Chapter 7

Governance, Advisors, and Boards

To understand the complexities of family business, it is important to understand its governance and systems. There are three basic forms of family business governance: the controlling owner, the sibling partnership, and the cousin consortium. The latter is usually characterized by members of at least three generations.¹ As the business matures and progresses through the stages of the business life cycle, more family stakeholders become involved. With the three subsystems in mind (owners, managers, and family members), it is easy to understand the differences between family members who are in different subsystems. For instance, a family member who is an owner but not an employee may be more inclined to consider an offer from an outsider to purchase the business than a family member who is both an owner and a member of the management who depends on the business for livelihood. The controlling owner may not be willing to pay high salaries to employees who are family members but who are not also owners.

The purpose of a family-­first business is to benefit the family only. Employment is often considered a birthright and nepotism is common. Valuable perquisites of employment are the norm and pay is not usually based on merit. The family is the priority, not the business. A management-­first business is associated with professional supervision of the firm. In this structure, it is common to see nonfamily management in charge. Family members need to undergo interviews and must be qualified in order to join the family firm. Ownership-­first businesses place emphasis on the shareholders. These shareholders are often nonemployed family members or members of the larger cousin coalition, and they have a short-­term financial outlook.² Poza emphasized that the ideal scenario is to have a balance among each of the three systems.

Governance Vehicles

There are numerous governance vehicles for the family to utilize. They are designed for the family to have a way of providing discussion and communication with each other and as a way to pass their agreed priorities and wishes to the firm management. Table 9.1 presents informal governance vehicles designed to increase family communication.

Family Meetings

Of all the tools or techniques a family business has at its disposal, instituting family meetings may be the easiest, and it can have the greatest positive impact on the future of the firm and the family. Most family businesses do not have good communication among the family members. The first generation commonly likes to make business decisions alone, and they often do not discuss how they arrived at their decisions. This may irritate other family members, some of whom may have different viewpoints on the issue. By having family meetings, families can discuss issues, problems, and opportunities and use the time to catch up with members who may now be adult family members leading separate lives, with families of their own. Family members who are owners but are not employed at the family business often feel out of the loop on many issues and decisions. The family meeting is a way to foster family togetherness and increase communication among members of the family.

To get the greatest benefit from the family meeting, a facilitator should be present to ensure the meeting runs smoothly. The facilitator should not stifle creativity or be confrontational, and he or she should encourage everyone to discuss and share issues, ideas, or concerns. It is good to use an agenda and have a note taker provide a written record of any decisions or agreements. The meetings should be scheduled regularly, possibly every quarter or every 2 months, and all family members should be invited.

Many entrepreneurial family firms, such as relatively new start-­ups, can benefit from this simple meeting. At the entrepreneurial stage in a family firm, the founders are usually working long hours, changes are ever present, and the environment is fast paced. Business ideas and issues are decided and then changed. The family meeting is a forum designed to increase communication among all family members, which can prevent confusion, dissension, or conflict. The most important concept is that the meeting is a vehicle for increased communication. As long as there are healthy dialogue and open avenues of communication, it is difficult to have conflict and serious dysfunction. When family members do not talk, serious dysfunction is more likely to occur.

Family Constitution

The family constitution is a document that lists the mission and vision of the firm and spells out the family commitment to continuity, responsibilities of ownership, conflict resolution procedures, as well as the company policies and procedures on such important issues as family employment, including hiring, retirement, and terminations. The constitution includes buy-­sell agreements, shareholder policies, role of spouses and nonfamily members in the firm, and handling of unemployed family business members. Procedures for when a family member develops a drug or alcohol problem or becomes disabled, rules of ownership such as procedures for selling shares, noncompete agreements, job descriptions for top management positions, and rules of governance are among the many other issues addressed. The critical function of the constitution is to document family discussion and input and to have discussed the issues before being forced to decide when the family has a crisis and emotions are running high. Interestingly, the vast majority of family businesses do not have this all-­important document. In addition to the aforementioned items, the following other considerations should be discussed for inclusion in a family constitution:

• A share liquidity policy, including buybacks and dividends

• A family remuneration policy

• A procedure for making decisions (e.g., consensus, vote) and who will make them

• Officer’s roles and responsibilities

• Employee roles and responsibilities

• A family member termination policy

• The number of times boards, councils, and the family will meet

• Establishment of an annual family retreat

• Educational reimbursement policy for family members

• A policy for settling disputes or conflict among family members specifying who will settle the dispute, such as the outside board of advisors or family council

• A family member exit policy

• Possible exit strategies for the business

• Establishment of a board of advisors or directors and their role

• Number and role of family members on the boards

• Establishment of a family council and its responsibilities and roles

• Reporting structure for family members

• Evaluation structure and procedures for family members, indicating who will perform the evaluations

• Human resources policies for all hires, family and nonfamily

The list is full of emotionally charged issues and items for discussion. It will take several meetings of the family and days to weeks of discussions to arrive at a document the family can agree on. Many families agree it is time well spent and that is vital to discuss before serious issues arise.

Family Councils

Instituting a family council is a significantly positive step toward managing the business in a more rational and professional manner. The family council is more formal than the family meeting. The purpose of the council is to present the family issues of running the business. The family council is where problems, concerns, issues, and opportunities are presented and discussed, alternatives are weighed, and decisions are made. In a family council, the family usually takes a vote, and decisions are made either by a simple majority or by consensus. Some families strive for unanimity, which can tend to delay decisions but has been found to increase family unity. For the family council to be effective, all members must recognize the council is the proper time and place to present their point of view. One of the major positive attributes of the family council is that family members agree to abide by the decision of the council (even if they disagree with it or are on the losing end of the vote) and consent to not grumble about it outside of the meeting but instead show support and unity for the family decision. The decisions of the family council are then presented to the board of directors in larger family firms for their enactment.

The creation of a family council can be difficult to manage initially. Research on family council effectiveness shows that for the council to work well, it often needs to be facilitated by a professional. This enables the meetings to be more productive and it holds members accountable for following through on decisions.³ It can be a tremendous adjustment for the owner-­manager who manages in a paternalistic manner to relinquish decision-­making power and authority to the council. Moving to a more professional and rational method of decision making has been shown to increase family business longevity. By the third generation, the larger number of family members, with multiple cousins and some second-­generation members still active, presents the need for a formal democratic voting process.

Generational Meetings

Specific generational meetings are useful to increase communication with cohorts. It is easy to see how a member of the second generation may have the same issues as other second-­generation members. Family business consultants and university-­based family business centers have found that when providing a workshop, dividing the participants into specific cohort groups accomplishes two important functions. First, participants feel free to discuss their issues in a safe environment, free from criticism by a family member of a different generation. Second, the other members in the cohort group can usually relate to the issue, since they are more than likely experiencing a similar issue. The group members realize they are not alone and others may feel the same way.

Consultants often use this approach to start a family retreat and then bring the family back together to discuss the issues. It is enlightening and somewhat humorous to hear the first-­generation cohort members express desire for the second generation to become more aggressive and take more responsibility and then to hear the second-­generation members trading stories of the resulting pain of when they did attempt to take more responsibility!

Once a month, on a Sunday evening, all the third-­generation Cathy family members (cousin consortium) of the Chick-­fil-­A restaurant chain have a telephone conference call. The purpose of the call is to share updates, stay in contact, and build relationships with cousins based all over the country. The activity fosters a sense of third-­generation community and closeness and increases the ability to relate one to another. When these distant cousins rise to power within the corporation, they will have relationships based on criteria other than just the family business.

Professional Advisors

Advisors can be divided by advisors inside the firm and outside the firm. Inside advisors consist of relatives and key nonfamily employees who work in the family business. The firm’s outside advisors consist of professionals such as the accountant, the lawyer, and family business consultants who specialize in helping family businesses navigate through issues that are unique to family firms. When the first family business consultancies formed, they were often former members of other family businesses who had experience dealing with particular issues. The accountants became involved with consulting, since a large part of their practice was family businesses and their clients were asking for help and advice. The lawyers became involved in tax planning, estate planning, and succession as well.

Table 7.1. Family Business Corporate Governance Vehicles

	Family meeting	Family council	Generational meeting
Stage	Founders	Sibling partnership Cousin consortium	Sibling partnership Cousin consortium
Status	Informal	More formal	Informal
Membership	Usually entails key family management. Often open to all family members in larger firms.	Family members are sometimes elected by the family (in large firms). Other membership criteria can be set by the family. Often it is open to all.	Open to members of each specific generation.
Size	Small	Depends on membership criteria. Ideally 5–­9 members.	Depends on family size.
Number of annual meetings	Due to its fast growth and need to take advantage of opportunities, family meetings may be called often, up to several times a week.	1–­2 times per year	As often as needed, usually 2–­6 times per year

By far, the most utilized and highly ranked professional advisor to family businesses is the accountant. This may be due to a lack of financial skills, especially among the first generation. Most family businesses have a good relationship with their CPA and utilize their accountant for valued financial advice. The company attorney is usually consulted only when a legal need arises or when discussing succession. The banker is third most often used, and outside business peers are also consulted.

Consultants

Family business consultancies today are usually multiconsultant teams in firms that can provide full services to a prospective client. The consultancies usually have a counselor or therapist to deal with interpersonal conflict issues that threaten to divide the business, a CPA for financial issues, a lawyer, and general organizational development or organizational behavior professionals who can help guide a firm through management issues such as succession or instituting a board of advisors. Succession planning is the most common reason for a firm to contact a consultant. The next is conflict management, followed by teamwork issues.

Upon entering a consultancy arrangement with a family firm, one of the first things a family business consultant does is have the family take one of the personality instruments, such as the Myers-­Briggs Personality Type Index (MBTI). These are excellent tools to help understand the differences between the various family members. Results detail how people prefer to make their decisions, how they gather their information, how they gain their energy (extroversion or introversion), and how they like to interact with the external environment. Personality instruments are excellent tools for aiding in conflict management and promoting team building. Usually one day of a certified facilitator leading the family through the various personality types and explaining the differences can lead to a significant amount of relationship improvement and improvement in working effectiveness.

Boards of Advisors

These voluntary and informal boards are made up of respected business owners; trusted professionals, such as bankers, certified public accountants (CPAs), and attorneys; and respected friends and business associates. The board acts as a sounding board and gives advice to the business. The business is under no obligation to accept the recommendations; the board has no formal authority due to lack of ownership. Most family firms do not utilize this helpful tool; however, some family firms, especially in the second generation, use a de facto board of advisors when they consult with other respected professionals in the community and in their social network. Some family business CEOs have benefitted from attending a CEO forum in their local area and gaining advice and input from it.

Boards of Directors

In the United States, every corporation is required to have a board of directors. In family firms, the board roles are usually filled by the owners. They are mandated to list certain officers on the incorporation papers and to meet at least once a year. In a nonfamily firm, the board of directors has significant responsibility and formal authority to make recommendations and decisions, as well as to have them instituted. They have hiring and termination authority over the CEO. They are paid positions and usually contain outside members. The purpose of the board is to provide a system of checks and balances and to help ensure accountability.

Due to the ethical lapses exhibited by the collapse of Tyco, Enron, Arthur Andersen, and WorldCom, among many others, the Sarbanes-­Oxley Financial Accountability Act was instituted. One of the outcomes of the legislation was strengthened guidelines for boards of directors. A board of directors must have outside independent directors in order to provide the best guidance and oversight. If the board is dominated by insiders, the thinking can become insulated and narrow and may turn a blind eye to unethical or questionable behavior. The Sarbanes-­Oxley legislation delineates the board’s responsibilities and now holds board members accountable for behaving responsibly and providing good oversight of the corporation, particularly in financial matters. There is now significant legal and financial liability associated with being a board member, as they can now be held accountable for any firm mismanagement.

Most family firms do not properly use boards of directors; however, family businesses with strong boards of directors have improved decision-­making ability. The research is clear on this point. This is partially due to the beneficial aspects of conflict. Diversity of opinion and good debate lead to members having their say and arguing a valid point. Points of view are put forth that normally could have been stifled. By hearing a variety of ideas and solutions to problems, family businesses make better decisions.

To foster good debate, the board must have nonfamily members serving on it, as well as people from outside the firm. The usefulness of a board of directors whose membership consists of those with significant experience outside the family or outside the business is especially apparent when the firm is run by a charismatic and powerfully assertive founder or other family member. A broader range of ideas, suggestions, and recommendations can now be discussed, especially those not seen as favorable by the family member in control. Reflect how difficult it would be to vote against your father or other relative, especially if this relative were your boss, and when your income, wealth, and future employment is intertwined.

The vast majority of firms who have a board of directors rate its contribution as good to excellent. Most of the boards meet only once or twice a year, and just 29% of boards of directors meet three or more times a year.⁴ Instituting a board of directors is a significant area of opportunity for many family firms to improve their management and company performance. A major responsibility of the board is to look at the business separately from the needs of the family. The needs of the family are discussed in the family council. The council makes recommendations to the board of directors on behalf of the family.

Most Trusted Advisor

In the past, the most trusted family business advisor has been the financial accountant. Recently, the most trusted advisor has been shown to be the spouse. The spouse also plays a significant role as chief emotional officer of the family. This role has traditionally been filled by the wife or mother of the CEO. Research has shown the importance of this role, as the success of the family business often depends on support from spouses. Often, spouses will mediate interpersonal conflict between family members and, in essence, act as the glue to hold the family tightly together. You may remember consigliore, or counselor, was the title of Robert Duvall’s character in The Godfather. The most trusted advisor acts as a counselor to the family business owner.