Family governance: – A mirror, sword and shield

Ajay AgasheFamily owned businesses have been among the oldest and few of the most thriving businesses. Some of the largest and oldest corporations in the world – [Takenaka Corporation, Merck, Wendel, Franz Haniel, Molson Coors Brewing, Jeronimo Martins and Thomson Reuters][1] to cite a few, have emanated out of family owned, controlled and managed businesses. Over the years, family businesses have evolved to become more structured, organized, corporatized, diversified and have even surpassed the barriers of their home countries.

Usually, family owned and controlled businesses do not have a short-term exit objective and are more inclined towards the growth of the family wealth with necessary precautions. Further, they have a different set of strategic goals compared to non-family owned private companies. Therefore, their long term contribution to economy is significant.

Having said that, family businesses have a fair share of their problems. Since, a family is primarily a social and non-professional body, business decisions are often susceptible to getting clouded by family emotions. Family businesses are vulnerable to tremors arising out of family rifts and disputes and often crumble as a result of the fallouts. Further, when numerous generations are involved, difference of opinion is common, and, therefore, it may be ideal for owners of family businesses to devise and put in place a robust family governance mechanism.

Typically there could be three sets of family members –

  • „ Those who neither own nor manage the family business;
  • „ Those who own the family business (shareholders having economic interest);
  • „ Those who are involved in the operations and management of the family business.

The communication between these three set of family members define the family governance in a nutshell. For successful family governance it is essential to manage these set of people by providing some method in the madness, if one may call it so. The same can be broadly classified in to a) Family Council – being the body for first set of family members, b) Shareholders Council – being the body for second set of family members, c) Board of Directors / Management – being the body for third set of family members

Family governance is nothing but partly formal and partly informal system involving decision-making and interplay between the Family council, shareholders council, Board of directors and Management.

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A family governance mechanism is the agreed-on principles, policies and practices which are drawn up based on the size, need, characteristics and dynamics of any family. Some of the cornerstones of successful family governance may be unity, regular family meetings/ bonding sessions, clear and transparent communication, and frequent discussions in relation to key business and wealth related decisions.

Typically it is good to consider the above matters and put in place a family constitution – which captures the family’s vision, the family values, the family’s employment policy and business/ asset ownership structure. Important aspects such as succession planning and emergency and contingencies plans, conflict resolution processes, guidelines for income flows and code of conduct are part of family constitution and hence it acts as the bible for the family members. Generally, a family constitution may contain provisions which deal with –

  • „ Definition of family
  • „ Appointment of shareholders
  • „ Family’s rights and obligations
  • „ Conflict resolution processes
  • „ Training of the family
  • „ Decision-making processes
  • „ Shifting family agreements
  • „ Performance-related information
  • „ Ownership rights and shares
  • „ Dividends and investment
  • „ Value proposition to shareholders
  • „ Career planning of future generations
  • „ Employment of family members

A sound family governance structure can help families address issues like –

–     How to preserve family and its wealth

–     How to make decisions together

–     How do families communicate and with whom and when

–     How to develop next generations and involve them in the business

–     How will there be a seamless transition of ownership and control of wealth from one generation to the next

One of the earliest examples of a family governance mechanism in the Indian context is the Family Constitution signed by the Bangalore based Rao family, which owns the GMR Group. The Rao family constitution contains clauses which inter alia deal with the process to manage differences among family members, provide a family code of conduct, and stipulate rules for family members’ entry in the business. It introduces the concept of a “deadlock trustee,” a person who resolves any disagreements between the next-gen successors when deciding the next chairman.[2] The constitution also defines the minimum qualification the family members must have to enter business, their remuneration and perks, including what car they will get to drive. Further, it contains specific provisions for a family member wanting to branch out.[3]

Another example of an exemplary family governance mechanism is of the one put in place by the Burman family, which owns the Dabur Group. As part of the governance process, family members gave up their day-to-day operational roles and professionals were brought in. Also, a family council was set up and all the male members of the family, above the age of 25, were made part of it. The Dabur family constitution laid down the voting rights of each member of the family. Further, the constitution rules out any role or remuneration for a family member. As a result of the governance process, today – almost two decades since the family members signed on the dotted line (of the constitution document) the business has grown exponentially and the family remains united.[4]

Other family businesses like Emami, Dr Reddy’s and Murugappa Group too have put constitutions in place. The Emami family constitution stipulates that the family members must meet every fortnight. It also stipulates that the entire family has to go on a holiday together every year. Further, it lays down succession processes and also the retirement age of various family members.4

Owing to cut-throat competition, rapidly evolving technologies, modern product and service ideas, challenges in the current business environment have increased manifold. More and more families are opting to put in place a formal family governance structure to ensure not only hassle-free operations and steady growth of their businesses, but also to establish a mechanism for smooth succession of wealth and control from one generation to another. A sound family governance mechanism not only aids in avoidance of conflicts but also acts as a shock-absorber in case of any disputes amongst the family members – ensuring always that the impact on the business is minimal.

 

The author of this blog is Ajay Agashe, Associate Partner, EY India

The co-author of this blog is Mokshada Gohil, Director, EY India

 

[1] EY Family Business Yearbook 2017

[2] Source – https://www.livemint.com/Companies/HIUyGkDN5hpfEJjJr64WiN/Creating-a-family-governance.html

[3] Source – https://www.hindustantimes.com/business/rao-family-of-gmr-group-signs-family-constitution/story-GgIeLRC0jUKzLLItMYZ32O.html

[4] Source – http://www.forbesindia.com/article/indias-family-businesses/a-family-constitution-can-bridge-the-gap-between-family-and-business-values/46417/1