Practical advice for the family-run enterprise

by | Jul 28, 2014


In Switzerland, as in many other countries, successful businesses are frequently managed and owned by families: a company once founded by an entrepreneurial grandfather decades ago is then build on by the next generation and the following generations managed to expand and consolidate the enterprise.

This process is, however, frequently wrought with challenges, not only of a commercial nature, but frequently due to challenges with a more personal, family-linked character. Families and family members are regularly less homogenous than the cliché might suggest. Practical and tested solutions to the many problems that can face multigenerational family-run businesses are therefore of great value, not only for the family members themselves but also, to a critical degree, to the wellbeing and future success of the affected companies. In this article, we would like to touch on a few established concepts and instruments of “family governance” that have proven to work well for family-run enterprises.

Family governance – Getting the basics right

a. Advantages of family businesses

What makes family business different from ordinary businesses is that they commonly have a small base of manager-owners. This can translate into fast strategic decision-making. At the same time, family shareholders are more likely to take a long-term view of the development of their company than financial investors thus giving more importance to sound basic structures and operational principles. Contrary to businesses held by unrelated owners, family businesses are conducive to a family ethos being realised and shared within the business. Lastly, but importantly, a family-run business regularly has access to the capital of the family and its members.

Despite this positive background, tensions in family-run businesses eventually and inevitably arise. Running a business operation is an inherently organic, multifaceted and ever-changing challenge putting to the test family structures comprising different attitudes, age groups, genders etc. To successfully mitigate or avoid such tension ownership and management are often and must frequently be separated. It is vital that such situations are addressed progressively and timely.

b. Family charter

Family run businesses frequently experience tensions between family interests and commercial necessities. In order to accommodate and balance these sometimes juxtaposing interests it is vital that the family owners draft fundamental principles that they want to adhere to and enforce in the running of their business. This is essentially what family governance is about: agreeing on control mechanisms and clear regulations to protect the business against undue influence and the exertion of power by family individuals and intrusion from outside. Such principles and mechanisms can ensure the necessary stability for the business to flourish.

These fundamental decisions on the family goals and values as well as the instruments for achieving and implementing such aspirations are best laid down in a family charter. The family charter should address the family goals such as increasing the value of the business or the realisation of personal ambitions by family members, who should be involved in the management (family members or outside managers), what direction the development of the business should take, what financial expectations the family members have, how the business should be funded, how ownership is structured and what place the family business takes in respect of the overall wealth of the family.

Further, the family charter should deal with the values of the family. Which are the sources of pride of the family which should be upheld in the business? What corporate culture does the family wish to cultivate in the business? What is the family’s view on corporate social responsibility and its commitment to the general public?

Finally, the family charter should set out by which instruments the family goals will be implemented in the business. How is the family organised and how are decisions made? Which are the channels of communication among the family members and to the outside world? Which are the crisis scenarios and emergency procedures should the business strike existential difficulties? How are disagreements amongst family members resolved, who has the final say and what is the status of minority family members?

Since values change with the passing of time, the family charter should make allowance for its revision or restatement after certain intervals.

c. Wealth strategy

The aim of a wealth strategy is to ensure the survival of the family assets for posterity by allocating the family estate to various sectors of investments. Wealth strategies include options for family members to exit the family company. Setting up a wealth strategy should take into consideration the personal development, needs, assets and risk trends of the family individuals whilst dividing the family’s wealth into a variety of investment fields such as participations in companies, real estate, securities and alternative types of investments such as art.

At the same time it is important to secure that both the chosen investment fields remain independent from each other and at the same time, family wealth is kept separate from commercial assets used for daily operations.

The wealth strategy is an important guideline for the family and should be approved by the family council (see below).

Family businesses: Organisation, information and communication

a. Family reunions and family council

Transparency fosters trust. As former US Supreme Court Justice Louis D. Brandeis once noted, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants….” This holds true for families as it is applicable to the sound management of large commercial companies. The place where this transparency can be achieved in families is the family reunion, a gathering of family members at regular intervals during which information is provided to the family members on the ongoing business, important events and future developments.

In particular if families are large and where the family decides to include spouses and children (of a certain age) to be admitted to the family reunion it makes sense to create from the family body a committee charged with the organization and running of the family reunions. The formation of such a committee – or family council – should be based on the family charter which should define its duties, exact composition and its decision-making powers and the requisite procedure. In its function as the link between the business and the family, the family council has the duty to disseminate information about the business to the family members at the family reunions. The family council should draft an information policy regarding the development of the business. Holding family reunions and involving younger generations from a suitable age goes towards establishing a healthy understanding and identification of these persons with family business.

The family council is best made up of family members with a direct stake in the business or who are actively involved in the management of the business. Choosing a chairperson for the family council can be a challenging task. The person should be someone that enjoys wide trust within the family and who has a large measure of experience in the family business and who can also communicate well with the various groups making up the family reunion. Since it is also the chairperson’s calling to promote compromise and facility consensus among the family members it is advisable not to appoint the CEO of the family business to this position. In many instances the CEO might lack the objective distance to the business necessary to achieve a healthy compromise.

b. Information and communication

In order to ensure positive relations within the family and the environment in which the family business operates (inner realm being the family and the outer realm being society at large), a sound and honest information policy should be devised and adhered to. Depending on the size of the family involved such communication may take the form of regular dinner table discussions or the distribution of updates in the form of family newsletters.

Both formal and informal communication should find their place. Discussing family relevant business issues at an early stage and with the necessary frankness are an important part of avoiding or diffusing differences of opinions and conflicts becoming insurmountable.

Taking into account that the perception of a family business by outsiders and the public at large has significant influence both on the reputation of the business but also on the loyalty of the family members to the business it is important to also develop a coherent and positive communication policy to the public. By communicating major decisions to the public, the family can increase its credibility and gain the trust of the general public and its customers.

At the same time the advantages of a positive communication policy need to be balanced against the need to keep confidential certain valid business interests, trade secrets and the will to safeguard the family’s privacy interests. Where no clear and well supported communication policy can be achieved internally, it is advisable to include an external chairperson or mediator in the process.

How should succession be organised?

a. Prerequisite

The family members should actively lay the groundwork for the active involvement of the next generation through upbringing and education. By familiarizing the children with the history of the business and talking openly about current developments, parents and elders can reinforce identification with the family business. The children should be actively involved from an early age. This enables the older generation to identify their interest, involvement and commitment.

b. Preparation phase

At some later point in time the succession planning should become more defined and detailed. The owner of the business should start to establish his objectives. He needs to think about how much control he wants to retain in the future (as shareholder and/or member of the Board of Directors), whether there exist family members capable of and interested in running the business once he steps down, whether he wants to stay on in an advisory capacity etc.. He needs to assess his financial situation, matrimonial and inheritance implications and has to consider tax issues that go along with succession steps. The owner of the business has to communicate and discuss his ideas with the family and start to implement a succession plan (e.g. as part of the family charter or in a separate document).

c. Implementation phase

Sound basis agreements are the vital building blocks on which seamless and satisfying succession is built on. Drawing up unambiguous agreements is essential (e.g. succession agreement between the owner of the business and his family, organizational regulations for the members of the Board of Directors of the company, shareholder agreement between the shareholders of the company, matrimonial agreement, inheritance agreements or last will).

In a succession arrangement, the principles of the succession plan should be laid down. It should contain provisions regarding (i) the family members who may become and remain involved in the running of the business and how the other family members should be compensated, (ii) the time aspect, e.g. staggered transfer of shares to the next generation, (iii) how the transfer of the actual ownership stake should take place, e.g. anticipatory succession, mixed donation or a sale at market price, (iii) how shareholder interests and management responsibilities may be combined, as well as (iv) exit strategies in case the succession plan does not work as intended, e.g. handing back of ownership. Families are well advised to ensure that the ownership of the company does not become too fragmented. Splintering of rights and votes frequently lead to stale mate situations. An effective successor arrangement must be flexible and should include alternatives.

Organizational regulationsgovern the duties and powers of the Board of Directors, its chairperson as well as of the delegates of the Board of Directors and may contain provisions regarding (i) the constitution of the Board of Directors, (ii) the frequency of meetings, the quorum and passing of resolutions, (iii) the inalienable duties and powers of the Board of Directors, (iv) the delegation of the companies management to delegates (e.g. certain family members), (v) the right to information and reporting duties, (vi) the remuneration of the Board of Directors and its delegates, and (vii) signatory rights.

The shareholder agreement is an agreement among the shareholders of a company and is intended to supplement the articles of incorporation. It governs the relationship between the shareholders in their function as shareholders, members of the Board of Directors and/or managers of the company and may include (i) provisions regarding the control and management of the company, e.g. power of certain shareholders to designate individuals as members of the Board of Directors, power of a certain shareholder to chair the Board of Director incl. rules on the casting vote, attendance rules, unanimous voting requirements for certain issues which are of key importance or the right to information and reporting duties, (ii) dispute resolution mechanisms in case of deadlock situations, e.g. involvement of a person of trust of the family or an external expert, and (iii) provisions regulating the ownership of the company, e.g. restrictions on transferring the shares, exit strategies (e.g. in case of insolvency or death of a shareholder), valuation of the shares, the deposit of shares.

Furthermore, it is sensible to ensure that matrimonial agreements and agreements on succession are in place and that wills are made.

Finally, adequate control mechanisms and the access to external expertise and practical experience of business management is important, and can be achieved, for example, by appointing independent members of the board of the family business.

Urs Feller

Urs Feller

Prager Dreifuss