Family councils: Managing conflicts in a family business

In my last column, I wrote about family business and its three life cycles. This is based on conclusive research that more than 90 percent of family businesses do not last beyond three generations.

The most common mistake committed by families who own businesses is that they focus only on managing the business. What they don’t realize is that in order to manage the family business successfully and professionally, it is just as important that they learn to manage family issues which often encroach upon the business environment, causing confusion, disorder and, in some cases, even total collapse. If the family is the entity that will govern the business, it is often very critical that they must have a governing structure just like any other organization.

The success of a family business will depend not only on how a business is managed but also on how the family is governed.

The family must first learn to accept that the business, ownership and family issues should be addressed separately. These three different areas require separate structures, systems and plans for governance.

However, most families are familiar only with business management structure, which means a board of directors and a corporate management structure. Therefore, it is often the case that all of the three different areas of issues are addressed only through the same business management structure. When the ownership and the family issues are addressed also through the business management structure, this causes a lot of confusion and eventually leads to the disruption of harmony within the family, and to the ineffective and inefficient management of the business. The issues that are business in nature are entirely different from the issues arising from ownership and family concerns.

To avoid these, the family must set up a structure to discuss family issues separate from the structure that takes up strictly business issues. Among the core components of the proposed mechanisms that will discuss family issues are: a family council and a family constitution.

The primary purpose of the family council is to facilitate free and open communication between family members in a formal and organized forum. Well-designed and effective family councils can help a family minimize internal and interfamily conflicts and hostilities. Aside from serving as a forum, the family council can also serve as a vehicle for mediating conflicts that will occur within all families.

The family council can also be responsible for carrying on the family legacy and instilling a sense of stewardship in the younger generation. The family council can also be used to undertake the following activities:

• Articulating family values for the guidance of the board, top management and the family’s philanthropic activities.

• Developing a challenging vision of the future of the family and the company that all members can share – a shared dream.

• Planning educational programs and events for family members.

• Establishing standards of behavior for family members in the community.

• Developing a family mission statement or credo.

• Furthering the development of young family members by setting up scholarships and/or venture funds.

• Organizing celebrations of the family legacy.

• Establishing a distinct office to handle the family’s portfolio of investments not related to the family’s main business.

• Establishing and overseeing the family’s philanthropic initiatives.

• Coordinating measures to protect the personal security of family members.

• Providing fun and leisure activities for the family.

• Establishing policies to regulate conflicts of interest among different business activities of family members.

The last main activity is especially crucial when the family has become engaged in different types of businesses. A family council is useful to organize, no matter the size of family companies.

It is important that the family council be organized as a formal structure with procedural rules for meetings. One effective basis for the rules for meetings is the Robert’s Rules of Order, a standard guide for facilitating orderly meetings and group decision-making. It promotes respectful debate and ensures fairness and the protection of minority rights.

For families that would like to have a formal governance structure for its Family Council, the following offices reporting to the council are recommended:

• Family office. This is a centralized financial planning group that enables the family to invest their wealth as a group. The family office should be a separate operation from the business.

• Family foundation. A single central foundation that will centralize the family’s philanthropic initiatives can be set up.

• Internal stock market. The family may set up an internal stock market that will manage the buying and selling of shares among family members. This will not only facilitate the selling of shares but will also ensure that ownership remains within the family.

• Redemption fund. A fund can be built by contributing a percentage of profits to the fund each year. This can be used for shareholders who want to cash in their stock for a fair price for personal reasons.

One ideal way for organizing a family council is to have a one-day or two-day family retreat at some quiet place away from the business.

In order for a family council to be effective, there should be an accompanying written and comprehensive family constitution. This is a critical requirement for family councils to succeed. Due to space constraints, I will discuss the different components of a family constitution in my next column.