One of the most challenging aspects of family business succession is to pitch, at the right level, control and authority over the wealth. Some family members will want the top job, others will not be interested, some will be capable and others less capable. Some will have a heart for the family, and for others, pride and self-interest may be their default setting. The future prosperity and harmony of your family will depend on getting this right.
Active Knowledge Question:
What approach are you taking to establish the optimum governance structures for your family?
You may have spent your lifetime building a series of successful businesses and investing those profits in building the wealth that your family may now enjoy. But the likelihood of that wealth continuing to compound once you are no longer around is dependent on the governance structures that you build to control and have authority over that wealth. Get it wrong or create weak structures and that wealth will disappear faster than you ever built it and you will have seeded conflict and disharmony in your family.
Great care must be taken in selecting leaders and building the right governance structures around them to underpin harmony and the compounding of wealth. This is a critical step in achieving equity and fairness in your succession process. It is putting in place the mechanisms that will ensure that your intents in delivering equity, fairness and growth are achieved.
The complexity of the governance structures you put in place will be an outcome of the complexity of the business and wealth structures you are seeking to transition and the number of family members in the next generation.
There are seven design aspects of governance that you should consider:
- Separation: There should be a clear separation of family and business interests and activities. There will be one stream that will oversee all the business operations, and then there will be a separate and distinct stream that will manage the family and their interests. In practical terms, this often comes down to a holding company on one side and a family council on the other. They should be led by two separate chairs/leaders.
- Leadership: People should be placed into leadership positions who not only are capable but more importantly are worthy of these roles, and that worthiness lies in their character.
- Decision-Making: The businesses are operated for the benefit of the family as a whole and not for any one individual. It is therefore important that the delegate authorities which the family permit the Board, CEO and management team to exercise are clearly spelt out, and they are held accountable to them.
- Remuneration/Distributions: A policy that sets out the basis of remuneration for any family member working within a family business and the basis for dividend or other distributions should be clearly set. Often family members working in the business prefer to keep money in the business whereas those who are wholly dependent on the distributions want to draw as much as they can. And salaries can always be areas of disharmony.
- Independence: Truly independent and worthy persons need to sit in, and preferable chair, the business board and the family council – they will not be the same person. This will be especially true if you have, for example, four family members where deadlocks can occur. The Family Charter, and the various corporate constitutions and trust deeds, should clearly set out their role, ability to cast deciding votes, selection etc. and provide clear guidance as to how they should form their decisions.
- Accountability: The expectations, goals, budgets etc. for all activities should be clearly agreed, stated and monitored with appropriate feedback. Disputes can often arise as to what was agreed and expected.
- Exit: A process for family members to exit the various businesses and be fairly compensated should be established as part of the succession process, documented and locked in concrete. Any entitlements they may have should be clearly stated, an appropriate valuation method set out and payment terms established. Often there is a penalty for voluntary withdrawal and, at times, a premium if a family member is asked to leave by other family members.
In addition, the manner in which you choose to structure your various businesses can be critical in achieving an effective transition. More on this next week but at this time recognise the importance of effective governance and do not leave it to chance or for the next generation to sort out at sometime in the future.
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All the best in the success of your business,
Richard Shrapnel
