How a Family Council Re-engaged Owners & Benefited Management

What is a Family Council and why would owners of a family business find the effort and time to form, organize and operate one worthwhile? To explain how the Family Council can operate and why it could be beneficial, this short article presents an example from a recent engagement with a client (identities changed to protect confidentiality).

First of all, a Family Council is more than a family meeting together over a Thanksgiving dinner. Family members, whether owners or members of families owning the family business, decide that regular, structured meetings with agendas that address matters involving both “hard” (economics and business) and “soft” (relational) issues can facilitate communication and cooperation that is beneficial to both family and the business. Family values, knowledge of finances, benefits of continuing the business frequently populate the agendas for such meetings. These gatherings provide a platform for multiple generations of family to learn about the business and opportunities for potential personal involvement. These gatherings almost always provide a time for fun and fellowship among the family.

Although  the governance of a family business is prescribed by the type of entity in which the business operates, a Family Council can operate parallel with the governing body. The formal governing body in a corporation is a board of directors elected by shareholders. The directors represent the shareholders in setting policy and direction for the business. In turn, directors elect officers to administer and carry out those policies in the day to day operation of the business. In a limited liability company (LLC), the owners are members who either operate like directors and/or officers or who appoint a manager or managers to run the business. In a family partnership (general or limited), owners are partners who also may also serve like shareholders, directors, officers or managers. In most family businesses, family members often serve in one or more capacities. A Family Council offers an opportunity for the family business to engage all family members regardless of whether or not those family members serve in one or more of the formal roles.

The family business in our story involved two branches of the original family founders of a now fifth generation corporation, each branch owning 50 percent of the voting stock. The “C Suite” (President, Chief Financial Officer and all Vice Presidents) are all non-family members. For the last 35 years, the shareholders have elected directors, the majority of which were non-family. To avoid deadlocks, the shareholders placed their stock into a voting trust where a trustee from each of the two family branches and a non-family director voted the shares for directors and for other major shareholder decisions.

While this governance structure served the business and family well over the years through growth and regular dividend distributions, new generations acquired stock through gifts and inheritance and non-family directors and the non-family trustee retired. The growing number of multi-generation shareholders felt that they had lost touch with the business resulting in some disagreement regarding their desire to continue or to sell the business.  Directors and management sensed a lack of clear direction from the owners which resulted in indecision regarding the direction for future investment for growth and expansion.

To help capture a vision for the future from the owners, the directors recommended that the shareholders engage a family business facilitator. This very experienced individual conducted a confidential survey of the stakeholders (shareholders, directors, officers and key employees) regarding their views on whether to buy, sell, hold or expand.  With the survey results in hand, he facilitated a family retreat to open the discussion among the multiple generations of shareholders and their other family members. This process involved a number of meetings resulting in a more detailed and comprehensive report prioritizing and balancing the varying interests of the owners. Of course, dividend distributions remained important although most of the shareholders were willing to reduce them to invest in the future of the business. Each family elected a representative to report to the board and management regarding their progress. Although this process stretched over 18 months, here were the take-a-ways and outcomes:

• The two family branches united in agreement to continue the business, the one family group changing their minds regarding selling
• The process provided the directors, officers and key employees with a clear direction regarding the family’s desire for moderate and measured growth
• The owners agreed to terminate the voting trust and to restate the buy sell agreement so that a “super majority” vote would be required for major decisions such as selling the business and electing directors which worked to avoid deadlock between the two groups of family shareholders
• The owners gained significant mutual trust as long-standing issues were discussed and addressed in an open and safe forum
• The owners re-engaged with each other, the directors and management and then decided to formalize an ongoing Family Council where each family line elected a representative to communicate with the directors and management resulting in better mutual understanding among all stakeholders as to where the business should head

A Family Counsel can facilitate education, discussion and engagement leading to clarity in the mission of the business. Input from the Family Counsel can provide the board and management with clarity and direction for the future of the business which provides the board and management with guidelines for addressing both threats and opportunities. Starting with a facilitator, a survey, a retreat and a fresh look at the business’s governing documents are often the beginning steps to engaging family in the future of their family business. If you would like further information or would like to discuss action steps to consider a Family Counsel for your business, please contact one of our attorneys in our Family Business Practice Group.

Pat Green is a Trusts and Estates attorney at Davis Wright Tremaine, LLP. He focuses his practice on wealth, business succession and estate planning and administration for high-net-worth families and business owners. He also implements complex charitable giving plans, including charitable lead and remainder trusts and donor-advised funds. Pat can be reached via email at patgreen@dwt.com or directly at 503.778.5329.