for less dominant families in such an arrangement. The holy grail will be a single family office which exists solely to serve the needs of one family. The costs need to be considered against the returns such an outfit can offer. For starters it will need to outperform any third-party wealth providers to justify the overhead costs.
Clearly define purpose and roles
The purpose of the family business will be self-evident: it makes a certain product or provides a certain service. The purpose of the family office is more difficult to define and will need to be the subject of consultation with all interested parties. Key considerations could include which assets to focus on for investment purposes, strategies for charitable giving, and priorities for spending and employing resources. These should ideally be written down in a charter and reviewed regularly.
The roles in the family business should be clear. Some family members will usually have clearly defined roles in the day-to-day running of the business. Others may own shares but be removed from the decision-making in relation to the business. By contrast, roles in family offices are less clear and often dictated by what each family members considers important. The best course of action to head off any potential conflict is to discuss upfront who is responsible for each component of the family office and how they will report to the rest of the family on their specific mandate.
The best place to start is with good communication. Where family and business collide, nothing can beat an organised and collaborative approach to considering and planning for the varying needs and desires of each member of the family. The details will be refined over time and the benefits should follow.
If you have any questions or require any further advice on this topic, get in touch with our specialist teams today at firstname.lastname@example.org
[This blog is intended to give general information only and is not intended to apply to specific circumstances. The contents of this blog should not be regarded as legal advice and should not be relied upon as such. Readers are advised to seek specific legal advice.]