Wednesday, June 7, 2017

Professionalizing Family Governance: Establishing a Family Council

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman 

Last week we discussed the importance of family businesses establishing a board of directors comprised of independent (i.e., non-family) members—a pillar of the “Stage Three” planning process. Still, many families are wary of this idea out of fear of losing control and/or a fear of exposing family problems. Out of this notion comes another common “Stage Three” planning strategy: professionalizing governance of the family by establishing a family council.

Family councils are formal bodies that meet on a regular basis and represent different branches or generations of the family, and thus may prevent or at least help to resolve various family-related conflicts. This structure ensures that the entire family is integrated, to some extent, in the business.[1]

There are several purposes of a family council:

  1. To provide family members with a forum to communicate, including to learn about the business and to ask questions.
  2. To facilitate the flow of information – among family members, and from the family to leaders of their business, and, in so doing, helping forge a shared consensus.
  3. To educate new generations about the business, while serving as a lifelong learning forum for more senior family members who are less active or inactive in business operations.
  4. To provide a forum to decide on family philanthropy.
  5. To organize “family fun” to help nurture high quality relationships and counteract the natural tendency for family bonds to diminish as families grow and the sheer quantity of social contacts among family members decrease.[2]

There are two additional functions of a family council that deserve particular attention. One is to help mediate family disagreements constructively before they become destructive conflicts that could negatively affect the business. Another critical function a family council can serve is to help confirm that there is sufficient “common ground” among family members by discussing, clarifying, and confirming in writing their shared values, vision, and mission, and through that process and those guiding principles reach further agreement on plans and policies that are particularly important to the family.[3]

A family council, whether formal or informal, can be particularly helpful as the number of family members grows and relationships become more distant, and/or when some family members relocate to new homes away from company headquarters and, as a result, are at risk of losing contact.

Just as corporations establish by-laws to ratify operating procedures, families that form councils should consider establishing something similar that will help organize how it will function,[4] including eligibility requirements for membership,[5] operating rules,[6] policies and rules,[7] and how to coordinate with the family’s business.[8] The council, however, is not intended to micro manage the family’s business.

Family councils are “great in theory,” but, in our experience, can be helpful or unhelpful “in practice.” The difference is typically a function of how the agenda is structured and how participants communicate: whether, for example, more time is spent “solving problems” (something that often leads to finger pointing, assessing blame, defensiveness and, in turn, infighting) or, by contrast, “possibility seeking” and appreciative inquiry (an approach that can energize participants, while building cohesion and understanding). The subject of constructive conversations and appreciative inquiry will be considered in future blog posts when we turn to “Stage 4 Strategies.”

In next week’s blog post, we’ll discuss another effective “Stage Three” strategy: clarifying and embracing guiding principles.

1. See Marta M. Berent-Braun & Lorraine M. Uhlaner, Family Governance Practices and Teambuilding: Paradox of the Enterprising Family, 38 Small Bus. Econ. 103, 107–08 (2012).  Family councils focus on family and ownership matters, the same way that the board of directors focuses on business matters. While the structure and operation of every family council is unique, it is quite commonplace for councils to focus on three sets of plans: (1) plans for individuals that are designed to support each member’s personal and/or professional goals; (2) plans for the family that clarify and establish overall goals of the family—and the resources needed to achieve those objectives; and (3) plans that guide how family members relate to the business, addressing such issues as ownership, management control, family involvement in the business, and long-term strategic direction of the business. See generally, e.g., Craig E. Aronoff & John L. Ward, Family Meetings: How to Build a Stronger Family and a Stronger Business (1992).

2. A growing number of scholars emphasize the importance of family councils in family business governance. See, e.g., Berent-Braun & Uhlaner, supra note 39, at 107–08; Julia Suess, Family Governance—Literature Review and the Development of a Conceptual Model, 5 J. Fam. Bus. Strategy 138, 142–43 (2014). 

3. Kelin E. Gersick & Neus Feliu, Governing the Family Enterprise: Practices, Performance and Research, Langsberg Gersick & Associates, (last visited Mar. 30, 2017) (“[F]amily meetings can help families achieve consensus regarding family mission, family values, and the raison d'être for the sustainability of the family business over generations.”) (internal citations omitted).

4. See Scott E. Friedman, Creative Uses of LLCs for Family Owned Businesses, N.Y. State B. Ass’n J., Dec. 1996, at 20, 20–21 (explaining that incorporating rules for a family council in an operating agreement can be helpful when forming an LLC).

5. For example, some families limit membership to adults over eighteen years old. Others may limit membership to “blood relatives” (i.e., excluding in-laws). The purpose of a council, however, is generally best served by favoring inclusiveness of responsible family members, whether they are blood relatives or not, and whether they are active in the business or not. But see Carolyn M. Brown, 7 Rules for Avoiding Conflicts of Interest in a Family Business, Inc. (Feb. 18, 2011), (cautioning that the more dysfunctional a family is, the more helpful it might be to start with a smaller group, expanding membership to include other family members as relationships improve).

6. For example, every council should decide how often to meet (with some benefiting from monthly meetings, others from quarterly or annually) who sets the agenda, who “chairs” the meeting, etc. See id.

7. For example, family councils might consider establishing liquidity policies if certain family members do not want to participate in the business, conflict resolution policies, etc. See, e.g., Int’l Fin. Corp., supra note 2, at 23–28 (noting the importance of establishing policies in a family businesses).

8. See Gersick et al., supra note 32, at 250 (recommending that family councils consider how to collaborate with the company’s board of directors). Families without a history of meeting together might be well served by getting going with comparatively “non-controversial” agenda items such as, for example, meeting to discuss and agree upon philanthropic priorities.

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to "Stage 4 Planning" Strategies, 65 Buff. L. Rev.,  May, 2017

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