Family governance systems provide a mechanism for communication among family branches, minimize family conflict and protect the interests of all stakeholders in the enterprise. Family governance relies on formal structures (such as documents or a family council), as well as informal structures, or the family’s culture.
Family enterprises generally include one or more family-owned or family-controlled businesses, and often a family office and charitable entities. Family members have different levels of involvement with the business.
The image of a “family tree” is appropriate. Over time, the tree grows, its branches spread, older parts die, seeds travel afar and new shoots spring up. Families and family enterprises succeed over time by developing durable yet flexible governance structures, which guide the family through known and agreed-upon rules, commonly held beliefs and values, and a shared mission.
For the family, the formal structures begin with the family constitution. This document, though not legally binding, is analogous to a corporation’s bylaws. It outlines the family governance structure and the family’s values, vision and approaches to decision-making. As families grow and develop additional branches, a family constitution becomes more important. It serves the same purpose for the family as organizational documents like bylaws and operating agreements do for the business.
The family constitution establishes rules for family interactions. An agreed-upon set of rules and expected behaviors can minimize disagreements, but when conflict does arise, the constitution provides a structure and method for its resolution. Research from the Wharton Global Family Alliance shows that family members are more likely to be satisfied with family decisions and less likely to engage in conflict when they perceive the decision-making process to be fair. A sense of fairness also has a positive impact on the family business. Consistent processes tend to help make the family and family business successful over many generations.
One important and sometimes overlooked component of a family constitution is the family employment policy.
A Key Family Document: The Family Employment Policy
Challenges arise when family members work in the family business. For some, it may be difficult to set aside past hurts and slights (whether real or perceived) when interacting with other family employees or managers. Perhaps a senior-generation family executive treats a young family employee not as a colleague but as a child. The issues multiply when non-family employees are factored into the equation. If there is one opening for a promotion, and the choice is between a family employee and a better-qualified non-family employee, would family status factor into the decision? If it did, would the business’s ability to attract and retain qualified non-family employees be affected?
Of course, not everyone born into a family merits a role in the family business. Each family business is unique and requires specific aptitudes and personality traits. Some family members simply lack the requirements or drive necessary for employment in the family business. Employing an unqualified family member may harm the company’s financial health, employee morale or family relationships.
Many family constitutions include family employment policies that set forth clear criteria for entry into the family business. These often include:
- Education requirements, perhaps mandating that family members major in subjects related to the business.
- A resolution that the business will not hire a family member if the business does not have a legitimate job opening.
- A mandate that family members work outside the family business for some period, possibly including a requirement that they receive a promotion before being eligible to join the family firm.
- A requirement that family members who wish to join the business first serve as interns, perhaps in multiple departments.
Promotions and compensation for family members should be governed by clearly defined guidelines that are understood by all. Family employees should be subject to the same rules as non-family employees. Again, the perception of fairness is extremely important. If family employees are rumored to have an unfair advantage, the company will not be able to attract and retain qualified employees. Promotion and compensation should be based on skill and merit. Family employees should be placed in roles that are suited to their skills.
Additional friction can arise when family members (especially those from different family branches or generations) work together. The family “pecking order” can spill over into the business. One can imagine such friction when a younger family member supervises the work of a senior-generation relative. Similarly, placing a patriarch or matriarch in an “emeritus” role could create friction with younger family members leading the business.
Each role in the business should be clearly defined in a job description. Employee conduct should be governed by an employee manual. The family constitution, which governs family conduct outside of the business, should clarify that family relationships will have no bearing on business relationships. Mutually agreed-upon rules and expectations (with a mechanism for resolving conflicts) will help promote business and family success and limit hurt feelings and litigation.
Not every family business can or should be run by family members. If a family member is unable to advance to an executive position or to continue employment in the business, it is critical that the loss of position in the business not equate to loss of position in the family. If there is no family member capable of running the business, engaging a non-family CEO can enable the family to continue to own the business, reaping the rewards of its success through distributions.
A fair and consistent dividend policy will promote family harmony and prevent the owners who hold smaller interests from feeling “cheated.” Family expectations regarding both employee and owner compensation should be articulated in the family constitution. Above all, the family constitution should make clear that the family business is not the family “piggy bank.”
Ultimately, the most successful businesses have clearly articulated policies with respect to hiring, employment and compensation. Family businesses should be no different. In fact, the need for clear policies is even greater in the family business, where the lines of professional and personal relationships often blur. Setting clear, documented expectations perceived to be fair by all stakeholders is one important and powerful way to help your business and your family achieve success.