12 Nov 2001

The Three Components of Family Governance

Having described the framework of family business governance and the governance of the business, John
Davis discusses the most challenging of the family business governance topics—governance of the family
itself.
by John A. Davis

There are three components to family governance:

 Periodic (typically annual) assemblies of the family; all families in business can benefit from this
activity.
 Family council meetings for those families that benefit from a representative group of their
members doing planning, creating policies, and strengthening business-family communication
and bond.
 A family constitution—the family's policies and guiding vision and values that regulate members'
relationship with the business. This written document can be short or long, detailed or simple, but
every family in business benefits from this kind of statement.
The rare family in business may have a more elaborate family governance structure, with a separate
meeting for family-owner-managers or a separate council for family shareholders or periodic meetings
between shareholders, the board, and management. I prefer the simplest structure that does the job and
the three components above are all most families in business need.
Properly composed and managed, a family assembly and family council help:
 Develop clarity on roles, rights, and responsibilities for family members.
 Encourage family members, family employees, and family owners to act responsibly toward the
business and the family.
 Regulate appropriate family and owner inclusion in business discussions.
The family assembly typically meets annually, lasts one to two days, and includes all adult family
members (yes, including in-laws). Families need to decide at what age children should attend these
meetings. One family says that children should attend when they are able to feed themselves; most
families start bringing the younger generation into meetings at around age 16. For the young children,
families should still consider organizing some group activities where the children can begin to learn about
the business and develop relationships with their siblings and cousins.

Figure 1: Basic Governance Structures of the Family Business System

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Family assembly activities include learning about the business through presentations by family and non-
family managers, discussing (not deciding) the direction of the company, being educated about what the
company does or about important skills like reading financial statements. It is also a good forum to get
updated on changes in the family such as important events and accomplishments, and on changes in
ownership. For example, have any shares changed hands since the last meeting? Are there new tax laws
shareholders need to be aware of?
If your family has fifteen or fewer adults, you may be able to have in-depth discussions and create plans
and policies in the family assembly meeting. When the family grows beyond this size certainly, families
generally benefit from having a family council. The family council can perform all of the following
duties:
 Plan family assembly meetings, which otherwise the CEO usually has to arrange.
 Discusses current business, ownership, and family issues and direction and keep the family
informed about these.
 Help the family reach decisions and speak with one voice about its goals.
 Keep the board of directors informed about family views about the company and maintain a
dialogue with the board about key business policies and plans.
 Develop plans and policies, in conjunction with the board, that regulate family activity with the
business.
 Guard against family interference with the business while seeing that the family's key goals are
satisfied.
 Develop loyal, informed, contributing family shareholders.
 Scout the family for business talent.
 Create educational events or otherwise encourage the education of family members about the
business.
 Plan family social gatherings and rituals and help to create healthy, harmonious family
relationships.
Any family council that accomplishes these tasks strengthens a family's relationship with its business and
its discipline and is a valuable resource for management and the board.
The family council can be composed in several ways, the typical way being one member elected per
family branch. One should try to compose the family council so that it "looks" like the family, having
adequate representation of all generations, both genders, in-laws, actives and passive owners, hometown
and geographically distant relatives. The family council typically meets a few times each year for one or
two days each time. Most families reimburse family council members for their expenses but do not offer
any compensation for their service. Other families feel at least a modest compensation is warranted and
earned.
Families in business need to nurture members' feelings of trust and pride concerning the family and
business as well as build a sense of teamwork to keep a family committed and disciplined in its
relationship to the business. It is wise, therefore, in the family council and family assembly to emphasize
consensus decisions around family goals and policies, openness to various viewpoints, as well as
significant transparency in company operations, decision making, and ownership holdings. If the family
is reluctant to engage in the discussions it needs to have in the family council or assembly—out of
concern about potential family conflict, not understanding what these groups should do or just being shy
in these meetings—hire a facilitator to help organize the meetings. Good structures that do not address
the right topics are a costly waste of time.
I want to point out again that a family council or family assembly complements rather than replaces the
board of directors. The family council sets policy for the family and recommends policy that concerns the
family to the board, such as around family employment in the business. The board of directors sets policy
for the business and may also make recommendations to the family council in matters that concern the
business.

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The board and family council should coordinate their work and not overstep each other's domains.
Coordination may take the simple form of having the council and board update each other periodically on
their important objectives, having an annual joint planning session, or having a board member sit on the
council or vice versa. Again, I opt for the least complicated solution to achieve adequate communication
and coordination between these two groups.
The family constitution articulates a family's vision for itself and the business, its core values and the
policies and guidelines that maintain family discipline. Among the policies a family council might create
include:
 Employment standards for the next generation.
 Career development policies for family employees.
 Family compensation.
 Succession process, including retirement ages.
 Ownership, including buy-sell agreements.
 Dividends.
Because each of these topics, except ownership, are clearly business policy areas, the family council
would consult with the board and get the board's endorsement of the policy before it becomes official.
Typically, the family council also gets the approval of the family assembly before issuing a policy for the
family.
The coordination of the family council and family assembly with management and the board on some key
plans affecting family companies is shown in Table 1.
Table 1
Structures and Plans to Govern a Family Business System

STRUCTURE

TOP BOARD OF FAMILY COUNCIL &

PLAN CEO
MANAGEMENT DIRECTORS FAMILY ASSEMBLY
Initiates and Consults and Consults and
1. Strategic Plan Generates
approves approves supports
Participates
Consults and
2. Family in Coucils
approves only Generates
Constitution Family and supports
business policies
Council
Consults and Consults and Consults and
3. Succession Plan Generates
supports approves supports
4. Family Business
Consults and
Leader's Generates Aware Aware
supports
Retirement Plan
5. Family Business
Consults and
Leader's Estate Generates Aware Consults
supports
Plan

Treating the family in a more formal, organizational way can feel a bit strange at first. It may take a year
or two for the family to grow into this more structured way of interacting. But the value of this process is
demonstrated in the strides so many families have made with these structures. They have learned that in
discussing issues that can be sensitive and raise complicated feelings, a little structure is a family's best
friend.

About the Author

John A. Davis is a Fellow in the Executive Education program at Harvard Business School, where he teaches in the family
business, family wealth, and life planning fields. He is also the founder of the Cambridge Institute for Family Enterprise.