FAMILY BU S I N E S S

M A NA G E M E N T
 L E S S O N 3 :
E R N A N C E A N D S T R U C T UR E
SETTIN G UP FA M ILY G OV
INTRODUCTION:
The most common mistake committed by families who own
businesses is that they focus only on managing the business. What
they don’t realize is that in order to do this successfully and
professionally, it is just as important that they learn to manage family
issues, which often encroach upon the business environment,
causing confusion disorder and, in some cases, even collapse.
INTRODUCTION:
The success of a family business will depend not only on how a
business is managed, but also on how the family is governed. It is very
important that the family first learn to accept that business,
ownership and family issues should be addressed separately. Each
area requires its own structure, system and plans for governance.
TYPES OF FAMILY INSTITUTION:
1. THE FAMILY MEETING
The simplest and most common family institution is the Family
Meeting, which is normally established during the Controlling Owner stage
of a family business. As the family matures, especially when the business
reaches the Sibling Partnership stage, these meetings become more formal
and structured. If there is resistance to this move, there is very little chance
of the family remaining together. If there is no resistance, the meetings will
be relabeled as Family Assemblies.
TYPES OF FAMILY INSTITUTION:
2. THE FAMILY ASSEMBLY
The more formal and more organized Family Assembly can function as a
temporary body for facilitating the transition from an informal Family Meeting to a
formal Family Council. The Assembly could function as an electoral board that will
select the members of eh Council. Otherwise, it could function as the Family Institution
for discussing relevant family and business issues. However, when the Family
Assembly reaches a certain critical mass and becomes too unwieldy to do all the work
necessary to govern the family and playa positive role in the interface between the
family and the business, then the family has to create a formal Family Council.
TYPES OF FAMILY INSTITUTION:
3. THE FAMILY COUNCIL
For family issues that are business-related, most family
business experts recommend the organization of a formal Family
Council. If successful, it can provide the rock of stability that will
ensure the survival of the company from one generation to the next.
FUNCTIONS OF THE FAMILY COUNCIL:
• The primary purpose of the Family Council is to facilitate free and open
communication between family members in a formal and organized forum. Well-
designed and effective Family Councils can help a family minimize internal or
interfamily conflict and hostility.
• Aside from serving as a forum, the Family Council can also serve as a vehicle for
mediating conflicts that occur within all families. Experts say that the Council can
also be a forum for discussing issues of continuity and succession.
• It can also be responsible for preserving and carrying on the family legacy and
instilling a sense of stewardship in the younger generation.
ORGANIZING THE FAMILY COUNCIL:
 The process of organizing a Council will obviously vary from family to
family. However, it is advisable that a small committee be designated that
will be responsible for organizing the Council.
 A Family Council is similar to the Board of Directors of a corporation.
Therefore, not all the family members have to be included in the Council.
 It is important, however, that a formal structure be organized with
procedural rules for meetings. Experts suggest that it would be a good idea
to use a professional consultant or facilitator to help establish a council.
For establishing an effective family council, here are four suggestions to consider:

1. Membership in the Council should be open.

2.Designate Council representative for the Board of
Directors.
3. Don’t be afraid to start slowly.
4. Establish ground rules for your Council.
COMPOSITION OF FAMILY COUNCIL:

 Family Office. This is a centralized financial planning group that

enables the family to invest their wealth as a group. The family office
should be a separate operation from the business. Professional
managers may be hired for specific functions such as investment
management, taxation and estate planning
COMPOSITION OF FAMILY COUNCIL:
 Family Foundation. A single central foundation that will centralize the
family‘s philanthropic initiatives can be set up. These foundations can
confer tax advantages while enhancing the family‘s reputation and
stature in the community.
 Internal Stock Market. The family may set up an internal stock market
that will manage the buying and selling of shares among family members.
This will not only facilitate the selling of shares by family members, but
will also insure that ownership remains within the family.
COMPOSITION OF FAMILY COUNCIL:

 Redemption Fund. A fund can be built by contributing a percentage of

profits to it each year. This can be used for shareholders who want to cash
in their stock at a fair price for personal reasons. A committee of the Family
Council can oversee the fund.
 Scholarship Fund. This is established to promote one of the Council‘s most
important functions, which is to support the career development of the
younger generations. A scholarship program can help qualified or needy
young family members to complete university and postgraduate education.
IMPORTANCE OF FAMILY MEETINGS:
 A family meeting serves the dual function of resolving family
business issues and helping maintain social relationships among
the members of the family. Most important, it is through these
meetings that family conflicts are resolved and decisions remade
that can be supported by the whole family.
ORGANIZING FAMILY MEETINGS:
o Ensure that everyone acknowledges the need for meetings. There
must be expressed willingness on the part of all family members to
participate in the meetings as a recognition of the importance of
this activity.
o Predetermined membership. Before the meeting begins, there
should be an agreement as to who should attend. A group of elders
can assume this responsibility.
ORGANIZING FAMILY MEETINGS:

o Organize a planning team. A planning team that will set the ground
rules should be identified to save embarrassment, encourage
participation, create the necessary structure and ensure that the
meetings are conducted in a professional manner.
o Draw up an agenda. An effective meeting requires a well-planned
agenda. A family member should be assigned to solicit agenda items
from the other members and ensure that these topics are of common
interest to the group and are of significance to the family within the
context of the family business.
ORGANIZING FAMILY MEETINGS:

o Establish a permanent meeting structure. There should be a

chairperson, a secretary to take the minutes and a fixed schedule
just like for board meetings. In case there is no recognized head of
the family, a facilitator may be invited during the first few meetings
until the family has agreed on a more permanent structure.
CONDUCTING FAMILY MEETINGS:
o Prepare an action plan. Decisions on family issues are often not implemented
because there is no ready structure for implementation, unlike in business
firms where there are departments and divisions that handle this. Therefore, an
action plan that identifies persons responsible for implementation together
with deadlines should be formulated foreach family decision.
o Ensure family fun. In order to strengthen family ties, some family meetings
should be in the form of recreational activities. During these times, business
concerns should not be discussed. Perhaps, the elder members can tell stories
of how members helped each other or give examples of how family members
have demonstrated their affection for each other.
FAMILY CONSTITUTION:
o The Constitution defines the family’s vision of the future and its
core values and beliefs. It spells out the purpose and
responsibilities of the Family Council, the Family Assembly and the
Board of Directors. There are many other components of the Family
Constitution. These may include the family‘s fundamental values and
beliefs, a code of behavior, policies regulating the relationship
between the family and the business, and policies governing family
members working in the company.
COMPONENTS OF FAMILY CONSTITUTION:
 A Mission Statement defining the family’s fundamental desire to be
in business together. This is a necessary declaration because
without that desire, there is obviously no need to write a
constitution.
 A statement of the family’s fundamental values and beliefs. This
should express the family‘s commonly accepted values which they
would like to ensure are preserved in the business arena. This can
spring from the family‘s shared experiences.
COMPONENTS OF FAMILY CONSTITUTION:
 A Family Code of Conduct. This specifies the family‘s expectations
with regard to how the members should treat one another and
conduct themselves. For example, family members should not argue
in public. Or ―Family members should defend criticisms of other
family members by non-family members.
 Policies for regulating the relationship between the family and the
business. These should include critical issues such as employment
of family members in the business
COMPONENTS OF FAMILY CONSTITUTION:
 Performance policies. There should be rules governing the
performance evaluation of family members, such as: ―If after the
first two years of work they are not performing well ,i.e., they are not
included in the top 25 percent of the company‘s executives, they will
be asked to leave.
 A retirement policy. There can be a rule such as: ―All family
members should automatically retire at age 60 and can serve on the
board of directors only until the age of 70.
COMPONENTS OF FAMILY CONSTITUTION:
 A dismissal policy. This is a sensitive issue that should be addressed directly.
For example: ―The authority to fire a family member rests solely with his or her
direct superior. However, prior to dismissing a family member, the general
manager should inform the Family Council, so that the ramifications of the
dismissal can be anticipated and properly managed.
 Stock redemption policies. The Constitution can specify the process under
which the family members can sell their stock with a minimum of family
disruption. Goals for a liquidity policy may be established, such that all
transactions should continue to maintain the balance of power among the
family branches.
COMPONENTS OF FAMILY CONSTITUTION:
 A non-competition agreement. There should be restrictions on
competition for family members who decide to leave and set up their own
businesses. This can include restrictions on commercial uses of the
family name.
 Job descriptions for the key positions in the governance structure. This
should spell out the duties, terms, responsibilities and privileges of the
Chairman of the Family Council, Chairman of the Board and other
positions occupied by other family members
COMPONENTS OF FAMILY CONSTITUTION:

 Succession policies. The constitution should spell out the specific

process by which the leaders of the family and of the business will
be chosen. The process should also specify members who serve on
the Board of Directors are to be selected. In addition, it should also
specify the responsibilities of the Family Council for training and
developing family members.
QUESTION?