Governance in a family business

Family businesses fail more often from unmanaged family dynamics than from commercial problems. Governance is the mechanism for separating the two.

The three overlapping systems

A widely used framework describes family businesses as three overlapping circles: the family, the ownership, and the business.

An individual may occupy one, two or all three positions, and their interests differ depending on which hat they are wearing.

A child who works in the business, owns part of it and is a family member has three sets of interests that do not always align.

Most disputes arise from confusion between these roles — a family conversation becoming a business decision, or an ownership question being resolved on family grounds.

Governance is the practice of separating them deliberately.

The structures

A board with at least one independent member. The single most valuable governance step for a family business.

An outsider changes the conduct of meetings, provides a perspective that is not entangled in family history, and gives the family a neutral party whose view carries weight.

Even an advisory board without formal authority does much of this.

A family council, separate from the board, addressing family matters — values, expectations, communication, and the relationship between family and business.

This gives family concerns a forum that is not a board meeting, which prevents them arriving as agenda items in the wrong place.

Regular shareholder meetings, conducted properly, with information provided in advance.

Family shareholders who receive no information reliably become suspicious shareholders.

The policies worth writing

An employment policy. What qualifications family members need, whether outside experience is required, how they are recruited, and to whom they report.

A common and effective provision requires several years of successful outside employment before joining, which builds credibility and ensures the person has an alternative.

A compensation policy. That family members are paid market rates for the work they do, determined by a defined process.

Compensation that reflects family standing rather than contribution is a reliable source of resentment among both family and non-family staff.

A dividend policy. How much is distributed to owners and how much reinvested, decided in advance rather than negotiated annually.

This addresses the central conflict between owners working in the business and those who are not.

An ownership transfer policy, covering who may own interests, restrictions on transfers, and buyout mechanisms.

A conflict resolution process, agreed while everyone is on good terms.

The family constitution

A document some families produce setting out shared values, the family's relationship with the business, and the policies above.

Generally not legally binding, and its value is in the process of producing it.

The discussions required to agree it surface assumptions and disagreements that would otherwise emerge during a crisis.

Families who have done this consistently report the process as more valuable than the document.

Non-family employees

Frequently overlooked in family governance discussions.

Capable non-family managers leave family businesses where advancement is visibly limited by surname, where family members receive different treatment, and where decisions are made outside the formal structure.

Retaining them requires clear paths, fair treatment and decisions made through the governance structure rather than around it.

For a business planning a sale or a management buyout, the quality of the non-family team is a substantial part of what is being sold.

Starting

Most family businesses have none of this, and installing it all at once is unrealistic.

The highest-value first steps: appoint one independent board member, write down the employment and compensation policies, and hold a properly structured meeting with all family owners once a year.

Those three change the dynamics substantially, and they cost very little.

The next generation

A specific governance question.

Family members who will one day own shares generally receive no preparation for it.

Some families run a deliberate programme: financial education, attendance at shareholder meetings from a defined age, and an explanation of what ownership involves.

The alternative is a generation inheriting interests in a business they do not understand, with no relationship to the people running it.

Which is how ownership becomes adversarial in the third generation, and it is preventable at very low cost.

General information only, not legal or business advice. Consult qualified professionals about your own circumstances.