Governance 101

The governance system for a family-owned business provides the structure through which the objectives of the owners and the company are set and the means for monitoring performance against them is established. This system balances the interrelationships among the family, the owners of the company, the company’s board of directors, and its management. It allows for the various stakeholders in a family-owned business to participate in a cohesive and constructive manner. In the beginning—and for smaller, first-generation enterprises—the governance system is usually quite informal: with the same small group of individuals serving as owner, parent, and CEO with those roles not clearly delineated. The founder may rely upon friends and close family members for informal guidance with the business. Informal groups of family members may provide input, whether solicited or not, on how the family relates to the business. As the enterprise grows and ownership becomes more diverse (such as when siblings or cousins become owners), a more formal and robust governance structure can be a great benefit. Below is a fully developed governance structure suited for a large family-owned business with multiple owners. As you read this, please remember—there is no one-size-fits-all solution.

Family Assembly

When we refer to a family assembly we are talking about the entire group of family members, whether or not they are directly involved in the business as a manager, owner, or otherwise. A family assembly is an open forum for all family members to connect as family and learn about the business. A family assembly allows the family to discuss family values and align on major issues. Typically, a family assembly meeting consists of equal parts fun family activities, education, and time to talk about the family business. Often, there is a presentation by the company’s chief executive officer or the chairman of the board on current developments in the business. A family assembly can have committees comprised of smaller groups of individuals focused on key areas of the family and the business.

Family Council

A family council is a subgroup of the family assembly. It is the governing body for the family, and its representatives are elected by family members. The family council develops the family’s vision for the business, aligns family values, and serves as the communication link between the family and the business. The family council may oversee committees of the family assembly. Often the chairperson of the family council serves on the company’s board of directors. Members of the family council can be compensated for their services. Whereas the members of the family assembly are typically not compensated, other than for having their expenses covered for attending family assembly gatherings.

Shareholders

The shareholders of a company elect its board of directors. The shareholders make major decisions on behalf of the business, including whether the business is to be sold or whether the company will grow by acquiring other businesses. The shareholders set long-term objectives for the business and guide and inform the board of directors.

Board of Directors

The board of directors sits between the owners and management of a business. Its members are elected by the shareholders, make decisions on behalf of the company, and direct the chief executive officer and management of the company’s implementation of such decisions. The members of a board of directors owe fiduciary duties to the company and its shareholders. Directors are legally bound to the business and may be held liable for the consequences of the business’s actions or inaction. Often, as a precursor to a fiduciary board of directors that includes “outside directors”—those with no pre-existing relationship with a company’s owners or management—a company establishes a board of advisors. The members of the board of advisors do not have decision-making authority on behalf of the company. A board of advisors provides nonbinding, strategic advice to the management team of a business. Businesses generally choose to have a board of advisors so they can benefit from the knowledge and advice of experienced outside professionals.

CEO/Management

A company’s CEO and management team run the business based on direction and guidance from the board of directors. They handle the day-to-day operations of the business. They implement the desires of the owners and the board under the direction of the board. Governance of a family business is an evolving process. The governance structure will and should change over time. The proper governance structure for a family business must be commensurate with the needs of the family and the business, their mission and their vision.   Bill Weigand is the chair of DWT’s family business group and serves as a trusted advisor to many multi-generational, family-owned businesses. He provides strategic counsel to businesses, particularly in the food, agribusiness, manufacturing, and distribution industries. Contact Bill at 206.757.8164 or billweigand@dwt.com. Rich Simmonds is the co-founder of the Pacific Family Business Institute. For more than 25 years, Rich has been working with family businesses and their advisors. As a Seattle-based family business consultant, he assists Northwest family-owned businesses in the development of next-generation family members, development of their business and family boards, and transitioning from one generation to the next. Contact Rich at 206.276.2362 or rich@pacificfamilybusiness.com.