Family Business Transition Series - The importance of family councils

April 06, 2017

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The success and longevity of any family business is dependent upon a well-thought-out succession plan. Our Family Business Transition Series is intended to provide the information and advice you need to find a solution that works best for your family and your business. 

Some business owners believe that family councils are only intended for larger families or those that have sizeable companies. Others fear that family councils will open them to criticism of their business management decisions and invite meddling from people who have no business acumen.

For those that lack confidence in their leadership abilities, or are afraid to hear what others think, there are reasons to avoid establishing a family council. And for those that are afraid that sharing sensitive information among family members will make them vulnerable rather than build a sense of stewardship of the assets that will eventually pass to those same family members ― well maybe a family council is not for them. 

However, avoiding a family council can ultimately mean ignoring the perspectives, dreams and fears of family members. For those who truly want the option of having the business remain in the family after their reign, we recommend a review of both the pros and the cons of a family council.

Around the world, family councils have been established at the community, regional, and national levels to promote the value of the family unit. They promote effective governance as the key to strong, cohesive families.

Governance is the process whereby decisions are made and then implemented. This does not just apply to larger family‐owned enterprises ― every family has important decisions to make. Each one has financial and educational needs, membership rights and responsibilities, as well as visions of perpetuity and values by which they live.

For a business family, councils are a forum for governance and are absolutely necessary for continuity and balancing the needs of the family with the demands of the business.

Read more: Don’t Put the Cart Before the Horse

Top ten reasons for establishing a family council

1. It promotes consensus‐building and family unity.
2. Family members learn to be leaders and are groomed for roles as future shareholders or directors in the family business.
3. It is a forum to teach family values and discuss rights and responsibilities.
4. It provides an opportunity to share, discuss and support each individual’s dreams and goals and recognize individual achievements.

Read more: Beware the Golden Handcuffs

5. It creates a connection for those family members not involved in the business.
6. Family members learn about the complexity of running a business and the need for ongoing reinvestment.
7. It provides a forum to educate family members on confidentiality, effective communication, critical thinking, problem‐solving, financial planning and other life skills.
8. It prepares the family for inevitable reorganizations due to births, deaths, marriages, divorces, plus business and economic downturns.
9. It promotes a family legacy for future generations.
10. It conveys a positive message to employees and outside stakeholders and illustrates that the family and the business are committed to good governance.

Setting up a family council

•    The most important step is to define the purpose of your family council and establish a shared mandate. For some families, the focus is on staying connected, while others establish a family council for the purpose of upholding shareholder interests. Some examples of family council mandates include:

  • To promote emotional and social well‐being through work‐life balance
  • To be a voice for the family
  • To build and sustain a unique family heritage
  • To enhance the quality of life for future generations
  • To build trust and respect for family and business through open and honest communication
  • To prepare next generation leadership of the family enterprise

•    The next step is establishing a format for meetings and determining how often the council will meet. We recommend that family council meetings include a business component, an educational component, and a social component. Content will vary depending on what is topical at the time, but the early meetings will likely deal with clarifying a common vision and setting policies for next generation involvement in the ownership and management of the family enterprise.

Criteria for membership and participation

  • Most adult members are eligible to participate in a family council, including those who marry or are adopted into the family. Some families choose to include teenagers who express interest in the structure and are mature enough to uphold confidentiality.
  • It is important to develop authority, responsibility and accountability (ARA) for key roles and/or committees. Typically, these include a council chairperson, a secretary, a meeting chair, a social committee, and others. An ARA maps out the expectations for those who choose or are chosen to play a lead role. The family must decide how people will be appointed or elected and how long each term of office will be.
  • It is also important to adopt meeting rules that include guidelines for communication, problem‐solving and decision‐making. As the family council is also a forum for education, we recommend formalizing the meetings along the lines of a business or not‐for‐profit board. The council can adapt some basic guidelines in the early days while it engages a trusted advisor as a meeting facilitator to help develop its own meeting rules. Ask about our program for running effective meetings.

Read more: Compensation may be another consideration. Why You Need a Compensation Policy

Whether you pass along the operating business or the wealth generated from the sale of your business, a family council will help you prepare the next generation for stewardship of your assets. For more information on setting up a family council as a component of your roadworthy Communication Vehicle™, please contact Daphne McGuffin or a member of The BDO SuccessCare Program™ team at 1 800 598 6400.