The sudden outbreak of the Covid-19 pandemic has presented some significant challenges to families and businesses across the globe, forcing them to find ways to adapt to the current situation. This has been a difficult time for most businesses. They have seen severe pressure on the operating side due to supply chain disruptions, slump in customer demand, erratic labour supply, and a host of other issues. Many of the family businesses have found themselves struggling even to survive, while others may have started to look towards the future, rethinking their operating and family models.
The forced pause due to the pandemic has at some level also helped families regroup and assess their priorities. One of the key issues that has demanded attention of many families during the period of this crises has been business continuity planning. Finding a suitable successor who will take over the reins of the business has always been an area of significant concern for the business founders but the pandemic has brought this issue to the fore. Accordingly, family businesses have started looking at setting up governance structures to manage transitions effectively as well as safeguard their business and financial assets.
Like any other business, a family business too should have governance in place to ensure that both its family and business strategies are taken care of. Setting up a governance structure not only avoids conflict within the family by clearly defining rules of engagement for family members but also formalises ownership structures.
Working with experts to set up a forward-looking holistic governance structure that encompasses key elements such as conflict management, succession planning, and investment planning is advisable. As they embark on this journey of setting up a family governance structure, here are four questions that families may want to consider to ensure that they are on the right track.
Does the governance structure create a family council/board that will allow for efficient management of the family’s affairs?
The family council is to a family what the board of directors is to an enterprise. It clarifies roles of family members and over time, is expected to facilitate a successful transition of the family culture and values to the next generation. It is essential for the family to decide on a right governing body that can address the family issues.
Is there a well-documented family constitution that lays down the guiding principles for the family and for the next generation?
A family constitution ensures clarity and transparency and can increase chances of business longevity by preserving togetherness and cohesion amongst family members. Family-owned businesses who adopt and implement a family constitution, with binding rules, are often more successful.
Has an investment committee been set up which will drive the investment decisions for the family and is there an investment policy document that lays the guiding principles for the family’s investments consistent with their objectives?
It is advisable for each family to set up an investment committee, which will act in a fiduciary capacity with respect to the family’s portfolio and is accountable to the family council, for overseeing the investment of all assets owned by, or held in trust, for the portfolio. The investment committee should be responsible for projecting the family's financial needs, determining the family’s risk tolerance and investment horizon, establishing reasonable and consistent investment objectives, policies and guidelines which will direct the investment of the family's assets, and reviewing the same on a periodic basis.
The investment committee should create an investment policy document. This investment policy document sets forth the investment objectives, distribution policies and investment guidelines that govern the activities of the family’s investments and lays down guidelines for any other parties to whom the family council/investment committee has delegated the investment management responsibility for the portfolio assets.
Do the reports and management information system, set up as part of the governance structure, capture information related to the family’s finances, investment portfolio including the family’s investment in the group companies, and any other matter that may require the attention of the family in holistic manner?
The family should have a formal management information system to capture information related to the family’s finances, investment portfolio including the family’s investment in the group companies, and any other matter that may require the attention of the family. This should be available to all members of the family so that they have better understanding of the family’s assets, liabilities, and cash flows.
Most entrepreneurial families have little experience about how to manage a succession. Setting up a governance framework can help them with this. The most challenging part of this exercise is not what kind of a governance structure to create but rather how to create it. There is no single approach or best practice for going about this but having experts facilitate the process can smoothen the way and provide an independent perspective.
Views are personal. The author is senior managing director, Origination and Client Coverage, Waterfield Advisors.