The Importance of the Family Council in the Development of the Family Business

Talking about key governance challenges, I mentioned in my previously published Management Tips essay “Challenges of Governance in Privately-held Family Businesses” the absence in many family businesses of a Family Council.

I touched on the subject again recently, in a panel on governance in small and medium-sized companies. I didn’t do a deep dive, as it wasn’t the focus of my presentation, and I didn’t want to exceed the time reserved for each panelist.

I’ve decided to address the subject once more in this MT, because of its great importance for the harmony and consequent longevity of a family business.

Conflicts between members of an entrepreneurial family must not be ignored, and the mitigation of risks to the prosperity of the business needs adequate treatment. I wonder how many promising family businesses have succumbed – or will — to conflicts among family members. Several emblematic cases have graced the pages of newspapers and magazines. I won’t go into why they happened – it’s not our objective at the moment to analyze the causes and determinants of conflicts — but an internet search will turn up high-profile cases of family disputes that threatened, or even destroyed, companies. The proper environment for these conflicts to be addressed and assessed, before they cause more serious business consequences, is the Family Council. The Family Council functions as a forum for discussion and decision-making about the business, expectations and behaviors of grandparents, parents, children, aunts and uncles, nieces and nephews, and non-blood-related members of the family inner circle. (Absolutely! Their importance cannot be overlooked.)

While corporate governance comprises several decision-making environments, the Family Council is the appropriate place for business management to contemplate the culture and affective relationships among members of a family business.

The Family Council is a group formed to discuss family matters and align the expectations of family members with regard to the company. It is responsible for keeping matters of family and business separate. The tasks of the Family Council are discrete from the objectives of the advisory council and the board of directors, since these are concerned exclusively with the company.

The responsibilities of the Family Council include:

  • establishing boundaries between family interests and those of the company;
  • fostering the family’s values in business operations;
  • establishing and agreeing on criteria for the protection and growth of assets;
  • diversifying and managing current and fixed assets;
  • defining criteria for and planning for succession and the transmission of assets and inheritance;
  • disseminating the company vision as a factor in the expansion, harmonization and continuity of the family;
  • instructing family members with regard to succession and professional development;
  • defining criteria to appoint members to the advisory council and board of directors; and
  • representing the family in their relationship with other councils.

For the Family Council to function harmoniously, thereby contributing to the success of the enterprise and to family well-being, it is important that an agreement among family members be formalized.

This year the Brazilian Institute of Corporate Governance (known as IBCG in Brazil) published a book called The Role of Family Protocol in the Longevity of the Family Business, aimed at clarifying for administrators, partners and heirs of family-controlled companies the importance of formalizing this agreement among family members.

In the book, the IBCG mentions three key documents for a family-owned business: the shareholders’ agreement, company statutes or bylaws (or social contract), and the family protocol.

The shareholders’ agreement is the contract established between stock holders of a company to decide how to exercise their shareholder rights, thereby affording greater predictability and stability for the company. In this document, members can foresee how they will exercise diverse rights, according to their interests. Therein might be established the exercising of rights, such as administration, voting, M&A and sales, intellectual property, and others.

Company bylaws are used by for- and non-profit organizations, and the social contract, used by other companies, is the “birth certificate” of the legal entity. Its clauses identify the legal status and category of the company, its name, location, and corporate purpose, payment of share capital, the term (duration) of the company, fiscal year, contractual forum, and others.

Finally, the family protocol is an agreement signed between the members of the family that sets down the tradition and the moral legacy of family forebears, the principles and rules that regulate relationships among the members of the family business, and between them and the company.

The Family Protocol is therefore a consensual agreement between the members of the family, duly formalized, in which the conduct of the family is established in relation to the company and in relation to the family itself. Just as important as the protocol itself is the process for its development and validation.

In your family business, whether you are a partner or employee, is there a Family Council? Has a Family Protocol been established? No? What are you waiting for?

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