Extraordinary families take measures to create good governance structures

 

It’s a topic that tends to generate strong, often surprisingly emotional reactions: how to manage the governance concerns of a family enterprise. If nothing else, those in the room typically snap to attention and become engaged when the topic is brought up.

Why the reaction? Many people have heard of families and/or their businesses coming apart at the seams, typically during transitions of ownership or leadership. Stories abound of families ruptured by members who want to sell shares at the “wrong” time, siblings vying for leadership posts or senior-generation members unwilling to share ownership with the generation now running the business. While the tensions are common, proactively preparing for them as a multigenerational family group is definitely not.

One family that understands the importance of preparation is the Pannell family (a pseudonym), with whom we have been meeting over the past year. The Pannells have three active generations of ownership in a four-generation business enterprise, with the second generation beginning to plan to transition out of leadership roles five to 10 years from now. While this family is an ordinary business family in most ways, it is taking extraordinary action in commencing critical conversations around its future transitions and concomitant needs.

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The Pannells have four branches in the third generation, three of which have a member working in the business (two bloodline, one married-in). The prior (G2) generation, now active octogenarians, ceded leadership control long ago to these three family members, who have grown the company internationally and whose own children (G4) are now making decisions about their careers. The family is scattered all over the United States, as is typical in fourth-generation clans. For more than a decade, they’ve been gathering annually for family reunions and a brief shareholders’ meeting, but they don’t otherwise have a lot of opportunity to see one another.

Until recently they had not held multigenerational conversations about what the company means to them as family, what purpose it plays in their lives and the lives of their employees and other stakeholders, and what role they imagine it will play over the decades ahead. They had not previously discussed how family assets and business ownership suggest certain roles and responsibilities, nor opened conversations about the need to clarify expectations about ownership and stewardship. In this regard, they are an ordinary family. What makes this family extraordinary is their decision to come together now to do exactly these things.

Motivating factors

Several recent developments compelled the Pannells to take the vital step of proactively engaging in governance education and conversation. For example, one branch has sold its ownership shares, and the family is seeking ways to bring next-generation members of that branch into family meetings so that further rupture does not occur. Also, one G3 member has taken a large loan from the business to spawn a new enterprise, and this is having unexpected ripple effects. And there have been recent rumblings about perhaps uneven use of the family vacation home; the family is contemplating how access will be granted in the future, once G2 is no longer spending summers and holidays there.

During a recent retreat, members of the family broached conversations about:

• What the business means to them as a family and what they envision for the future of the business.

• What they hope to achieve, avoid and preserve going forward, in the family and the business and for individual family members (whether involved in the business or not).

• How the needs and interests of the three spheres of their family business (ownership, management and family) naturally come into conflict (as they do in all family enterprises past the first generation).

• How to prepare/educate/mentor/manage family members interested in working for the family business, including policies and guidelines that should be established.

• How to prevent family members who sell ownership in the business from losing their place in the family circle, and whether current buy/sell agreements should be clarified or amended.

• How distributions have been decided upon to date, and how stock distribution decisions are made in other companies.

• Why the youngest generation would like at least one of their cohort to be in a key company leadership position eventually, with others being prepared for future board involvement.

• How family and business governance has operated to date, and how it will need to evolve over the years ahead, in order to ease communications, shared decisions and transitions.

Establishing sustainable governance

The active engagement of three generations in candid discussions bodes well for the Pannells’ future, both as business owners and as a family. They are beginning to establish a number of practices that are common in business families who take a long-term view. Best practices for setting up sustainable family business governance include the following:

1. Discussing the potentially sensitive topics of ownership and management of the business—what the business means to the family and has meant historically, as well as the family’s vision for its future. The family’s shared vision and mission should be articulated, or reviewed and re-enlivened if they already have been codified.

2. Examining how decisions have been made, including how power and resources are allotted, and discussing what changes will be required in the future to support clear and effective decision making in the family and the business.

3. Establishing forums to achieve family, business ownership and management objectives. These forums include family assemblies, family councils, enterprise boards and shareholders’ councils. They take time, sometimes years, to put into place.

4. Reaching agreement on how information will be communicated, and who may be privy to various types of information. (Surprise in a family business is rarely a happy thing.)

5. Educating the family. Education enables individuals in each of the three spheres of the family enterprise—owners, managers and family members—to understand the world from the others’ perspectives, and to become savvy and cooperative stakeholders. Education also builds skills that support a shared family identity and culture.

6. Creating policies and agreements that maintain the family’s open communication, interpersonal trust and collaboration—before disruptive collisions occur. Employment policies should be developed before the next generation is ready to enter the business. Distribution policies should balance the needs of the family and the business in the right proportions.

7. Revisiting all of the above from time to time, in order to keep up with changes in the family and the business.

No cookie-cutter solutions

Many families seek the assistance of a trusted adviser in creating a governance structure. They might say, “We understand that we need one, because our family and business are growing, but we don’t know where to start,” or, “We want to start a family council; how do we do this?” Governance primarily consists of establishing rules of engagement: how the enterprise will be run, and where the boundaries of control and influence are for each sphere of the family enterprise. This requires information, discussion and stakeholder buy-in.

Although advisers can facilitate a helpful process and can help families to craft governance mechanisms and forums, there are no cookie-cutter structures and agreements that work for all families. And, as any seasoned adviser knows, what distinguishes extraordinary from ordinary families is the process of constructively vetting ideas, discussing options and crafting agreements that are unique to their family. Good governance is built upon important conversations.

Indeed, this process requires multiple conversations, spanning many months, often years. Without these, any adviser-led governance strategies are unlikely to get off the ground, or will nosedive over time.

It is inevitable that the family’s governance structures and agreements will need to be changed as time passes. Founders must come to terms with the fact that what has worked for them is not likely to work for subsequent generations. And all three spheres of the family enterprise need forums to establish their own mission and policies, to discuss options and make decisions about matters that affect them, and to represent their concerns and interests to the other stakeholders.

Communication skills can carry enterprising families through what are often make-or-break situations. Families should not begin all the difficult conversations at once; patience and persistence are recommended. Governance is best developed over time and with many inputs.

Families that take steps to establish clarity, consistency and consensus through governance structures are well on their way in the progression from ordinary to extraordinary.

Kristen Armstrong is a strategic wealth coach with Ascent Private Capital Management of U.S. Bank.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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