Who's on first?

June 01, 2013

There is no doubt that any entity is stronger when run by people who see an alignment between the organization and their personal passion and direction in life. Studies indicate that a strong culture, stemming from the foundation of principles and values that are characteristic of a closely-held business, can provide a significant competitive advantage. This is especially true of the family business where relationships, loyalty and legacy have been attributed to its financial success.

As we discussed in our last article, a Communication Vehicle™ that provides an equal focus on the business, ownership and family/personal areas is critical in ensuring effective governance and continuity of the family firm. Aligning the goals of the business with those of the individuals who are the stewards of the family enterprise is a key component of this Communication Vehicle™. It requires a family participation plan that outlines the criteria for involvement in the family firm at the ownership level and for the day-to-day operation of the business.

Why family members join

Understanding why family members choose to work in the family firm will help develop clearer policies for participation in its ownership or management. From their research on "family business successor commitment", P. Sharma and G. Irving identified four factors that cause family members to become involved in the family firm.

Ought to: They have a sense of loyalty to their family and/or they are expected to join the business possibly due to their birth order or gender.


Have to: They might otherwise miss out on financial or social opportunities that the family firm can provide them or their siblings.

Need to: They have a perceived lack of alternative careers, perhaps stemming from minimal exposure to the world beyond the family business or a belief that they have no transferrable skills.

Want to: They see an alignment between who they are and what they want in life and for what the organization stands.

While family or extended family may join for reasons one through three, the objective of The Communication Vehicle™ is to eventually move them to the "Want to" category in order to build a solid foundation for the relationships, loyalty and legacy that are fundamental to the success of the enterprise and its inevitable transition.

The family participation plan

A family participation plan is a tool to communicate the rights and responsibilities regarding involvement in the family firm. It can help prevent any misconceptions of how and when people are eligible to participate in the creation and preservation of the family assets. As it documents the policies and procedures for both employment and share ownership, all family members ― including extended family — are very clear about their eligibility and accountability for either role.

For example, a family participation plan would clarify whether or not in-laws, step-children or extended family can own shares, or communicate the overriding policy for compensating family members who work in the business. It should also document any guidelines for conducting business with family or extended family whether as a customer or supplier.

The success of a family participation plan is as much dependent on a collaborative approach to developing the policies and procedures as it is to the acceptance of the final document. The more people are directly involved in the process, the more connected they are to the outcome. The real objective is to determine what works for the family and the business and shift the focus from "me" to "we".

Consider the types of questions that might arise in the collaborative development of a family participation plan.

  1. What is the overall vision for family participation in the ownership or management of the business?
    Is there a desire to one day pass ownership to family members or is the preference to sell to a third party? Is there an expectation that family members can play a role in managing the day-to-day operations?

  2. How does a family member qualify to be an owner?
    For example, must they be a direct family descendant or is there an expectation that ownership will pass only to those descendants who are working in the business?

  3. How do new owners pay for their interest?
    Should they expect to pay market value for shares of the business, or will the business be gifted to the next generation?

  4. How do they exit again?
    What is the process for selling ownership either voluntarily or involuntarily? Does the exit process align with entry into ownership?

  5. What are the criteria to work in the business?
    What is appropriate in terms of education, capabilities, qualifications and work experience for family members who apply for a role in the company?

  6. What is the process for hiring family members and how are roles allocated?
    Are family members given precedence over non-family applicants for a job? Is there an expectation that roles will be created for family members needing employment?

  7. How is compensation determined?
    Will family members’ compensation be determined by the level of authority and responsibility for the roles they play using the same formula assigned to non-family members?

  8. How are family members mentored in the business and who will be responsible for their continued personal development?
    Are there clear expectations of family members and will they be afforded the same personal development opportunities as non-family members in the same role?

  9. How is their performance evaluated?
    Will all family members receive regular performance appraisals? Is there a standard performance-based promotion program that applies to both family and non-family team members?

  10. What are the criteria for future leadership of the business?
    Are the criteria for future leadership pre-determined and communicated before a family member accepts a position in the family firm? Are these the same criteria that apply to non-family members? Is there a formal mentoring process for grooming leaders?

  11. What are the policies around confidentiality, employment with competitors, or dealing with customers and suppliers who are family members?
    Is there clarity regarding expectations of confidentiality of the firm’s business operations and employment with direct competitors? What is the firm’s policy for servicing customers or selecting suppliers who are family or extended family?

  12. What are the consequences for a violation of the family or business code of conduct?
    Is there a documented code of conduct for family participation in the business along with the consequences of any failure to adhere to these policies?

Like a family charter, a family participation plan is a foundational component of The Family Business Senate™ - the governing body of the family business. It is designed to help you find a balance between the goals of the organization and the goals of the family to prevent collisions.

For more information on how to map out a family participation plan or other elements of the Family Business Senate™, contact your BDO advisor or The BDO SuccessCare Program™ team at 1 800 598 6400.

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