CHAPTER 4

Family Governance

Mission/Vision

A vitally important aspect of family business uniqueness yet one that is often overlooked is the creation of a mission statement. For many businesses, the mission is often profit maximization or market dominance. Family-owned businesses often have a mission or purpose that is different than other companies. For many families the goal is to build their wealth in the first and second generations of family leadership. Many firms change their goals to one of stewardship that passes it on to future generations, protecting their social standing in the community and protecting their family legacy.

To enable the future success of the firm, a mission statement is vital to show all stakeholders what the purpose of the firm is and what it stands for. A strong well-crafted mission statement can be used as a decision-making tool when a decision is hard to make. If the mission is front and center to the operation of the business, a member just needs to ask, “Does the decision I am making fit with our mission?” If the answer is negative, it is an easy decision to make. A good practice in family business governance is to have two mission statements: one for the family and a separate mission statement for the firm. The mission statement would be created at a family council meeting and then put forth for ratification by all family members at an annual meeting.

Example of a Family Mission Statement

The Smith family is a group of entrepreneurial family members in business together. Our purpose is to successfully grow and develop as a family through our business interests. Our family and our businesses are both important; they are intertwined. Success in the family leads to success in business. We strive to maintain family harmony, respect, love, and togetherness as we do business together. We agree to work hard to help every family member achieve their goals. We will support and invest in new ventures to enable our family to higher levels of success.

Values

Another major difference between family firms and nonfamily firms are the values of the family and the business. As the business and the family are intertwined, the values of the family guide decision making and are paramount in the business. The family name is often on the front door and the family feels an extra responsibility to act in a way that represents their family in a positive light. Aligning family values with the business values is an important guiding principle that many family firms hold dear (Table 4.1).

Table 4.1 Common values associated with successful family firms

Integrity	Good Work Ethic
Honesty	Trust
Truthfulness	Open Communication
Stewardship	Long-Term View
Protect the Legacy	Personal Growth
Value and Respect for Family and Employees	Create Value for the Business
Dedication

Large Family-Owned/Family-Controlled Corporate Mission/Vision/Values/Purpose Statements

The following are examples of statements from family firms:

SC Johnson

SC Johnson has a four-page document entitled This We Believe that details the values and the guiding principles of the family and the company. These principles were first summarized in 1927 by H.F. Johnson, Sr.

The company strives to serve and earn the trust of the following five groups of people:

Chick-fil-A

Chick-fil-A does not have a mission statement; instead, they have a corporate purpose:

Bacardi Limited

Family-owned Bacardi Limited has the three pillars of:

Hallmark Cards

Founded in 1910 and still led by family, privately held Hallmark Cards Inc. states their vision and values below. Notice their desire to benefit their local community as well as stay privately held.

Our Vision

We will be the company that creates a more emotionally connected world by making a genuine difference in every life, every day.

We Believe

That our products and services must enrich people’s lives.

That creativity and quality—in our products, services, and all that we do—are essential to our success.

That innovation in all areas of our business is essential to attaining and sustaining leadership.

That the people of Hallmark are our company’s most valuable resource.

That distinguished financial performance is imperative to accomplish our broader purpose.

That our private ownership must be preserved.

We Value

Excellence in all we do.

High standards of ethics and integrity.

Caring and responsible corporate citizenship for Kansas City and for each community in which we operate.

These beliefs and values guide our business strategies, our corporate behavior, and our relationships with business partners, suppliers, customers, communities, and each other (Hallmark.com).

Example of a Family Business Mission Statement

The Smith Corporation is in its third generation of family leadership. Our founder Thomas Smith created our company based on three values:

We will never forget who made us successful. The Smith family donates five percent of all net profits to local charities in the community.

Goals and Objectives

Families in business together also have different goals and objectives than nonfamily firms. The goal of one family may be continued family leadership throughout the generations. Another may desire to have their children go into whatever career they would like in order to fulfill their potential and the business is designed to support them. Another family may be entrepreneurial and use their business as a family bank to support family members and start new organizations that benefit family members. All families are unique, they put their imprint on the business with their mission, vision, values, and goals and objectives.

Family Meetings

The first and simplest mechanism of family governance is having family meetings. These happen informally in the early years of the firm. Family meetings are the key to effective communication at this stage. They can be as simple as an informal breakfast or lunch to discuss business issues and opportunities, and to keep everyone updated. In the later years as a company grows and has a larger number of employees and family shareholders, the need for more effective communication increases. In the second and third generations and beyond, there are other governance structures such as the shareholder council and the family council that will take on more importance. The purpose of a family meeting is to increase communication and make sure everyone has the chance to hear the same current information (not secondhand), and to have the ability to share their own points of view and ask questions. In this manner, everyone is on the same page, attendees feel respected by being allowed to present opinions and concerns, and the family can discuss areas of importance for each member.

Who should attend family meetings? There is no universal answer for this question. The best answer is, it depends on the type of family, the personalities involved, and the individual business. Some family business consultants recommend only family owners and family employees attend the meetings. Others recommend that spouses and in-laws attend the meetings to better understand what is happening, as their lives are also affected by what happens in the firm. As an example, if a family meeting were held without spouses and the company needed to have a round of pay cuts, a nonemployed spouse would appreciate much more information as to the reason and the necessity. By attending the meetings, they would be provided with the information firsthand and would have better understanding and potentially buy into the decision at a greater level. Without good information, they may disagree, decide it is not needed, spread dissent, and create conflict.

Family owners/employees are used to having very informal family meetings spontaneously such as a quick lunch. When the professionalism of the family meetings is increased, the attendees need to be the same regular attending members. There are other governance mechanisms that can provide increased communication for other members of the family and will be discussed later.

Family Retreats and Holidays

Family retreats are designed to keep the entire family close and to celebrate accomplishments and achievements of family members. In the third generation and after, families can become quite large. One southern California family-owned automotive dealership had annual family retreats consisting of over 150 people. Especially in larger families, but in smaller ones as well, people can lose track of what is going on in other family members’ lives. The retreat is an attempt to keep the family engaged and engender family love and trust. In a retreat, everyone is invited, children as well. Some families accomplish this by going away to a cabin in the woods or a beach resort on a semiannual basis, others do it once a year and use it as a minivacation for family members. Some families use some of their financial capital and buy a condominium in Hawaii, or a home on a lake for the dual purposes of family personal use and a place to gather as a family for retreats. The retreat has a loose agenda, there are a few days of fun and family activities, mixed with some business meetings, and often presentations by family business professionals such as life insurance agents, estate planners, and consultants on topics such as improving communication, financial planning, succession, or improving decision making. Competitions and games are used to build teamwork among family members.

Through retreats, children of family business owners get introduced to the purpose of the business, and to its mission and vision at an early age. They see the importance of the business to their family and learn family history passed down from multiple generations. The purpose of inviting the children is to make them knowledgeable concerning the business and shape their view of the business. The task is for them to see it as a legacy and something valuable, and not as a negative that takes too much of mom and dad’s time.

A sample agenda for a family retreat is as follows:

Generational Meetings

Specific generational meetings are useful to increase communication with fellow members of the same generation. It is easy to see how a member of the second generation may have the same issues as other second-generation members. Family business consultants and university-based family business centers provide workshops for each generation, dividing the participants into specific cohort groups which accomplishes two important roles. First, participants are freely able to discuss their issues in a safe environment, free from disagreement or criticism by a family member from a different generation. Second, other members of the same generation can usually relate to the issue, since they are more than likely experiencing a similar issue. The cohort group members realize they are not alone, and that others may feel similarly.

Consultants will often use this approach to start a family retreat. They will separate the various generations into their own specific meetings, and then bring the family back together to discuss the issues. It is interesting to see the differences in the various generations. For example, the second generation may have differing opinions concerning times they have tried to take more responsibility only to get countermanded by members of the first generation. The first generation often complains the second generation does not step up and take responsibility enough!

Family Assembly

There are many names families use to describe some governance mechanisms. Some families have a family assembly. This assembly is for the entire family including spouses and children. This organization is not focused on decision making. Instead, its focus is to nurture the family, to create tight bonds with each other, to make sure the family is healthy, and to ensure all family members feel a sense of togetherness (Eckrich and McClure 2012). The family retreats and holidays would be a part of the family assembly.

Family Philanthropy

Many families in business together use philanthropy as a way of binding the family closer together. Once businesses reach a certain level of success, many of them will donate a certain percentage of their profits to charities or causes that are important to the family. Research shows the vast majority of family corporate giving is to their own local community as a way of paying back the people who enabled their success. Education, children, and then religious giving follow (Breeze 2009).

The philanthropic arm of the organization can be a useful avenue for many nonemployed family members. This keeps them engaged with the family and the business and provides satisfaction regarding their family benefiting society. As an example, Trudy Cathy White is the sister of current Chick-fil-A President Dan Cathy. She is not employed at the family-owned corporation as her two brothers are. She stayed engaged by being involved in the WinShape Foundation, the charitable arm of the Chick-fil-A family. It focuses on education, provides young people tuition for summer camps, and benefits foster children. All are causes important to their father and founder of the company S. Truett Cathy. They honor his legacy with their charitable giving.

The Family Constitution

The constitution is one of the most vital tools for families in the governance area. In the United States it is called the constitution. In other areas such as Europe, or Latin and South America it is referred to as a protocol. Some call it a family agreement or charter.

The constitution is a written document. It is a living document that can be updated and changed as needed. This important document puts into writing what the family has agreed upon concerning the business. Writing the constitution is an exhaustive process. and it takes a significant amount of time to finish. It is commonly worked on during family meetings and family retreats, and it is not uncommon for it to take years to complete. Depending on the size of the company, some families have the family council compose the first draft and then present it to the entire family for suggestions and recommendations.

The family constitution has multiple purposes. One large benefit of the constitution is to bring up important and often problematic areas in advance and before they actually happen. These areas could devolve in the future into business disruption and/or interpersonal conflict. Writing the constitution allows family members to discuss the issues and what should be done to prevent, eliminate, or manage them. Another benefit of the constitution is for the family to document in writing important procedures of how family business items will be addressed, and it can be used similarly as a policies and procedures manual. This document is vital to the professionalism and effective management of the firm (Montemerlo and Ward 2011).

The constitution gains its power and authority because all the decision makers have input into what goes into the constitution. The family members discuss and write the constitution together. There is consensus, there is agreement and buy in because all family members were allowed input. The family members agree to abide by the guidelines and procedures spelled out in the constitution. This is a vital area of importance. Once decisions are made, the family needs to have unity and agreement without complaining members of the family spreading dissent to employees or management. There is power in numbers and unification.

The Vital Importance of the Constitution in Preventing Conflict and Dysfunction

The importance of the family constitution can best be understood by some examples: A young son of a business-owning family is hired after attending college. After a few years he is promoted to a supervisory position. The son has a harsh management style and begins to treat employees in an abusive manner. A female employee accuses the son of harassment and sues the company after reporting the situation to family members (since there was no human resources department), and no action was made to resolve the incident or investigate it. Several other employees claim similar treatment. The business is facing serious liability. Several family members of different branches of the family want to terminate the offending employee. It is easy to see the mom or dad of the offending family member wanting to protect their child and disagreeing with other family members. This type of situation is loaded with conflict and can devolve into serious interfamily dysfunction.

If the family had a written constitution and discussed this type of event in advance, the decision concerning what to do about the family employee would have already been made. It would have been made previously, and at a time when emotions were not running high. All the family members would have agreed to abide by it. The constitution will limit the amount of disagreement and conflict.

In another family firm, a daughter marries a young man whom the family does not approve. The daughter failed to obtain a prenuptial agreement with her husband. It is not a healthy relationship. Eventually, they divorce, the former husband sues for half of the daughter’s ownership shares in the company. The family members are aghast at the possibility of being “partners” with the former husband. This is the type of issue that is commonplace and needs to be discussed in advance to be prevented. If the family had decided on a shareholder policy prohibiting nonfamily ownership, and what to do in the case of a family member’s divorce, such as requiring prenuptial agreements, or establishing a buyout fund to purchase family members’ shares, the problem could have been prevented or eliminated.

What the Constitution Covers

The mission and vision of the organization are paramount and are placed at the top of the constitution. The purpose of the organization is important to communicate to younger generations. Every decision is seen through the “lens” of the mission and vision of the organization. Often, family members will ask themselves “what would grandpa do?” Or “what would mom do in this situation?” Having the mission and vision at the top of the document shows the family members what their company stands for (and most importantly what it will not stand for) and details the company’s lasting and important values.

The constitution covers a multitude of possibilities. It is obviously impossible to cover every contingency, but the constitutions being written today have benefited from 20 years of trial and error by previous family-owned businesses and by family business consultants. In a nutshell, the constitution covers employment issues; what the process is for entering the business (college degree, previous experience working at another firm); stock valuation; the mission, vision, and purpose of the company (is it to pass on to future generations, or to sell?); shareholder ownership policies; termination and hiring policies; who reports to who; buyout agreements; compensation for family and nonfamily; what the process is for leaving the firm; etc.

Suggested Outline/Questions for the Creation of a Family Constitution

The following is a list of questions for families to ask of themselves, discuss, find agreement, and then document into their written family constitution. It is not an exhaustive list, it covers many of the most important items. At a minimum, it can be used to spur families as to the types of questions to discuss. If the family uses a facilitator in the form of a family business consultant, they will have lists of questions they feel are important and have been shown to speed up the process of writing a constitution:

The Family Council

The family council has often been used in place of the shareholders council and the BOD in smaller firms. The creation of a family council and moving to a democratic majority vote decision-making process is often one of the first recommendations made by family business consultants. In older and larger firms with more family members, the council is more formalized. Members are voted onto the council at the yearly shareholders meeting, and decisions are made by voting and presented to the larger shareholder council for ratification.

Responsibilities of the Family Council

One of the biggest responsibilities of the family council is the drafting and creation of the family constitution. The council can make initial drafts based on family input and then present the proposed document at the annual shareholders meeting for ratification. The process is long and rigorous, but the benefit for the family can be immeasurable in preventing conflict and disagreement, and for continuation of the family’s mission and values throughout the generations. The mission and values should be incorporated into every decision the family council makes.

Another large responsibility of the family council is electing from its membership one- or two-family council representatives to present the views of the family to the BOD. The directors give time during each board meeting (it is on the agenda) to listen to the views of the family and will then have knowledge concerning the family’s views on certain situations and areas of importance. Considering the SEW concept, the board is often not aware of what the family may value. It can very often be counterintuitive. The board may arrive at what they consider to be an excellent strategy; however, if it goes against the wishes of the family, there will be problems. By having a member of the family council sit on the BOD as the family representative, the board is made aware of the thoughts, feelings, and concerns of the family on important issues that affect the family. For example, the board may not realize the deep-natured feelings the owners have to protect the founder’s legacy. Or, the value of the social status family members have merely by being an owner of the firm. The family would want their thoughts known regarding anything having to do with respect to the family legacy or anything that could impact their social standing in the community (Eckrich and McClure 2012).

Structure of the Family Council

The structure of the council is formalized. Its meetings are scheduled far in advance, it has a written agenda. Often, it is facilitated by a family business consultant who is charged with keeping the meeting on track. This is an important task when the business is in the early stages of family council formation. The controlling owner may tend to dominate the meeting, which has the effect of hampering discussion and opposing views. The facilitator is experienced in politely facilitating a meeting where everyone has a say, and the controlling owner is now a member and not the sole vote or decision maker. Decisions are now made democratically, by voting. In smaller firms, all shareholders are usually members. In larger firms, the council is limited to those members who have been elected by the shareholder council, usually at the annual meeting. At inception, the number of family members on the council is relatively small. As the company grows, numerous family members may want to be involved. The family must now decide who should be on the board by a democratic vote at the annual shareholder meeting.

A family council should have a budget to pay for travel costs of family members, trips for continuing education or conferences, honorarium, and to reimburse members for attending family events associated with the business, such as a family meeting or a family retreat.

Interaction with the Board

In the early days of the firm, the family council will function as the BOD. As the company grows and enters the mid-second-generation and third-generation stages, the addition of a BOD is prudent. The family council will elect one member to serve on the BOD and will communicate the desires of the family to the board.

Family Business Checklist

The following are helpful questions for family councils to consider and discuss. These questions are helpful when developing the family constitution and when considering succession:

Questions for the Next Generation

There are numerous questions, and these would require a significant amount of time and attention to answer. The families who have successfully managed intergenerational successions and moved to more professional levels of management have successfully worked through many of these questions.

Board of Advisors

Instituting a board of advisors is another positive step to increase the professionalism of a family-owned firm. When a privately held family firm grows, it lessens its dependence on the original controlling owner as it enters its second and third generations. Having a board of advisors as a sounding board and to provide recommendations and advice can be very beneficial. Family members grew up in the same house, they speak the same language, and use the same terminology. They tend to have related views and think similarly to each other. The board of advisors provides different views and perspectives that the family has often not considered.

Ideally, this board should be made up of successful businesspeople in the local community that the owners respect. It should not have the company accountant or the company attorney as a member. The board is stronger with more outside views that are independent from those of the owner or the company. Another accountant, a different banker, and a different attorney should sit on the board of advisors to allow the family to benefit from different advice and views. The purpose of the board of advisors is to obtain many different perspectives, and be presented with different voices, views, and experiences, than those of the insiders in the business.

The board of advisors should be considered informal and advisory only. The board’s recommendations, although valuable, do not have formal authority as those of a BOD. The business is under no obligation to accept or act on the recommendations put forth by the board. Many advisory boards are voluntary; recently, family-owned companies have begun compensating board members for their time and service with an honorarium or a stipend per meeting. Many advisory boards meet annually or twice yearly. The owners can make phone calls between meetings to obtain advice from their members as well; this is a very common use of the advisors. It can be tremendously beneficial for an owner to solicit advice when making a large decision. The advisory board is also a step in the direction of a BOD once the company grows.

Estate Planning

It is not the purpose of this book to make any recommendations for estate and tax planning purposes. Professionals (tax attorneys, accountants, and estate planners) should be consulted. The rules and guidelines often change. This subject matter is vitally important; the success or failure of the business rides on effective estate planning for future generations to thrive. This is a vital area to be discussed using the various governance structures the family and the business have. Many families are often unaware of the costs involved to successfully navigate a transition of leadership from one generation to the next. Costs that are often overlooked include fees for certified public accountants, attorneys, insurance, taxes, and costs for professional advisors. The need for an up-to-date and realistic business valuation is critical.

Family business owners often want to divide the ownership shares of the business equally among all the children. However, equal ownership can be problematic when inactive shareholders have an equal vote with active (employed) shareholders. If an outside shareholder’s concern is for income/dividend maximization, the individual may often vote against capital expenditures needed for growth, diversification, or equipment purchases. This handcuffs the TMT and the family to effectively operate the business.

If the firm shares were split equally with the second generation, by the third generation imbalances in share count can occur, with larger families having significantly dispersed and divided ownership. This gives them a smaller share of ownership per family member. A childless heir would have a significantly larger percentage of share ownership and thus control. This is setting up the family for a potential conflict with this type of imbalanced share distribution. Certain branches of the family would be significantly more powerful than others, simply due to good intentions of fairness by the previous generations.

Nonvoting Stock

One of the techniques estate planners suggest in succession planning with family firms is the creation of nonvoting stock. Inactive family members can be owners of the firm, but not decision makers in the firm. The technique has negative aspects associated with it as well, especially when a new generation of descendants of inactive family members becomes active in the family firm. Again, the family business should consult specialized professionals such as an attorney.