Q/A: Clarifying the Practice of Family Enterprise Governance

Q/A: Clarifying the Practice of Family Enterprise Governance

A Q&A with James Grubman, Ph.D. and Dennis T. Jaffe, Ph.D.

 

Overview

Q: What mechanisms should a large family of wealth have in place on making inclusive decisions?

Q: what are the problems that can happen when this is not the case and just one person makes the decisions?

Q: How does a family governance plan help the family make effective decisions and how often should this be reviewed and adjusted annually?

Q: This all comes down to family governance issues, how does a family start to formulate a family governance plan?

Q: How do families involve through marriage or adoption non-blood line family members into the process?

Q: Tell us about a family constitution.

Q: How do families incorporate a family council into the governance plan?

Q: How early do you recommend engaging the younger family members into this process and how?

Q: How do families preserve their history and culture yet also adjust to changing conditions and social norms over generations?

AJR: what mechanisms should a large family of wealth have in place on making inclusive decisions?

JG & DJ: A wealthy family cannot function truly as a democracy since certain family members may need to be responsible for some decisions as owners, duciaries or elders. Yet there are serious long-term risks in one person holding all the reins of power. Finding the best middle-ground for decision-making in the family requires setting up healthy mechanisms to balance the twin goals of inclusiveness and leadership.

The main components needed in family governance follow the journalistic “who, what, why, when, where, and how” bullet points. The Why is codified by the family’s mission statement, designed after extensive discussion about their core values. A mission statement is like a lighthouse beacon that helps the family keep to a path, avoid getting lost in the stresses of life, and illuminates the way back home when the family may be off track. A mission statement alone, however, is a noble set of ideals without the practical implementation of knowing How, what, who and when the family will govern itself and make decisions. That’s what the family constitution is for. A constitution doesn’t have to be overly complex, but it does have to identify mechanisms such as the family council, whether the family will also have a family assembly, the description of how the council and/or assembly are to function, how many members will constitute the family council, where these members will be drawn from, the minimum age or other requirements for being on the council, the frequency of meetings, whether members must be family bloodline, and a multitude of other specifications. The constitution will specify in broad terms the scope of the family’s decision making, making sure these do not override or conflict with other important governance mechanisms the family may have in place, such as the board of directors of the family operating company or provisions in ownership agreements or trust documents. Finally, supporting the general terms of the family mission statement and constitution need to be the various policies developed and managed by the family council in running the day-to-day operations of the family enterprise.

Through the mission statement, mechanisms described in the family constitution, and supporting policies and procedures, the family is able to communicate and listen to each other, avoid con icts due to misunderstanding, and anticipate disagreements before they grow into deep rifts.

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