Frozen by design: Why your family governance system could keep you stuck in the present
The HBO show ‘Succession’, the fictional story of the media mogul Roy family, is everywhere these days. In a nutshell, the show pins all the toxic traits known to family business onto the Roy family, and viewers get to revel in the family members’ struggles to thrive in an environment of connivery and competition, narcissism and abuse, and self-interest and nepotism.
Like many media portrayals of family businesses, ‘Succession’ highlights a business family that is highly dysfunctional. In fact, the family dynamics on display are so disproportionate to what we might realistically expect to see in a family with near-unlimited resources that it should make any family business professional cringe.
In reality, the ‘average’ business family has a keen interest in promoting a healthy family and business environment where both can thrive. Yes, there may be in-fighting and power struggles at times, but most families have come to realize the importance of fostering family unity and family cohesion in attaining long-term sustainability. The ‘how to’, however, remains a challenge.
How do you keep an enterprising family comprised of dozens, even hundreds of shareholders united and aligned? Many multigenerational families rely on family business governance mechanisms to keep the growing family connected and aligned, and able to make decisions and swiftly act on them. Popular governance mechanisms include non-binding agreements such as a family constitution or a family employment policy, or governance bodies such as a family council.
The problem with this? Once a family establishes these governance mechanisms, they rarely revisit their purpose or evaluate their success. The result is that family governance gets stuck focusing on the past and present and doesn’t keep an eye on the future.
Family governance must meet the family where it is at today and support it on its journey to where it wants to be 10 years from now. Any family governance mechanism must evolve alongside the family to continuously reflect the family’s changing needs and objectives.
This is why families should regularly assess the effectiveness of their family business governance system – in other words, evaluate how well the current governance meets today’s as well as tomorrow’s anticipated needs. A failure to do so likely leads to mismatched processes and structures at best, and complacency and a lack of accountability at worst.
Here are five crucial questions your family can use to assess whether your family governance is positioned to keep your family unified and your business successful for generations to come.
Crucial questions to challenge and strengthen your family governance system
1. Do we have clarity of purpose and direction?
Families with a vibrant and relevant family governance system regularly revisit the purpose and direction of the family governance system and assess its individual mechanisms.
Effective family governance creates a crystal-clear sense of purpose and direction. What are we trying to achieve through our family governance? Do we want to nurture unity and alignment in the growing family group to achieve longevity? Do we want to ensure that we are able to make decisions together and remain actionable, even under pressure? Do we use governance mechanisms to create transparent processes and hold people accountable? All of the above?
While we may have clarity on purpose at beginning of the family governance journey, this often becomes murky over time. As family needs and objectives change – and likely diversify , so must the mechanisms used to steer the increasingly complex family. We often see family governance systems that may have been a great fit with who the family was in the past, but don’t meet its current needs.
What we should be striving for are governance systems designed which the future in mind – those that support the family in becoming the family it wants to be 10, 15, 20 years from now.
Indicators that there may be a problem
There is a lack of understanding of the family’s needs and objectives, and the level of alignment around them
There are separate factions rather than one unified family
Family council meetings are only focused on planning the next family meeting
Enthusiasm and attendance at family meetings is waning
It is difficult to convince family members to take on family governance roles
Reflection questions for your family
· What will our family look like in 20 years [size, geographic dispersion, diversity, ownership dispersion]?
What challenges will the business face over these years, and what do we as a family need to be doing to prepare for that?
Is our ownership group aligned around our long-term vision?
Does our family governance effectively balance the needs and objectives of the family and the business, and support our long-term vision?
Are we clear about the purpose of our family governance? Does it serve us well today? Does it support us in becoming the family we want to be 10 years from now?
2. Do we have clarity of roles, responsibilities, and processes?
Families with effective family governance systems clearly define and respect governance roles, responsibilities, and processes, and make sure these are understood by all family members.
We frequently come across family members who do not fully understand the role of the family council, who have never heard of the family employment policy, or who are not familiar with how family members are selected for governance roles. Asymmetric understanding of family governance leads to a fractured family – it signals to those without knowledge that they are not in power, which creates mistrust, and it signals to those with knowledge that those without simply don’t care to understand the why, how, and what of family governance. When those without knowledge finally ask a question, they may be met with defensiveness or condescension, which further exacerbate the unhealthy dynamic.
When it comes to family governance, there is no communicating too much. You must make sure family members feel like they have all the information they need to make educated decisions. What is more is ensuring that people do not only have access to information, but also that they understand it and this requires constant communication. Activities such as family learning forums – virtual or in-person – can be helpful in creating a competent and committed family shareholder group.
Indicators that there may be a problem
Questions from family members that make those with family governance roles think ‘this should be clear by now’
Passive-aggressive (or openly hostile) comments around lack of transparency, holding back information, keeping family members in the dark with regards to what is happening in the business
Conversations that point out information or power asymmetries and comments highlighting power differentials
Reflection questions for your family
Do family members comply with our written agreements (e.g., employment policy) or are there frequent violations?
Do family members understand the role and responsibilities of the family council and other governance bodies, e.g., the board, and how they interact?
3. Do we have the right leaders on our board and family council?
Family governance will never be effective unless we have the right leaders – and leadership is not monolithic.
Our family council may need a variety of types of leaders; some who can help think about and plan for the strategic challenges of the future, some who are good communicators and collaborators who can bring people together, and some who can organize and execute plans while holding people accountable. What is more, the family group should ideally feel that they are well-represented by those who hold these governance roles.
As our family grows and evolves, we need to understand that the type of leadership that we needed to launch our family governance process may be different from the leadership that we need to get through the next 10 years and beyond. So, as we articulate our family vision for the future, we should also be asking the following questions:
What do we need from our family governance leaders to effectively achieve our family vision?
Do we have effective ways of providing feedback and accountability to our leaders?
What do we need to be doing to train our next generation so that we have a bench of potential leaders for the future?
Indicators that there may be a problem
One person is doing all of the work.
People are afraid to surface issues because of the reaction that they get from leadership.
Leadership is focused on protecting the status quo and gets defensive when challenged.
There is no transparent process to select and elect family members for governance roles.
Reflection questions for your family
Do family members feel represented – in terms of values, objectives, attitudes, experiences, age, gender, etc. – by those who hold governance roles?
Do we have a rigorous and well-understood process to identify, select, and elect family members for governance roles? Does the family agree with this process? Are changes needed because our family has changed?
Do we have a pipeline and an onboarding process for future governance leaders?
4. Are we nurturing a unified ownership group?
Healthy multigenerational families design family governance systems that nurture ownership unity and healthy family relationships across the family group.
The perpetual challenge for family business owners is the need to simultaneously cultivate an ownership group that is unified and supportive about the continuity of the business and invested building and maintaining strong family relationships. Research by Generation6’s Torsten Pieper, Ph.D. and Joe Astrachan, Ph.D. shows that business success alone is not sufficient to sustain your family business across generations. To build the foundations for successful generational transition, family governance must be focused on creating strong and healthy relationships among family members, educating family shareholders, and working to align the shareholder vision with the business vision for the future.
We often work with families that perpetuate a strong branch logic, where family members may be elected to the council or board based on branch membership, or where share transfers are only allowed within individual branches. Over time, this leads to branch mentality, where values, beliefs, and goals differ between branches, which drives the family apart. A more sustainable approach, in our experience, is working towards understanding the family as one entity, versus a group of branches or factions
So, how is family unity, or family cohesion, cultivated? Prior research shows that cohesion develops when family members (whether they are owners are not) feel connected to one another, as well as to the business. Torsten Pieper’s (2006) research shows that family members connect to the family business through different cohesion-building mechanisms – financial and emotional, both on the family and the business side. The Pandemic highlighted what happens to families that rely on financial incentives alone to connect family members to the business (we call this ‘business financial cohesion’): They were more likely to experience family conflict and disenfranchisement as they paused payouts to family members.
Effective family governance balances financial and emotional components, both on the family and the business side. In highly unified families, family members are willing to put the collective needs ahead of their own personal needs to sustain the family and the business moving forward; there is a strong sense of values shared by all, and the family has a sense of pride, identity and status that comes from being a part of this family business, among other benefits.
Lastly, families with a high level of alignment and unity have learned to communicate effectively: They speak candidly about controversial issues and allow different opinions to be heard. They talk about successes as much as they talk about failure, and instead of acting defensively, they have learned to listen with the intent to understand (rather than the intent to reply!). Without effective communication and conflict management, achieving ownership unity becomes a Sisyphean task.
Indicators that there may be a problem
We select family council and board members based on branch representation.
A large number of family shareholders do not participate in family meetings.
One person is dominating conversations or is making all of the decisions.
Family members have no desire to spend time together.
Family conversations and connections are centered solely around the business.
There are things we don’t talk about, we refrain from engaging in controversial discussions or w hen we do, things get out of hand.
Reflection questions for your family
·Are we fostering or maintaining a branch mentality vs. a one-family approach?
Do we make sure that all voices within the family are heard? How?
Do we reach out to those who aren’t engaged on a regular basis? How?
Do we create opportunities for family members to connect and engage outside the context of business discussions and interactions?
Do we openly address disagreements in the family (current and historical)?
What do we afraid will happen if we do talk about a controversial issue? What are the downsides of NOT talking about certain issues?
5. Are we effectively nurturing the next generation of leadership?
Long-lived families successfully nurture an engaged and competent next generation of family leaders, owners, and stewards.
It’s as simple as that: Without a next generation of engaged family members – whether or not they have an operational role in the business – there is no family business. While the conversation around succession in family businesses is too often centered on developing the next leader of the business, for a multi-generational family business to be a success, family governance must also nurture the engagement of the next generation as owners, potential board members, and leaders of the family council. For the family business to survey, we need a group of leaders, not just one leader.
One family that we recently worked with had spent so much time focusing on finding the next leader of the business that when we performed their governance assessment, we found that they didn’t have any viable successors for key board roles that were going to be available in the next three years, despite the fact that there were 35 members of the next generation.
Indicators that there may be a problem
We don’t have anyone on the family council or the board under 40.
Parents feel like they have to drag their children to family meetings.
Next generation members seem more concerned with what they get from the family business than what they can give.
Reflection questions for your family
Do all family shareholders know the importance of these roles for the future success of both the family and the business?
Are we systematically nurturing the engagement of the next generation as committed shareholders? How?
Are we listening to the next generation’s voice so that they feel valued and connected?
Do we have a pipeline of next gen family members for council and board?
What do we do to prepare family members to serve on the board?
Where do you go from here?
If your governance is out of sync with your family, it’s time to step back and systematically assess the viability and relevance of your family governance system. Assessments of the shareholder group, the family council, or the board of directors are excellent ways to identify where your family and business governance falls short, and to identify areas where change is needed to better support your family business and business family.
A systematic assessment of your governance system also signals that governance leaders are actively ensuring that are held accountable – and accountability promotes transparency, credibility and trust in the leaders and structure in the governance system. And trust is a key element that underlies both good governance and strong family relationships.
We encourage you to take these reflection questions back to your family, and begin engaging in these discussions, if you haven’t already. It is never not the right time to rethink your governance to better meet the needs of your family and your business.
About Generation6
At Generation6, we balance rigorous research methods with the need to generate applicable insights. We evaluate governance structures and processes both on the family and business side. Our family council, shareholder group, and board evaluations typically take three to four months from onboarding to completion. Board assessments provide the board with a set of actionable recommendations improve overall board effectiveness, and a thorough assessment of key aspects of board performance such as boardroom culture, director competences, board leadership, and more. Family council assessments focus on aspects such as council purpose and scope of responsibilities, relationship with shareholders, and effectiveness of services offered. And periodic shareholder surveys ensure that you regularly hear the voice of the family shareholder group and know what drives, but also what concerns them.
Please reach out to discuss your governance challenges with us.