Why is Family Governance so Important?

by | Jul 28, 2014

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. In 4 parts is described “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Family governance is the key to multi-generational success!

All around the world is a well-known saying “Shirtsleeves to shirtsleeves in three generations.” The odds of success are not great.

→Only six to ten of 100 wealthy families and family businesses survive to the third generation.

How can a family beat this proverb of failure?

We will address proactive ways to beat this proverb. We will look at how a family can create a strong governance system, and the benefits that will give to the family members. We will start by defining what is family governance, and what are the best practices for strong family governance. Then we will go through the practical steps that a family can take to create the strong family governance system. This will include a Family Council, a Family Constitution and continuing Family Gatherings.

What is family governance?

How can families continue their wealth and their family businesses for many generations? The answer is to create a strong family governance system.

→Family governance is “how a family makes decisions as a family.”

What model of decision making should a family use?

There are many models of how decisions are made (dictatorship, consensus, democracy, throwing dice, etc.). Some models are more effective than others. We will compare two models often found in family groups.

Model examples

The Founder makes all the decisions model:
  • Decisions might be made by the Founder only, who feels that he or she is entitled to make all important decisions. Other family members might not even be aware of those decisions, and none would have their opinion included.
  • The risk in this system is that when the Founder is no longer present, the younger generations are likely to revolt and to reject the controls of the Founder. (In some cases they would not even be aware of the wishes of the Founder).
  • This is also a time when many sibling rivalry issues come out into the open.
  • Regrettably this often leads to litigation and negative publicity, with a likely result to be failure to keep together the family and its wealth or business.
The entire family participates model:

The entire family participates in an agreed decision making process (family governance).

  • Decisions are made in a way that the family has decided together.
  • Each family member participates in creating his/her decision-making system.
  • The agreed governance system is put in writing.
  • All family members have agreed to follow the governance system.
  • Family members all have the opportunity to remain involved and cooperative.
  • No litigation happens or is threatened.

If we compare the family group to a country, we would compare a country that uses a citizen voting system. Members vote to elect those who will represent them. Those who are elected are accountable and can be replaced in future elections.

How do countries make decisions?

If we compare a family group to a country, we can look at the governance model in any country. Using the “Founder makes all decisions” model, we would compare a country that uses a Dictator system of governance. As seen recently in the Arab Spring, the citizens are likely to revolt in a Dictator model.

→Participating in governance is a basic human right. Families work the same way.

What are the key features of a strong governance system?

Best practices from countries and best practices from public, listed companies can provide guidance for family businesses and families with substantial wealth. These include the following:

  • Transparency. Transparency means that the information is shared with all the members; there are no “secret” decisions. Information is always available, and is always truthful. Proceedings in the Congress, or Parliament, or Diet are open to the public, sometimes by live television coverage. Freedom of the press adds additional assurance that information is widely available. →Today twitter helps too!
  • Accountability. Accountability means that promises are kept; including promises made during campaigns. Any member can ask for information about the goals and progress on the goals. In listed companies, the C-suite executives are accountable to the Board and the Board is accountable to the shareholders/owners.
  • Participation. Third in importance is a feature that is not mentioned often in governments or in listed company best practices. Participation is extremely important in family governance. Participation means that each family member feels included in the governance process. Many people question whether or not a family governance system is legally binding on everyone. The answer is that when each family member contributed to creating the system, each family member is motivated to follow it.