John L Ward is the Co-Director of the Center for Family Enterprises at Kellogg School of Management (USA) and the Wild Group Professor of Family Business at IMD (Switzerland). He serves on the boards of four family companies in Europe and the USA.
A family council is common in a large, sophisticated family-run firm. But they can be tricky to implement and, like families, each is unique and evolves in its own way
When successful business families expand in family size and shareholder numbers they typically form some kind of a family organisation – a family council or a family association to look after the family's interests. In fact, as discussed in the previous issue, the family organisation often becomes the family's central governing body. For enterprising families the family council may oversee and coordinate the roles of the family company's board of directors and also the family's foundation and its family office.
Though family councils are common prescriptions for large, sophisticated families, they are complex to implement and for each family the concept will be different and will evolve. To attempt to help families think through or review their family governance system, the goals, roles and holes of such a system will be explored.
Goals and stewardship
There are two broad goals. The first is to assure responsible, committed and active stewardship of all the family's assets. Families seek to keep their businesses strong and their financial and heritage assets safe and productive. As generations pass, this goal becomes more difficult to achieve because proportionately fewer and fewer family members have had the actual firsthand experience of growing up with the business or of operating the assets. The second goal is to assure effective, healthy and strong family relations. Families seek family continuity for its own sake. As generations pass this goal becomes ever more challenging as fewer and fewer family members grow up in the same home or even in the same community.
Roles and functions
To realise these two goals requires three functions. The family council fosters these functions and the activities to support them. The first function involves meaning and purpose for the family to provide commitment and motivation to serve the family's aspirations. The second function involves education and development of family members to provide the skills and knowledge to achieve the family's objectives. The third consists of leadership and effective decision-making processes for the family to provide the leadership for and continuity of the family's interests.
Holes and conflict
On paper the roles, goals and structure of family governance are quite clear. Different families, depending on their size, culture, resources and scope of interests, will pursue more or less of the functions of the family council and will, almost certainly, alter the structure of the family organisation. In practice there are three particularly difficult issues that can create frustrations and conflict: selecting family members to leadership roles; voting family member interests and business ownership interests; and funding family activities and governance costs.
Selection of family members to family roles creates an inherent tension between a family's bias for inclusion and sharing opportunities with an organisation's needs for efficiency and effectiveness. Some families focus on role competence and merit and create competitive voting processes. Sadly, many often feel there are 'winners' and 'losers'. Some qualified people avoid the contest. Other families focus on rotation and equality and develop a progression of board participation.
The selection options are numerous between these extremes:
- competitive elections;
- confirmation of nominating committee proposal;
- constituencies select representatives (branches, generations, etc);
- incumbents select successors;
- ladder-of-chairs up the organisation's hierarchy;
- active subcommittee volunteers as members of coordinating committee;
- random rotation of roles.
Many families minimise the challenges of this issue by hiring a professional staff (family office executive director) to provide most of the leadership. Nonetheless, somehow some governance roles are necessary, if only to oversee the family office.
The voting rights issue is also a difficult one. Families usually like to promote the 'one person, one vote' system. Enterprises prefer to allocate votes on the basis of relative investment – one share has one vote. If shares and family membership are widespread, families often lean to per capita processes. If shares are concentrated or disproportionate, families separate the voting system depending on the issue: family social activities on a per capita basis; business governance decisions on a per share basis. Ideally, families will work hard, through education and community spirit, to ensure either system of voting will result in the same outcome.
Funding family activities and governance is a related complex topic. If ownership distribution and family members are not equivalent, there is the prospect that there are disproportionate benefits relative to the taxes paid, most often because the funding comes from a percentage of company profits or a percentage of investments managed. To mitigate this funding complication some families have per capita dues or charge on the basis of services used, despite the administrative burdens of doing so. In some families earlier generations foresee this inevitable issue and endow or pre-fund family council functions and costs.
While the process of organising, thinking through and managing a family council and the overall family governance system is challenging, the goals and roles of a family council are essential to the long-tem continuity of an extended family. The keys to success are clear. First, plan ahead and address future issues sooner than later. Second, approach all issues with the fundamentals of fair process in mind. Third, realise that past investments in family cohesion bring the goodwill, trust and tolerance to skip through troubling times. When these conditions are in place, natural, unselfish, informal family leadership will emerge when needed. Everyone will know it, and everyone will respect it. Then adaptation of the formal structures and processes will occur for the family's next era.