Family governance is essential for family businesses to achieve their goals and maintain success across generations. A well-structured family governance model covers all aspects of the family system, including communication, values and traditions, decision-making, conflict resolution, and succession planning. The one thing all family businesses have in common is the need to maintain trust and unity, as well as a shared vision of success. Establishing effective governance helps ensure that family members have the same understanding of values, goals, and objectives.
In this article, we will discuss the importance of good family governance, what it involves, and why families need to institutionalize their governance model.
Institutionalizing Family Governance: The Need for Change
In today’s competitive, globalized market, family businesses must be prepared to face new challenges and changing conditions. Family businesses are increasingly being challenged by competition, new industries, emerging markets, and international investment. As a result, it is essential that family businesses adopt a progressive governance model that allows for agility and adaptation. Institutionalizing a governance system ensures that the family business is run efficiently and effectively, with clear roles and responsibilities, and long-term goals are met.
Here are a few key reasons why it is important to institutionalize family governance:
- To remain competitive. International players are increasingly entering family businesses’ traditional markets, making it more difficult for them to maintain their competitive edge. By institutionalizing the governance model, families can ensure that they remain competitive in today’s fast-moving market and deliver strong, consistent performance.
- To comply with global best practices. The world of business is increasingly interconnected. Standards of corporate governance are becoming more stringent, and families must ensure they comply with international rules and regulations if they want to enjoy market access. Instituting a formal governance system ensures that family businesses remain compliant and do not fall foul of international standards.
- To meet consumer needs. Customers expect the highest level of service and quality, regardless of a company’s size or structure. Delivering on these needs requires good governance and effective decision-making. By institutionalizing a sound framework, families can ensure that their business is ready to meet the needs of customers.
- To meet ESG requirements. Environmental, social, and governance (ESG) considerations are becoming increasingly important in the business world. Expectations around responsible and sustainable business practices are higher than ever before, and family businesses must ensure that their governance model is fit for purpose.
Legal Elements of Good Governance
The legal elements of effective family governance are essential. The law provides a useful framework for families to manage their businesses and protect the family’s wealth. It is important to recognise the legal implications of any business decisions and ensure that family governance documents, such as wills, trusts, and shareholder agreements are up to date. Families must be aware of the relevant legal requirements in their jurisdiction and ensure that they comply with them.
Here are a few key legal elements to consider:
- Shareholder agreements. Shareholder agreements are legally binding documents, which set out the rights and obligations of the shareholders in relation to the business. These documents can include information about board structure and responsibilities, transfer of shares, decision-making processes, dividend policy, and much more.
- Family constitutions. Family constitutions provide families with a framework for decision-making and help ensure that the family’s interests are represented in the business. These documents should be adapted to the evolving needs of the family and updated regularly.
- Wills. Wills are a key part of succession planning and should be reviewed and updated periodically. Doing so ensures that the family’s assets are distributed according to their wishes and that any tax liabilities are minimized.
- Trusts. Trusts can be used to protect family assets and provide tax benefits. It is important that families understand the legal implications of setting up a trust and ensure that it is tailored to their needs.
Family Businesses Must Prepare for the Future
Family businesses are the backbone of many economies. Their longevity and resilience make them an attractive option for investors, customers, and employees alike. But to remain competitive and successful in an ever-changing business environment, families must ensure they have the right governance model in place. By instituting a formal framework and keeping on top of the legal elements, they can ensure that their business is ready to meet the challenges of tomorrow. If done well, family governance can be the key to a successful and prosperous future.
