Navigating the Path to the Perfect Governance Structure for Your Family Enterprise

Welcome to Legacy Builders: Strategies for Building Successful Family Enterprises. I’m your host, Cory Gagnon, and in this show, we explore different ways to take control of your wealth while building a lasting legacy. Together, we’ll cover global ideas, concepts, and models that help family enterprises to better navigate the complexities of family wealth. This podcast is brought to you by Beacon Family Office at Assante Financial Management Limited.  If you find today’s episode helpful, feel free to share, and don’t forget to hit the subscribe button. Now let’s dive in!

Today, we are discussing the ultimate strategy for selecting a governance structure for your family enterprise. But first, let’s ask ourselves this question – why is a governance structure important for a family enterprise?

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If you’re a family office or family business looking to preserve and grow your wealth, then you need to have a robust governance structure in place. A governance strategy is the foundation of any successful family office, ensuring that your office operates efficiently and transparently.

So what is a key element to make a cohesive family office work? 

As Friedrich Nietzsche, a 19th-century German philosopher said; 

“In family life, love is the oil that eases friction, the cement that binds closer together, and the music that brings harmony.”

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His words emphasize the importance of love and unity in a family. This can be particularly relevant to family governance because a strong governance structure is built on a foundation of trust and cooperation between family members. 

Just as love acts as the oil that eases friction and binds family members closer together, a strong governance structure can also help family members work together more effectively by defining clear roles, responsibilities, and communication channels.

Additionally, just as music brings harmony to a family, a well-crafted governance structure can foster a shared vision and set of values that brings the family together and helps them achieve their common goals.

The importance of love and unity in a family cannot be overstated, as it provides the necessary foundation for a successful and harmonious family governance structure. In fact, love and unity can be seen as the bedrock upon which all other aspects of family life and governance rest.

A family that is united in love and purpose is much more likely to be successful in achieving its goals, as all family members are working towards the same end. This is where a well-crafted governance structure can be particularly valuable, as it provides a framework for family members to work together effectively and achieve their common goals.

Now, why do we need a family governance strategy?

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A well-crafted governance strategy can help ensure that the family enterprise operates efficiently, transparently, and ethically and that the family’s wealth is effectively managed and preserved over time.

The topic is particularly relevant to those involved in family offices, wealth management, succession planning, and estate planning, as it provides insights into how to structure and manage family businesses and wealth over the long term and across multiple generations.

In my experience building a governance structure is a crucial step in the process of managing and preserving wealth for future generations. 

Having worked with a wide range of families and businesses as a senior advisor to effectively preserve, protect, grow, and then successfully transition their wealth, I’ve been fortunate to work alongside industry veterans and gain a broad perspective on some of these best practices in family governance.

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In contrast to that, I would like you to imagine a family business that has been running for generations. Let’s call the patriarch of the family John.  John still holds the reins of the business but he is now in his late seventies and is looking to retire soon. Involved in the family business are several members of the family, including two of John’s sons, one daughter-in-law, and three of his grandchildren.

Recognizing the importance of having a solid family governance structure in place, John decides to call a family meeting. He wants to ensure a smooth transition of leadership and make sure that everyone is fully aware of the current state of the business.

Together, the family discusses the future of the business and agrees to establish a family council, comprising both family members and key non-family members of the business. This council will be responsible for making strategic decisions regarding the future of the business.

Before this, John makes sure to hold a series of individual discussions with family members to determine their interests and suitability for various leadership positions within the organization. This will enable the council to assign roles and responsibilities to members that best fit their skills and expertise.

The family council holds regular meetings to review the performance of the business and address any concerns that members might have. The council also devises policies and procedures that govern how family members can enter and exit the business, in order to minimize any disputes or conflicts that may arise.

Through these meetings and discussions, the family in the enterprise is able to establish a strong governance structure that promotes transparency, accountability, and communication among family members. Over time, this approach leads to greater unity, trust,  and a long-term sustainable family enterprise.

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So why did I tell you about this scenario?

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I want you to understand the benefits of having a structured system in place to manage and govern your family enterprise. Without a proper system in place, family businesses can experience conflicts, communication breakdowns, and overall inefficiencies that can ultimately lead to the failure of the business – or even the breakdown of the family unit itself. By highlighting the benefits of family governance, such as increased transparency, communication, and clarity in roles and responsibilities, people can be better equipped to establish their own governance structures and ensure the success and longevity of their family enterprise.

One quote from the book called: the Family Business Ownership: How to Be an Effective Shareholder the Author Craig E. Aronoff says;

“Effective shareholders are those who take an active interest in the family business, educate themselves about the business and its industry, and work collaboratively with other family members to create and promote a shared vision for the future”

Aronoff highlights some of the key characteristics of an effective shareholder in a family business. Firstly, they are actively interested in the business and its operations, and they take the time to educate themselves about the industry in which the business operates. Secondly, they work collaboratively with other family members to create and promote a shared vision for the future of the business, which can help to align everyone’s goals and objectives. By doing so, they are helping to ensure the success and longevity of the family business. Overall, the quote emphasizes the importance of engagement, education, and collaboration in effective family business ownership.

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Now, what happens if you don’t build a family governance structure?

Family governance typically refers to the set of structures and processes that families use to manage their business and assets over time. These might include family meetings, family constitutions, formal boards of directors or boards of advisors, and other tools and practices that help create a shared vision for the family business.

When family governance is absent or is ineffective, the risk of conflict increases and so can misunderstandings within the family. For example, family members might hold distinct business objectives or have conflicting views regarding crucial matters such as the transition of leadership and ownership, family members’ participation in business activities, the alignment of familial visions and values with business strategy, and the allocation or reinvestment of business profits. In the absence of a clear governance structure, these disagreements can escalate and result in hurt feelings, strained relationships, or even legal disputes.

Furthermore, in the absence of a governance structure, decision-making might lack clarity, resulting in delays and inefficiencies. When family members are uncertain about their roles and obligations, enforcing accountability for their actions can become problematic. This situation can give rise to indifference or even inappropriate conduct, as family members might exploit their positions or leverage in manners that do not align with the business’s best interests.

In summary, practicing family governance is important for the long-term success of a family business. By creating clear decision-making structures, accountability mechanisms, and a shared vision for the future, families can help minimize the risk of conflicts and inefficiencies and maximize the potential for long-term success and sustainability.

Since the goal of Legacy Builders is to give valuable insights and strategies for business owners, family stewards, and the rising generation, I want to share some information on how to identify three components of family governance that might be helpful in determining your own family governance needs.

From the Harvard Business School. this information comes from an article called “The Three Components of Family Governance” 

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According to the authors, there are three components to family governance, namely periodic assemblies of the family, family council meetings, and a family constitution. 

Let’s break each of these down:

First, Periodic Assemblies of the Family

This involves bringing the entire family together for a meeting, which is typically held on an annual basis. The purpose of the assembly is to provide a platform for open and honest communication, the sharing of information, and decision-making. The assembly can help to foster a sense of unity, purpose, and shared responsibility among family members.

Second, Family Council Meetings

For families that require a more structured approach to governance, family council meetings can be useful. These meetings bring together a representative group of family members who are responsible for creating policies, planning, and strengthening family communication and bonds. The family council serves as a decision-making authority for the family, helping to manage conflicts and improve relationships.

Third, A Family Constitution

The family constitution is a formal document that outlines the values, goals, and rules that govern the relationship between family members and the business. It covers key areas such as ownership, leadership, succession, and conflict resolution. The constitution can help to ensure that the family’s interests are aligned with those of the business and can provide a framework for decision-making.

To read the full article, we have put the link in the show notes.

If you want to learn more about the topic, I recommend reading Craig Aronoff’s book Family Business Governance: Maximizing Family and Business Potential and the Harvard Business Review’s Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise by Josh Baron, Rob Lachenauer

And if you’d rather watch something related to the topic, the show Succession. While the show is fictional, it does beautifully capture what happens when a family patriarch steps down from their global enterprise, following how the family adjusts to this change.

As we wrap up this episode, I want to circle back and emphasize the importance of having a governance structure in place for a successful and sustainable family enterprise. Love and unity within a family are crucial for a strong governance structure to be built upon, as family members are more likely to achieve their common goals. The benefits of family governance include increased transparency, communication, and clarity in roles and responsibilities, plus, improved family relationships. In contrast, without a proper governance structure in place, family businesses may experience conflicts, communication breakdowns, and overall inefficiencies that can ultimately lead to the failure of the business…possibly the breakdown of the family itself.. Finally – and I cannot stress this enough – we covered the importance of practicing family governance for the long-term success and sustainability of a family enterprise, but most important, the family unit.

Thank you for joining me for another episode of Legacy Builders. I’m Cory Gagnon, your host, and if you enjoyed today’s episode, you can subscribe on Spotify, Apple Podcasts, or your preferred podcast platform. 

If you would like to help support this show, you can do so by leaving a rating and review. Until next time, stay intentional about building your legacy.