Whether your goal is to pass the keys of the operation to the next generation, or sell to a third party, you need to ensure that your business (and related wealth) can survive the inevitable change in leadership. For the business to one day operate successfully without you in the driver's seat, you need to groom others for the decision-making role early in the planning process. This requires a transparent governance system.
Stemming from the Greek word meaning “to steer”, governance can be explained as the process that organizations use to not only make sound decisions, but also ensure follow-through on them. We believe that an effective governance structure is dependent upon open communication, positive problem-solving and competent decision-making.
When one person has total authority, the governance of the business is very basic. It is easy to discuss, debate, make decisions and then delegate the tasks required to implement these decisions. However, in grooming the next generation to one day be the lead driver, more people need to participate in determining who will do what and how, as well as commit to the decisions made.
Effective governance is not always easy to attain, especially in a family business that has differing objectives for the three circles and just as many overlapping areas that add to the complexity. A roadworthy Communication Vehicle™ is needed to achieve an effective governance structure. Keeping the wheels aligned with an equal focus on the business, ownership and family/personal areas of the business is necessary to navigate the potholes and ensure a smooth ride.
The Family Business Senate™
Our Family Business Senate™ was designed to help business families understand and manage the typical complexities, as well as to create appropriate structures in each of the three key areas for more effective governance.
Our last article on how to equip a roadworthy Communication Vehicle™ outlined the importance of a family charter in laying the foundation for continuity of the family business assets. Therefore, a family charter is considered the cornerstone of effective governance. It also provides the basis for a family participation plan that clarifies how family members can contribute as shareholders and directors in the ownership circle and/or qualify for a role in the day-to-day management of the business. (There will be more to come on this topic in our next article.)
Finally, the family charter sets the stage for the development of the communication, problem-solving and decision-making structures that are essential to effective governance. Through the creation of forums that will sustain the differing objectives of each of the three areas, business families can encourage inclusiveness, participation, transparency and accountability.
Such forums include:
- A family council or similar structure where family members gather to:
- Promote connectedness and build traditions
- Discuss matters that impact individuals and their lifestyle needs
- Develop documents like a family charter or participation plan
- A management board that oversees the day-to-day operation and/or maintains the wealth engine
- An ownership advisory board that sets the strategy and focuses on the preservation of the family assets
These structures are all valuable forums for engaging and grooming future generations. They are also extremely important in professionalizing the governance of a family business.
As you map out your exit strategy, ask us about equipping your Communication Vehicle™ with a Family Business Senate™ that will help formalize the governance process. Remember, this vehicle carries a precious cargo - your family and your wealth - so it is an important investment in the future.
For more information, contact your BDO advisor or The BDO SuccessCare Program team at 1 800 598 6400.