Family business governance: How to ensure wealth is safeguarded

Mixing family and business can make for a potentially fractious working relationship. While on the face of it running a business with family means you can benefit from high levels of trust and mutual commitment, this doesn’t guarantee there won’t be disputes over ownership or profit-sharing. This is why the implementation of clear governance structures is so important.

Setting a clear plan for the business and establishing distinct communication lines to deal with issues such as inheritance, share options and changing family dynamics can go some way to avoiding disruptions.

Samantha Brown, a relationship manager for RBC Wealth Management in the British Isles, says history has shown the majority of family businesses don’t survive beyond the third generation.

The foundation that a family business is built on provides the answers to fundamental questions such as the future direction of the business, the strategies that should be followed in order to ensure continued success and how inheritance and shares are handled as and when issues arise.

“Wealth is a highly emotive issue, which can sometimes lead to decisions that cause friction between family members. By introducing a governance framework, the principal of a family can help ensure that the family wealth remains protected,” she says.

Safeguarding family wealth

There are a number of structures a governance plan can include and it’s important that all generations understand the intended direction of the family’s wealth.

Some of the most common governance options available to families include the establishment of family offices, family investment companies (FIC), family partnerships or trust structures. The right structure largely depends on the individuals and their needs.

“Having governance in place is about safeguarding objectivity and ensuring fairness,” Brown adds.

An FIC, for example, is simply a UK company set up to hold investment assets where all the shareholders are family members. The benefit for business owners is that they can define who are the shareholders and distribute both voting and non-voting shares to denote control.

However, the most effective family governance should be designed in reference to the specific family and business situation rather than relying on an “off the shelf” solution, says Chris Nutter, a relationship manager at RBC Wealth Management in the British Isles.

“Governance should not be created for its own sake, it should be used more as a stepping stone to achieving the family’s goals, such as keeping the business in the family or meeting certain philanthropic commitments,” he says.

Similarly, Daniel Cordery, a relationship manager at RBC Wealth Management in the British Isles, says that families should aim to keep their governance structures as straightforward as possible. “Keeping it simple is a good first step – making it too complicated with too many boards or committees could end up with the planned changes not actually taking place,” he says. “It is important to think about who is on that board, what happens if someone was to die or how the family company or wealth is protected in the case of a family split. Without a governance structure in place, emotions can take over and have a considerable impact on the future wealth of the family.”

It’s all in the design

A well-designed governance structure will provide a wide range of protections to a family, from setting expectations and succession planning, to preparing the next generation to take over the management of the estate.

It will also ensure the correct level of decision-making within the family business or those managing the family wealth. For example, identifying those who can make decisions on the running of the business on a day-to-day basis and those that are in a position to make more strategic decisions on the future or how the family’s wealth should be invested.

Other areas where a governance structure can play an important role include the long-term growth and sustainability of the business or wealth. It can also set out the procedures for family members who don’t want to be a part of the business, or who want to remove their portion of assets from the pot, to exit in a fair and harmonious manner.

“One option for families is to explore the idea of setting up a family constitution, which is a written document aiming to codify the broad principles for which the family stands, in addition to the wider aims for the family wealth” Brown says.

Dealing with disputes

Disputes within a family business, or concerning its wealth, can be costly and run the risk of damaging the future of the business and eroding the family’s capital. A governance structure can include a “dispute resolution process” that has predefined rules to be applied when dealing with certain matters.

This type of provision can be as simple as specifying the procedure for dealing with a dispute, or as detailed as naming the venue or a person – an advisor, non-executive director or family member – that will preside over the process.

It can also be beneficial when dealing with factors outside of the family, such as regulatory changes. By detailing the family’s strategic vision and focus through a clear governance structure, the risk of investment decisions being made on an ad-hoc, unfocused and non-cohesive basis is vastly reduced, therefore going some way to further protect the family’s assets.

Brown adds, “It is important that family governance is seen more as an evolution rather than a revolution. There is a limit to the speed of change that families can absorb, so allowing members to adopt the changes and perhaps introduce a regular review of the governance processes in place can help make the implementation easier.”

This article was updated on August 1, 2024.

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