One of the best things about living in Philadelphia is the proximity to several of our country’s revered historic sites. Independence Hall, where the Declaration of Independence and the United States Constitution were debated and adopted, is right here. There’s nothing like celebrating the Fourth of July in the very spot where our country was born.
Our system of government here in the United States isn’t perfect. If you watch the news, you know that. But representative democracy is the most practical and effective way to run our large and diverse nation. (Can you imagine the chaos that would befall us if every citizen of voting age — hundreds of millions of us — had to vote on every bill proposed by our national, state and local legislators?)
Representative governance is also the most practical and effective way to run a family enterprise in the third generation and beyond.
From autocracy to representative democracy
In the founding generation, a business operates as an autocracy. The founder, usually in partnership with a spouse, makes all the important decisions. That’s logical (and obvious), since the founder is the person whose capital is at risk.
In the second generation, family businesses become monarchies. There is now an heir (and, often, one or more “spares”) working in the business. Some business decisions are made by consensus, but the business leader has veto power. Toward the end of the second generation or at the beginning of the third, the G2s who are not the heir apparent may start to feel like lesser royals. Those who don’t work in the business may feel like commoners.
When the family reaches the third generation and begins contemplating the fourth, family branches have developed, and some branches are larger than others. Some might consist entirely of shareholders who do not work in the family firm. Family members may have moved far from each other. At this stage, representative governance emerges as the best way to keep the family united in support of the business.
Debates are likely to arise about how (or whether) dividends should be paid and who is eligible to join the family company. Family history lurks in the background of business discussions. This is the time to develop policies and procedures — employment policies, dividend policies, stock redemption policies and confidentiality policies, to name just a few.
To clarify why these policies are needed, it’s advisable to write a family constitution, with a preamble that includes the family mission, vision and values to put the policies in context.
The framers of these constitutions (a group of dedicated family volunteers) anticipate problems the family will face down the road and lay out procedures for resolving them. The full family ratifies the documents, which are debated and revised until everyone is comfortable signing them.
The family’s elected officials
In a large family, not everyone has the time or the bandwidth to do the work of creating family policies and resolving quandaries. That’s where representative governance comes in. Most families call their governing body a family council, though other names, like family senate, have been used. Some family councils have branch representatives; others elect their representatives by generation or ensure that certain constituencies, such as married-ins, are represented.
Many family councils convene committees to handle major tasks such as planning an annual family meeting or developing a family education program. Committees can be opened up to include family members who don’t serve on the family council but have a strong interest in the project at hand (for example, parents of young children who want input on educational programming).
In large, later-generation families, it can be advisable to create an additional governing body called an owners council, which represents only those family members who hold shares in the family business. Having both a family council and an owners council draws a distinction between the business realm and the family realm. It also opens up opportunities for more family members to serve.
In family governance, just as in U.S. governance, there will be arguments over fiscal policies. Key constituents will lobby their representatives. Factions might develop. But there will also be the satisfaction of enacting policies for the common good and seeing cousins working together and strengthening bonds.
Given the importance of family governance, I’m surprised at the number of business owners who don’t even realize it’s a thing, let alone recognize it as the way to resolve family issues. I look forward to the day when everyone wants to be in the room where it happens.