Family governance refers to agreements and shared activities that organize the family so that it can maintain its values, ventures, and investments through multiple generations. In other words, it is the “glue” that helps a family maintain its financial success generation after generation.
The basic method of family governance is the family council. That is a formal governing body that represents the family. It makes decisions on issues that overlap the family and the business. It makes suggestions on behalf of the family to the family business.
The family council is not directly in control of the family business. Instead, it may have different levels of input into the family business. The family council may be allowed to appoint someone to the family business’s Board of Directors.
Family council meetings are often best facilitated by an outside advisor. The reason is that family governance is often a new exercise for families. And even if older family members are familiar with the process, younger family members need to be orientated.
What is unique about a family business is that the owners are not just business partners, but also related to each other. The positive aspect of this is that there is a connection. There is a connection of shared interests, values, and concerns that go beyond the business. The family members want to share a legacy and family identity. They want to be engaged together in activities that involve more than money. Perhaps they have philanthropic goals. They may have community ties. Sometimes they will own a vacation property. Family governance is how family members can organize to fulfill their larger mission.
Once the business passes beyond the first generation, things get trickier. Now there is the challenge of aligning the desires and interests of an increasing number of households. Plus, there are often more people in the family, so that distributions from the family business get diluted.
More effort is required to maintain family ties as each succeeding generation takes over. At the third generation, cousins are raised in separate households. This is different from the second generation, in which the children were typically raised together with common parents.
Also, as the generations progress, they may be involved in multiple enterprises. As a result of all of these complexities, family gatherings need to be organized intentionally.
Family governance begins with the family making a commitment to meet regularly. A gather of the full family is called a family assembly. Most families that engage in deliberate family governance have regular family assemblies. These meetings are usually held annually.
Getting the family members to attend the assembly is always a challenge. Family members may have good intentions. But it is hard for all of the family members to clear their schedules and attend a meeting lasting several days, often at a location far from their home.
Most families that engage in family governance provide incentives and assistance to encourage people to meet. Family assemblies are typically paid for by shared family funds, rather than by the individuals. Often the family will pay for babysitting to assist young adult members who have young children and may lack available cash.
Family assemblies combine fun, education, quality family time and business meetings.
Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law, PLC and co-founder of How to Create a Legacy, LLC.
Michael Zolno has an MBA and MA in research psychology and almost 40 years’ experience as a consultant. He is also a co-founder of How to Create a Legacy, LLC.