The Family Business - Governance of the family owned business

15 March 2019

Good governance can ensure the effective and prudent management of a company’s business and assets, delivering sustainable long term success for its stakeholders.

Only 12% of family owned businesses survive beyond the second generation of ownership. A family owned business has additional complexities, needing to think beyond the managers, to those family members who are not shareholders and have no day-to-day involvement in the business.

Effective governance is something that can and should be considered even in the early stages of a company’s lifecycle. The founder may be the sole owner/manager, but could, nevertheless, lay the foundations for good governance by ensuring that the business looks beyond pure profit generation to establish a wider vision and purpose from the outset.

As the second generation starts to enter the business, governance may be as basic as ‘family meetings’ across the dinner table. However, at this stage family businesses should start formalising their governance processes, as doing this early on will be easier when the business and family structures are more simple and the voices of opinion less diverse.

Developing a governance framework can help the family determine its values and the purpose of the business, producing guiding principles for the family’s broader wealth. It will address the roles and balance of power between the business managers, shareholders and the wider family members, distribution of wealth, decision making at company and family levels, dispute resolution and succession. There is no standard form model and it will need to evolve over time to meet the changing needs of the business and the family.

The legal and administrative elements of a business’ governance may typically be found in the company’s constitutional documents (a public document known as ‘articles’). Separately, a family constitution may cover private matters particular to the family and the family’s wider wealth and assets.

Drawing up and agreeing a family constitution can be challenging, as it will address some difficult subject matters and possibly the odd elephant in the room. The role of a trusted adviser can be valuable in guiding the family members to establish clear and practical principles and deal with difficulties through professional experience and impartiality.

For further information, please contact Alexandra Nelson or a member of our Family Owned Businesses Team.

This article is from the March 2019 edition of The Family Business, our newsletter for those working within family-owned businesses. To download the latest issue, please visit the newsletter section of our website. Law covered as at March 2019.

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