Grant Gordon is Director General of the Institute for Family Business (UK).
The family council can provide a forum where families can discuss strategic issues and formulate policies that are well-matched to their goals as shareholders
In family business, planning for the future is one of the keys to securing long-term shareholder adhesion to the family project. The family council is arguably one of the principal tools at the disposal of families to help better plan their futures and exercise greater control over the outcomes.
Many families still view the board of directors as the only legitimate place for shareholder and business issues to be debated and for policy decisions to be taken. Boards can be effective when they have the independence to challenge management's strategic thinking. In these circumstances they can play a leading role in keeping the company on a path for growth and long-term success. Companies with a well-balanced board including some first class non-executive directors can focus on debating the strategic issues facing the firm. Family issues are ideally not allowed to interfere with the business agenda.
Families can come unstuck through a lack of unity within the family in terms of their overall vision, that is agreeing where they want to go in business terms. One example of a dynasty that suffered from the consequences of unclear direction was the Guinness family, owners of the eponymous Irish stout that was at one time the largest selling beer in the world. During the years following World War II, while the brewery continued to make healthy profits there was a lack of direction in terms of where the business was headed. This lead to a series of unsuccessful diversification moves. The company temporarily lost its way undermined by weak overall governance, especially at board level, that stemmed from a lack of leadership, formal planning and goal setting by the family shareholders.
Vision and values
A well articulated and written vision can provide the starting point for the family to have a rallying cause and can help build unity within the wider family group around a set of common goals. In practical terms the family vision can become the road map that will help guide the company, forming an integral part of the overall corporate strategy. To be most effective the family vision is arrived at through a parallel planning process with the business, as family and company objectives need to go hand in hand and be mutually compatible and achievable.
Values on the other hand are a set of behaviours that the family and its firm have inherited from the founder and his or her successors and have been developed over years of being in business as a family. Values can become deeply embedded and are often a major source of strength and resilience for the family firm. There are many examples of organisations that have achieved competitive advantage through a values driven approach such as the Axel Johnson Group, established in Sweden in 1873 and today in its fourth generation employing over 15,000 people. This family firm has sought to stay united based on sharing a common set of values as the foundation for achieving success. The family reviews their vision periodically adapting themselves to the current environment but keeping in sight their basic values. During their long history, operations have changed in size and shape according to the times, but also according to the beliefs, business assessments and dreams of the family.
Firms now recognise the need to have a clearly articulated set of values as the basis for operating and to provide the framework for how the company goes about its business and interacts with all its stakeholders. Third generation Yorkshire, England based premium food specialists Bettys & Taylors are strongly committed to a values based company philosophy founded upon a set of well-articulated and sensible guiding principles. This company has achieved recognition for its progressive and friendly work environment by being consistently highly ranked in the Sunday Times Best Companies to Work For awards.
Successful family firms build long-term success and sustainability on the twin foundations of a clear vision allied to a strong set of values. Where can firms find these ingredients? Founders and subsequent family and business leaders are usually the starting point from which the vision and values emerge. The wisdom, foresight and sheer ambition to succeed of the individuals who started the family business venture are often a powerful force that will have an endurable impact and can inspire succeeding generations. But markets and business cycles dictate that visions need to be periodically re-examined and put under a microscope to test their validity and be amended, if necessary.
The family council can be a good starting place from which to begin exploring such issues. A well constituted family council can provide a forum in which families can take issues of strategic importance for debate and help formulate policies that are well matched to their goals as shareholder's. The family council offers a chance to move the debate away from the boardroom, where business goals and strategy should normally be key issues on the agenda.
Once it is clear what the purpose of the family council is, it is important to ensure that the council is constituted in a manner that is broadly representative of the shareholdings in the company. The family council ideally involves a cross-section of family who are actively working in the company as well as those who have independent careers. The council should also be representative of the different generations in the family. For large families, where it is not practical for all the family to meet regularly, the family assembly, which includes all shareholders, can be a useful starting place to nominate or elect membership of the family council.
A good practice is to limit mandates, especially where there is a large family in order to give voice over time to as many people as possible. The chairmanship of the family council can be rotated periodically to encourage sharing the responsibility among family members. Family councils are often best served by some form of consensus-based process for making policy recommendations or reaching decisions. Major decisions such as a partial sale of the business, or a significant liquidity event may be referred to a vote of the shareholding body. The family council's recommendation on any such issues can carry considerable weight.
To have legitimacy the family council should ideally have the support of the senior generation. Unresolved succession issues can act as a hindrance to the proper functioning of the formal family governance mechanism, for example where senior generation members are hanging onto control and the new generation of family leaders are not fully empowered.
Well constituted and empowered to do its job, the family council can start to deliberate. It helps to define a clear agenda that will be drawn from a menu of owner related issues. Needless to say, clarifying the vision and values is one of the primary tasks that the family council can address. The process that the family council will undertake to articulate the family's vision and values helps dig deep into the motivations and rationale for the family business. It allows the family to examine the reason why they are in business together and what are the forces that unite them. It can help confirm the family members' commitment to a common goal and can highlight where there is a lack of consensus and potential areas for disagreement. Where there is a lack of unity, divergent views can be discussed and clarified, and acceptable solutions found.
Within the planning process the family can appraise the levels of growth and risk that they believe are appropriate. This evaluation will also explore the issue of expected returns and can include formulating benchmarks for the board and management. With an eye to the long run the family can also consider new and creative strategies for trans-generational wealth creation, as distinct to merely aiming to attain shorter-term gains in shareholder value.
The aim should be to produce a brief document that sets out in clear language the essence of the family vision or high level goals for the business and the values that underpin these aims. To ensure that the document is grounded in reality the business and family agendas need to be closely matched and mutually achievable; parallel planning discussions with board members and the business leaders are necessary steps in this regard. The vision and values should ideally match up with the aspirations and beliefs of the family and the family council should ensure that the process is inclusive of the entire owner group and once finalised be properly communicated.
Families should periodically re-examine such an important policy document as the family vision and values statement. This agenda item could be looked at twice in a decade. At this rate the vision would be revisited approximately half a dozen times during each generation. Major business events may necessitate more frequent reappraisal of the family's goals and may require linking the family council's planning cycle more closely with the long-term or strategic business planning cycle.
Through these processes the family council can take its share of responsibility for helping to secure shareholder unity. It can be a burden for boards in family companies to fully shoulder this responsibility when their focus is on what is best for the business. The family council can be the conduit for gaining owner consensus behind strategic proposals that the board has formulated. A good board will know through regular communication with the family, either directly or through the family council representatives, what is the family's zone of acceptability. The family council leader can be a good conduit for the chairman of the board to gain views on what the consensus family views are and where there may be stumbling blocks on achieving a shared family and business vision.
Creating the charter
Another useful role for the family council is to take on the responsibility for creating a family charter. It has become common for families to establish in a non-legal fashion a document that serves as a road map for the family including some key policies. The charter helps the family establish processes by which it can regulate its existence and ensure that as a body the family shareholders are an asset and positive driving force behind the family company. Taking the effort to formalise policies relating to the family and its relationship with the business is just one more step towards creating an open, healthy and committed owner group. This process can go a long way to healing possible wounds with family branches that may have felt disenfranchised or not listened to. Too often in the absence of any such formal guiding principles families abandon their futures to chance improvising as they go along.
The family's relationship with the business, as set out in a family charter, defines the way in which the two entities will work side by side. The underlying aim is to help set guidelines that will help management, the board and the family mutually coexist and ensure that each constituency is clear on its roles and responsibilities and where the boundaries lie. Most families aim to achieve transparency and an atmosphere of open communication but there also needs to be well-defined lines of accountability and reporting and protocols for how future family leaders will be selected. Determining the manner in which the chief executive, chairman of the board and leader of the family council communicate with each other and how other stakeholders are kept informed can also be set out as a family charter policy.
Many family companies also create a policy for shaping in outline terms the board of directors. This can cover such issues as how to select family representation, the procedure for selecting the future board leader or Chairman and the policy covering the nomination of outside board members.
Another useful domain for family councils is to debate and recommend policies governing the rights and responsibilities of individual family members and guidelines for relationships between family members and the company. This touches upon arguably the most important issue in family controlled business: the preparation and fostering of the next generation of family members. A holistic approach takes into account the entire owner group, including those who already are or will become shareholders. By taking an inclusive approach from an early stage everyone's potential contribution can be recognised and the chances of gaining broad commitment to the family enterprise going forward increase. Leaders have to be developed and chosen in order to fill a variety of roles; for example leader of the business, leader of the family or leader of an important issue such as family philanthropy. Spelling out the opportunities for family members to work in the business and the procedures and guidelines for gaining a career in the company is important and is a policy issue that the family council can deliberate upon.
The family council is a practical forum for the family charter to be debated and for policy proposals to be drafted, reviewed and eventually put to the wider body of shareholders for their approval. The charter is usually not a legal document but a statement of intent by the owners with guidelines covering key shareholder related issues. There may be parts of the charter that are of particular import, such as the sale and purchase of shares that may come under the jurisdiction of the company's bylaws. It is important where there are overlapping issues that the charter and the bylaws or articles are consistent.
With broad family support and attention to detail a family charter can increase the family's chances of avoiding pitfalls and steer a successful course across succeeding generations. The family council as the forum for crafting, implementing and monitoring the charter can help unlock significant benefits including achieving greater business success and family harmony.
Strengthening the enterprise
What is the acid test on whether the family council is helping to strengthen the family enterprise? If the tone of the meetings is positive, if the broad majority of shareholders value the contribution of the family council and if the board see it as a valuable addition to the overall governance structure of the family company it is probably worth the effort. On the other hand if tensions persist and the family council is failing to make the expected contribution before abandoning the exercise, perhaps the family should look at the underlying issues and examine why consensus is still eluding the family.