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  • Katherine Bullock

Helping Business Families successfully manage change - The Family Charter: Where to start?



Defining family Families actually tend to know the answer to who is a family member even if they don’t articulate it – whether it includes blood descendants, spouses, partners, adopted and step-children … For me, the key is to note how this group changes when roles in the business or involvement in wealth management are discussed. Where are the lines drawn and how can they be effectively and gracefully enforced?


"Good governance at the family level regulates family interaction and manages expectations…"

Families within families emerge as generations expand. Expansion is rarely even and anticipating this can reduce concerns over dilution or concentration of control and ownership. In addition, as families become more diverse and more geographically spread, they may know and understand each other less. It requires more focus to understand the requirements of distant cousins who are met perhaps irregularly at Christmas. In some cases, it may be better to define family by branch or make use of a family trust or two.


Good governance at the family level regulates family interaction and manages expectations. It includes family who may or may not be – or ever be - owners or managers in the business. Yet even where family members have neither ownership nor control their influence and interest can be an asset or a liability depending on how they are engaged.


For example, divorce is a risk that can be managed – whether through pre and post nuptial agreements or arrangements to negotiate and arrange the buy-back of shares. But it can also be helpful to map the generic approach that will be taken in the event of a divorce and to share the resulting sections of the charter in advance.


Defining roles Must all shareholders work in the business? Must all Board Members be family? Clarity of roles and their remit can help to eliminate potential candidates without friction. This is especially so where titles have been used to ease succession. Exactly what authority, responsibility and reward do they carry?


Conventional and rigid governance structures may hamper the more pragmatic, trust based stewardship that better suits some business families. A similar pragmatic approach to the charter may also work. I have worked with more than one family who preferred their charter as a series of guidelines to which exceptions might be made. On the whole, they shaped those guidelines to prohibit rather than allow. After all, it is hard to say “no” to family and a charter that supports the difficult decision – even takes the blame – may be a helpful tool. Saying “yes” on the other hand is easier and in those cases the exception could be made.


It is important not to create the impression that a total free hand is possible. There are legal rights and responsibilities that need to be considered and complied with – directors, shareholders, employees, trustees are all roles with duties and obligations that are prescribed, regulated, and enforced by law. Similarly, tax implications cannot be overlooked such as the impact of a binding contract for sale on the availability of business property relief.


Balancing how family extracts wealth from the business requires care in order to avoid tension. A consensus on the timeframe as well as return for investment is important. Some family businesses find that a mechanism that permits family members to extract capital (eg by disposing of their shares) can ease this tension and in the end is seldom used.


Governance here deals with business ownership, its transition through generations and its concentration or dilution. Separating ownership from the benefits of ownership is where the family trust (or perhaps the Family Investment Company) may come in.


Clauses to consider here might limit interaction with the business to clearly convey the expectation of non-interference or special treatment. They may also ensure that specific kinds of business decisions are submitted to the family to be considered before being taken by the Board.


Information flow Information is the life force of both of the above. A Goldilocks’ measure – it needs to be just right. How much information is shared and with whom? There are many sensible forums and functions to deploy (hint: you really don’t need them all) – the family assembly, the family council, the board of directors, the shareholders assembly. But the key is to ensure that there is sufficient engagement, communication, and information to maintain trust.


For me, it is important to pay attention to the day-to-day as well as the show pieces. Does information arrive at the same time and in good time? Are minutes kept and circulated? In essence is there transparency, professionalism, and efficiency? An agreed chain of command is critical if business is not to be disrupted and subverted, but you won’t need to enforce it if information isn’t withheld or delivered by back channels first. Clauses here might encourage family members to ask about business matters through agreed channels to prevent every social call or gathering becoming an unofficial board meeting or informal shareholders call.


The ice is broken. Come back next week for some insight into how a family charter can help with the day to day operation of the business family.

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