The three components of family business governance

The three components of family business governance

The following model represents KPMG’s established Family Business Governance methodology, which helps to create and govern a family.

Partner, Global Head of Family Business

KPMG in France


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The components of family business governance

I came across a brilliant piece of research by John Davis of the Harvard Business School, which I’d like to share in the next few articles as it provides great background to KPMG’s established Family Business Governance methodology, which helps to create and govern a Family Business, pictured below:

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The components of family business governance

According to Davis, there are three components to family governance:

  • Periodic (typically annual) assemblies of the family; all families business can benefit from this activity.
  • Family council meetings for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business communication and bond.
  • A family constitution—the family’s policies and guiding vision and values that regulate members’ relationship with the business. This written document can be short or long, detailed or simple, but every family business benefits from this kind of statement.

Family council for effective communication

If we deal solely with the first component – family council meetings – Davis had this to say:

The rare family in business may have a more elaborate family governance structure, with a separate meeting for family-owner-managers or a separate council for family shareholders or periodic meetings between shareholders, the board, and management. I prefer the simplest structure that does the job and the three components above are all most families in business need."

Properly composed and managed, a family assembly and family council help:

  • Develop clarity on roles, rights, and responsibilities for family members.
  • Encourage family members, family employees, and family owners to act responsibly toward the business and the family.
  • Regulate appropriate family and owner inclusion in business discussions.

Family council meeting activities

The family assembly typically meets annually, lasts one to two days, and includes all adult family members (yes, including in-laws). Families need to decide at what age children should attend these meetings. One family says that children should attend when they are able to feed themselves; most families start bringing the younger generation into meetings at around age 16. For the young children, families should still consider organizing some group activities where the children can begin to learn about the business and develop relationships with their siblings and cousins.

Family assembly activities include learning about the business through presentations by family and non-family managers, discussing (not deciding) the direction of the company, being educated about what the company does or about important skills like reading financial statements. It is also a good forum to get updated on changes in the family such as important events and accomplishments, and on changes in ownership. For example, have any shares changed hands since the last meeting? Are there new tax laws shareholders need to be aware of?

Treating the family in a more formal, organizational way can feel a bit strange at first. It may take a year or two for the family to grow into this more structured way of interacting. But the value of this process is demonstrated in the strides so many families have made with these structures. They have learned that in discussing issues that can be sensitive and raise complicated feelings, a little structure is a family’s best friend.”

Family councils are an important vehicle of communication for every family business. Family members need to know what guiding principles will steer the overall management processes, as well as understand other family members’ expectations about the current and future management and ownership of the family business.

Everyone in the family has their own plan for their lives, and they need information to make informed decisions. It’s also essential that family members are kept up-to-date with changes in the family business. Family councils provide a dedicated communication forum for addressing issues. Their success hinges on the family and the business’ ability and willingness to communicate though.

Read more on The Three Components of Family Governance.

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