Building a coherent family governance framework

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STRUCTURING A STRONG GOVERNANCE SYSTEM
Drawing up a family constitution can help family businesses endure and prosper

Building a coherent family governance framework Ethical BoardroomBy Jahanara Sajjad Ahmad – Executive Director Corporate Governance and Group Financial Advisor, Bibojee Services (Pvt) Ltd

 

 

In the current uncertain and ever-changing business environment, family businesses not only contribute a great deal towards wealth and job creation but, most importantly, employment retention as well.

Employees who have served the business with loyalty over the years, are cared for by the family members and best possible solutions are created in order to retain the loyal staff. Thus, job security, which is a major concern for most employees across the globe, becomes the least of their worries.

This does not lead to complacency among the employees; on the contrary it leads them to try their level best to come up with solutions to fight the challenging economic and business circumstances in the best interests of the organisation and its stakeholders.

How governance is viewed in family businesses

For family-run businesses that are listed, corporate governance is addressed to an extent with the mandatory regulatory requirements issued by the capital markets regulator, be it the stock exchange or the apex capital markets regulator.

However, corporate governance remains neglected in most unlisted family-run businesses, with some family members advocating its need and necessity, while others do not see any value in setting up governance structures and view corporate governance frameworks as a tedious, mere box-ticking exercise.

One thing that is common across all businesses, corporate sectors and even state-owned enterprises, is that there needs to be at least one champion driving change and advocating best corporate governance practices throughout the organisation. In order for corporate governance to get practical acceptability, that champion needs to be someone who is viewed as an influencer across the organisation. It goes without saying that change is indeed driven from the top.

Key areas of governance for family businesses

As the family business grows, it needs to maintain a competitive advantage and, therefore, adopting and implementing corporate governance practices becomes key to its successful and seamless functioning.

If I were to identify key areas of corporate governance for family businesses, it would be transparency, perceived fairness and communication. I believe these are the three key governance areas which, if instilled within the family business framework, would contribute immensely towards business longevity and play a crucial role in overcoming business-related family disagreements.

Once disagreements start arising among family members, it ultimately leads to cracks developing in the business structure as well.

The family constitution and why is it needed

Just like other businesses, a family business too requires a solid foundation for its business structure.

The first step towards building a coherent family governance framework would be to develop a family constitution.It cannot be emphasised enough that a family constitution is the most critical strategic planning tool for the family business. If drafted well and with mutual consultation, the family constitution can serve as the ‘family glue’, providing emotional cohesion, and can help to maintain the relationship between the family and the business as well.

To elaborate further, having a family constitution in place is a way of building and fostering a mutual understanding of the rights and responsibilities of all persons who have an interest in the family wealth. This can, in turn, contribute to the preservation and growth of the family business and wealth.

Drafting a family constitution

The first step towards drafting a family constitution would be to call a meeting of all the family members who are in the driving seat of the business.

If the founder has passed on and the second generation is serving as board members and C-suite officers, then a meeting of the second-generation family members should be called.

The agenda for the meeting should first focus on how the decisions would be made during the meeting, for instance, whether the decisions would be taken at 51 per cent majority or at 75 per cent (super majority) of those present at the meeting or it has to be a unanimous decision. One can also categorise the matters that need majority, super majority or unanimous decision-making.

Family meeting and matters to consider

The meeting of family members should then discuss and decide on the following matters to be made part of the family constitution:

1. Define family and family member 

For the purpose of the business, would ‘in laws’ or ‘spouses’ be included in the definition of family or would the definition only include the bloodline?

2. Family vision and objectives 

Reflect and discuss where, as a family, do they come from as an entrepreneurial family business? Where are they now and where do they want to go? The vision and objectives would then be translated into business goals or how the business can take care of maintaining this family vision while achieving its business objectives as well.

3. Core values and family philosophy 

Decide on the family and business values along with the guiding principles. For instance, family unity, merit only or not.

4. Competitive advantages 

What makes the family business stand out? It should be more than just the founder’s name and reputation established by the founder. This does not mean to disregard the efforts of the founder, as reputation is a key asset of any business, but this means that the second generation should have added further value to the business set up by the founder.

5. Objectives of the family constitution

Business continuity and working in harmony as family members. The objectives of establishing a family constitution should be clearly understood.

6. Decision-making forum

Decide on what governing bodies do the family and its business need, such as the family council at the family level and even a supervisory board at the business level. What should be the family council’s hierarchy? How often should the family council meet?

Should a two-tier governance structure be followed for their businesses where the family members sit on the supervisory board but have relevant business experts serve on the company boards?

The focus should be business success while maintaining family control of the business and family unity.

7. Head of the forum/family council 

The head of the family council need not be the eldest family member just because of their seniority in age. Instead, a family member who has gained the family’s trust and respect and is perceived to take fair decisions should head the forum. The role and responsibility, powers and functions of the head and the family council, who will take on which tasks, and for how long, should be decided upon and documented within the family constitution.

8. Decision-making process 

As mentioned earlier, it should be decided which matters would require unanimous agreement, matters which can be decided with a simple majority and those which would require a super majority.

‘It cannot be emphasised enough that a family constitution is the most critical strategic planning tool for the family business. If drafted well and with mutual consultation, the family constitution can serve as the ‘family glue’, providing emotional cohesion’

9. Process of amendment in the family constitution

Who can propose amendment, how will it be evaluated, how will the final outcome decided be documented?

10. Scope of issues of the various decision-making forums

Scope of decisions falling under the ambit of the family council should be stated. The scope can include matters relating to the family in general, individual families, family welfare, support for the most vulnerable family members, etc.

11. Family employment policy

This is a key area. As human capital is one of the biggest risk to any business, the family constitution should state a policy for employing family members within the family business.Matters to be addressed in this policy include who to admit, whether there should be a minimum education criteria, minimum outside work experience before entering the family business, grooming of new entrants into the business, performance evaluation, employed family members reporting lines (normally direct reporting to parent is suggested to be avoided), annual leave limit, punctuality and succession planning for working family members, etc

12. Ownership and succession planning

This should cover existing ownership and shareholding position, and succession planning regarding ownership i.e when and how the ownership will be transferred to the next generation, male/female ownership transfer matters in case Islamic laws are chosen to be followed, transmission of ownership of the deceased individual, ownership outside of family members, for example, by employees, etc.

13. Dividends and distributions

The family should agree on dividend distributions (which are of course linked to ownership of shares of the family business) and perks and benefits (which are linked with employment, board of directors/supervisory board of the family members), to be provided to family members.

14. Retirement plan for family business leaders

Family businesses should consider the retirement plans put in place by other companies and take their cue from these plans or replicate similar structures within their family business.

15. Exit policy

This is extremely important, in order to retain the family control. For listed companies there are takeover and acquisition laws in place, however for unlisted businesses, an agreement needs to be put in place regarding transfer of ownership of shares in case one family member decides to exit the family business. Procedures should be agreed on how to exit, who should be given the first right to purchase of these shares, pricing policy for these shares, etc.

16. Policies on political activities and using family business funds for perusing personal ventures/ambitions

There should be a stringent policy in place to prohibit use of business funds and use of company facilities for personal ambitions.Building a coherent family governance framework Ethical Boardroom

17. Dispute resolution mechanism, assignment of roles and responsibilities

Procedures for arbitration by the family council should be developed. Hence, business-related disputes between family members can be resolved at the level of the family council as soon as disagreements start to arise between family members due to business-related matters.

‘Communication is key in order to keep the family ties intact. Family members become so engrossed with the business that they forget to meet as simply family members’

Once the basic building blocks for the family constitution are agreed, a trusted lawyer should be appointed to draft the family constitution and give it a legal form, so that the constitution reflects a well-defined, morally or binding guiding culture or even a legally binding agreement between the family members. Once a family constitution is drafted, all must comply with it.

One must note that the family constitution is a living document that can be revisited periodically, say every three years or so, as shareholder structures or economic conditions might change.

Transparency, perceived fairness and communication

As I mentioned earlier, transparency, perceived fairness and communication is imperative to keep the family glued together and overcome business-related family disagreements.

Given that, as families grow, not all family members can be accommodated within the family business, which could make certain family members think that few members are getting more benefits from the business than the others. This leads to distrust and resentment within the family members, which in turn affects relationships.

A good way of dealing with this ‘misconception’ would be for each family member’s income, benefits and perks arising out of the family business to be clearly documented and disclosed at each family council meeting. In case one family member gets more benefits than the other, the reasons for this should be clearly stated and documented in the interest of transparency and for it to be perceived as appearing fair to the other members of the family who do not get as much or less benefit from the family business.

I have also noted that regular communication is key in order to keep the family ties intact. As the business grows and it forms various off-shoots in the form of new companies or ventures, the family members running each off-shoot become so engrossed with the business, that they forget to meet as simply family members. Their meetings revolve around the business only, which leads to creating distance between them.

Lack of unity among the family members can be exploited by others to the detriment of the family business.

Conclusion

In conclusion, establishing sustainable governance structures are the first step towards achieving coherence among family members which, if implemented correctly, ultimately leads to business continuity. We have all experienced recently how vulnerable we all are and how fragile the world we live in is.

One must therefore remember that life is all about give and take. We must realise that one cannot have it all, hence giving leeway to others and working with having best intentions for each other also contributes towards family coherence, which ultimately translates into business continuity as one united family.

Disclaimer: The views expressed in this article are those of the author and not those of her employer.

About The Author:

Ms. Jahanara Sajjad Ahmad, FCA is a fellow member of the Institute of Chartered Accountants of Pakistan. She has over 18 years of post-qualification experience in finance, audit, capital markets, Islamic finance and corporate governance.

Currently, Jahanara is the Executive Director Corporate Governance and Group Financial Advisor to the Bibojee Group of Companies. Previously she has worked in the UAE in the field of Corporate Governance with Dubai Parks and Resorts PJSC and Hawkamah, the Institute of Corporate Governance, based in Dubai International Financial Centre. At Dubai Parks, Jahanara lead the process of the Company’s participation in the 2016 Ethical board room Corporate Governance Awards, which Dubai Parks won and helped position the Company as the market leader in terms of governance frameworks and practices.

At Hawkamah, Jahanara provided consultancy to various GCC Companies, including State Owned Companies and Islamic Banks, and assisted them in setting up their Corporate Governance frameworks and practices in accordance with international best practice. She developed the Middle East’s first Code of Corporate Governance for the Dubai Real Estate Developers. Jahanara was driving Hawkamah’s Task Forces on Corporate Governance of State Owned Enterprises, Islamic Banks and Insolvency and Debtor Creditor Rights systems and implementation of the policy recommendations culminating out of the work of the Task Forces throughout the MENA region.