Happiness Tuesdays

“In times of test, family is best.” —Burmese Proverb

Subsequent transitions are even more disappointing, with only 12% transitioning onto the third generation and rates dropping to only 3% onto the fourth generation. Why are the success rates for these wealth transitions so bleak? What can a family do to improve their chances of sustaining family wealth through multiple generations?

Navigating the challenges of family, business, and financial matters is no easy task, particularly as families and businesses grow and experience the discomfort of change. Implementing a family governance system can help families maneuver through these challenges more easily. In addition, creating a system that addresses the needs and desires of the current and future generations while simultaneously maintaining the business’s success will allow the family and the business to thrive.

The challenges facing families

As businesses and families become more successful over time, they grow more complex. As a result, differing interests, views, and preferences may arise between the current and future generations regarding issues around the continuity of the family business and a potential wealth transfer.

Family dynamics become more multifaceted as the second generation grows into adulthood and expands their own families with spouses and children. This added family complexity may contribute to later disagreements, communication breakdown, poor decision-making, and possibly even the dismantling of the family business.

Family governance systems create the structure needed for all involved parties to: voice their opinions, create a space for everyone to feel included and respected, and help families arrive at agreed-upon decisions that will be followed in the future. All of these, in turn, create a more successful family dynamic and family enterprise.

Understanding family governance

Since every family and business is unique in the way they function, there is no one exact way to define family governance. Instead, it may be best to consider it a set of tools and processes the family can utilize to reach their common goal.

Unfortunately, many families do not take the time to fully understand their family governance needs or do not address the needs until a conflict arises – which is often too late.

With aging generations, family expansions, or blended families – it may no longer be the immediate family members directly impacted by a family enterprise or a potential wealth transfer.

Family governance best practices

Creating a Family Values, Vision and Mission Statement helps to articulate the collective overarching principles and vision that guide the family. Identifying family values is the first step toward decision-making on business strategy, organizational structure, family agreements, owners’ commitment, and leadership style. A family mission statement is a unified expression that all family members help create, outlining what the family wants to be and do together and the principles guiding their family.

Creating these documents is an opportunity to increase family alignment through rich communication within the family about family history, legacy and direction for the future.

A Family Constitution includes the family values, vision and mission and outlines in greater detail a framework of clearly stated principles and protocols for how the family agrees to deal with family‐related matters that impact business issues.

The constitution would set out the rules and procedures under which the family is governed, including how it operates its shared assets, allocates its joint resources, resolves conflicts and conducts its collective affairs. It encourages a family to live according to their values and agreed-upon expectations.

Family Meetings can be the ideal environment for having conversations between family members as all are or will be somehow impacted by the business or the family’s wealth. Meetings are regularly scheduled in a neutral location, providing a welcoming and inclusive forum for communication across all generations to ensure each member has a voice.

These meetings can be facilitated by a third party to help guide the flow of communication and ensure that discussions remain focused and productive. Encouraging each family member to share individual values and their vision for the future helps families learn more about their members and how they can support one another in achieving their goals.

The family meeting can also be used as the setting for educating the next generation about how to be effective business owners on financial matters, discussing the family’s philanthropic giving vision and goals, or as a conflict resolution mechanism promoting greater alignment and respect between family members.

A Family Council serves as the coordinating body for the family and comprises appointed members who represent the family in a family business system. This can be an effective vehicle for family decision-making, mainly where large families with multiple generations participate in a family business.

One of the primary roles of the council is to build unity and trust across the different branches and generations of the family. This enables the family council to act as the voice for the family in addressing key matters that impact the family and its relationship with the business.

Family Councils initiate activities and perform duties to help families stay aligned with their goals. Core responsibilities typically include: providing oversight and review of the family assets, being proactive in educating family members on the business and financial matters, offering guidance around making decisions that impact the family; managing issues concerning the family and its interaction with the business, such as a family employment policy; establishing and modifying terms for the family constitution, as well as planning and organizing family meetings, reunions and other family events.

If required, and as the family grows, subcommittees can be formed to address and manage specific areas such as communication, conflict resolution, education and stewardship, leadership development, transition planning, or decision-making.

Some family questions worth considering

• How can we create better communication amongst the family as a whole?
• How can family wealth be successfully preserved so it can be transferred to the next generation?
• How can the business be effectively managed to transition it to future generations successfully?
• Do the children want to become involved in the family business, and when is the appropriate time to introduce them? What about their spouses?
• How will a business transition affect all family members, even those not directly involved?
• How can we bridge the knowledge gap between the different generations?

Conclusion

Families successful at transferring substantial capital from generation to generation have benefited from best practices in family governance and a keen understanding that success in sustaining long-term wealth is not easily achieved and requires intentional effort and structure.

A family governance system is meant to be a living entity that builds on family values and traditions and should be revisited and amended as the family evolves.

We can help identify some of the key considerations regarding your family governance structure and assist in facilitating family meetings or helping you start creating your family legacy.

Politics & Governance

Is a family governance policy something that you would consider creating for your household?