The Truth About These 3 Family Governance Myths

October 14, 2016 03:31 PM

Every morning between chores, the McNamara family gathers around grandma’s farm table for breakfast. She’s been cooking breakfast on the dairy farm for generations. Now there are three generations sitting around her table enjoying scrambled eggs, toast and the milk they bottle themselves.

Even though those who work on the dairy gathering in grandma’s old white farm house for breakfast is a great tradition, that quality family time shouldn’t replace a formal family governance plan. As families evolve and businesses grow, there becomes a need to organize the family around a common vision. That’s where family governance comes in and it doesn’t have to be difficult or fancy.

Here is the truth behind some common myths about family governance.

Is family governance the same as a family employment policy?

Not quite. According to Barb Dartt, a consultant with the Family Business Consulting Group, there are generally three groups of people involved in a family owned business: family members, business management and owners. If you drew a circle with each of those groups, you’d find several areas where they overlap.

“For example, there are people who are family members working in the business and also owners, but as business grows, you tend to have family who own part of the business but don’t manage or nonfamily members who are executives,” she says. “So as you get into the second and third generations of the business, those three systems become more complicated.”

The fundamental idea behind family governance is to determine how a family will govern itself. Dartt says it answers these common questions. What is our collective commitment to the business? How will we support the business?  How will the business support us?

It’s too complicated and not a good fit for farm businesses.

This is a myth. Family governance doesn’t have to be extremely complicated. According to John A. Davis of the Harvard Business School, there are three main components of a family governance plan. The first is to have periodic meetings.

Dartt uses the following example to show how family meetings can benefit a second generation farm family. Maybe there’s a dad who has three children and owns a farming business. One of the three children is back running the business and in the fathers estate plan, it says the operating business will be passed to his farming heir. The other two children will inherit the money from his life insurance policy and farm real estate. Eventually, there will  be owners who don’t manage the business.

So once a year, that family gets together for a two hour meeting. During the meeting dad and his son give an update on the business, the family reviews the estate plan, and then they might have a CPA or a lawyer doing a little bit of education.

For families with third, fourth and fifth generation, things get a little more complicated. That leads to Davis’ second component, family council meetings. He says sometimes larger families benefit from an elected group of their members doing the planning, creating policies, and ultimately strengthening business-family communication.

Dartt gives an example of that scenario.

“A family I’m working with now has 8 third-generation members and 26 fourth-generation members who are cousins,” she says. ”Only one of the cousins works in the business, but all 26 of them have inherited stocks from their grandparents. They need to use a representative group so they will elect a family council. They will still have an annual shareholder meeting, but the family council offers a place to govern their family with a representative body because their family is so large.”

The final component of a family governance plan, according to Davis, is a family constitution. The constitution outlines the family's policies, guiding vision and values. It can be a written document, short or long, detailed or simple, but every family in business benefits from this kind of statement, Davis says. This doesn’t have to be difficult, according to Dartt.

“For example, there are some very tangible things you can do around educating future owners,” she says.

All family members will start making decisions for the business.

This contention is also false. Developing a family governance plan will not add any stakeholders to monthly or even yearly decisions in the business, Dartt says.

“It’s really about creating principles that guide the ongoing give and take between the family and business,” she says.

Those guiding principles are important. Imagine, for example, owning a livestock operation and finding out one of your daughters was writing animal activist blogs for HSUS? That actually happened to one of Dartt’s clients. She says if that family hadn’t had a code of conduct in place and exit terms of ownership spelled out, the situation would have been much more difficult. It’s crucial for all the members of family business to have common goals and vision.

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