How to have successful governance of a family business

Published: Mar 3, 2020
By: Natalie M. McVeigh
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When you think of family business governance, you might think of a board of directors or a family council. Both bodies are important and serve a constituent group in the three-circle model (e.g., family and enterprise, or business). However, there is another body that we spend less time talking about and for whom we prepare heirs for leadership. This body is no less important, perhaps even more important, than the board of directors who works for them: the shareholders.

Forget the shareholder group for a moment because shares of stock are often passed down as a tax strategy, given at birth, or put away in a trust. In some cases, there are so many shareholders it is not clear who they are. For many, this means much more than getting a nominal, or significant, financial return on the business they own. Shareholders who are not educated, engaged and informed do not stay shareholders for the long haul. How do we ensure that the shareholders are responsible?

It might be helpful to start with broad strokes regarding what shareholders do. Shareholders own the company and are responsible for approving changes that will impact the organization overall, such as electing or removing directors, revising the by-laws, conducting mergers and acquisitions, changing the capital structure, and altering the organizational culture (e.g., changing company name). This does not mean shareholders, as owners, set the strategic vison for the company, the board does that; or get into day-to-day operations, management does that. But they do influence through oversight on these large issues that affect the company.

Talking about responsible shareholders involves a conversation about shareholder rights and responsibilities.

Rights	Responsibilities
Financial Return – The expected return on the capital that has been invested in the company.	Financial Literacy – Understanding key performance metrics for the organization: Being able to read a balance sheet, cash flow statement, and income statement are ways in which shareholders can engage in a conversation around reasonable ROI and potential liquidity needs for capitalization that the organization may have.
Emotional Ownership – A sense of belonging and a feeling of involvement with the asset they own.	Owner Mindset – “Where the family enterprise may offer special opportunities to family members, but the family is united as responsible owners who operate the business professionally, to create family wealth within the parameters of their values.”^[i]
Information and Transparency – Oversight is a clear purpose of governance and without access to regular, transparent information there is a breakdown.	Set Meeting Times and Read Provided Materials – Have regular and predictable shareholder meetings with agendas and prepared materials. Inviting SMEs or attending education courses for gaps in understanding may be useful.
Board Representation – The board of directors works for the shareholders by representing them in decision making.	Board Selection – Shareholders are involved in the selection of directors by creating a process. Understanding the role of the board, creating job descriptions and board prospectus, and so forth help ensure appropriate board members are selected and evaluated.
Transfer Ownership – Owners can opt in and out of ownership. The means by which this is done may vary by legal agreement.	Buy/Sell Agreement or Share Buy-Back Policy – Creating and funding vehicles for shareholders to transfer their shares into that is clear and understood allows those who are engaged to stay and ensures that the organization is not put into financial duress during times of transfer.
Continuity – Many families want to be a part of a multigenerational organization through ownership.	Owner’s Council – A body of elected members who represent the shareholder group and educate new shareholders as they join enables the owner’s mindset and family values to pass from one generation to the next.

Responsible shareholders do not just appear. Ideally, they have reciprocal relationships with the board of directors and family council. In fact, being a shareholder is constantly evolving, and it is important to remain current and informed to ensure that they are in a position to understand what is going on and why. Good governance and responsive shareholders don’t happen overnight. It takes time and effort, but adds real value in the long term. Getting clarity and an early education can certainly help.

This article originally appeared on Family Business Global spring/summer 2020 issue.

[i] Jaffe, Dennis. (2013, August) GOOD FORTUNE: BUILDING A HUNDRED YEAR FAMILY ENTERPRISE

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Natalie M. McVeigh

Natalie McVeigh is a Managing Director in the Center for Individual and Organizational Performance and the Center for Family Business Excellence Group within the Private Client Services Group and has more than 10 years of experience as a consultant and coach.

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