Family enterprise governance: stewardship for the benefit of future generations

Board considerations for a unique stakeholder—the family member

Family enterprise structures often include diverse stakeholder groups, which may add complexity from a governance perspective. Stakeholders will likely include family members at varying ages and stages, with differing interests and priorities that extend beyond financial performance and other common metrics, and could include a number of family branches. If multigenerational trusts are direct or indirect shareholders, relevant stakeholders could also include unborn future generations who have an interest in maintaining enduring wealth. All stakeholder interests should be taken into account when acting in the best interests of the company. To the extent those interests are not all aligned, it is a business judgment for the board to determine the relative weight to attach to each.

As the owners of the business, family members should have meaningful input on governance, either by sitting on the board or through nomination rights. There should be a process for identifying candidates, nominating individuals and selecting directors, which may be on a branch-by-branch basis (with direct nominee rights) or a family-wide basis (through search committees or otherwise).

We share five additional considerations for family enterprises to keep top of mind when reviewing their governance structures and looking toward the future of the business.

1. The benefits of independent directors

Families should consider whether to include one or more independent directors on the board—someone who does not have a relationship with the family members or the family enterprise. Independent directors are uniquely placed to help navigate conflicts of interest and sensitive issues where there is a misalignment of interests within the family. When a board is entirely comprised of family members, there is risk of friction or conflict when the personal interests of the family member directors (or their branches) are not aligned. Having at least one unconflicted director who can act in an unbiased manner can be a tremendous asset. Independent directors can also strengthen the board with specific skills and experience.

2. Soliciting family members’ perspectives

There are two additional structures a family enterprise should keep in mind that can enhance family engagement and help to ensure perspectives are raised and taken into account: family councils and advisory boards. Family councils include a broader cross-section of the family than the board of directors, creating a channel through which family members who are not part of day-to-day decisions can stay apprised and express their views. Advisory boards, which include third-party experts, can help supplement the board governance structure, especially for larger families where outreach and engagement beyond the board is needed.

3. Succession planning

It is incumbent on the family to cultivate a robust pipeline of potential candidates for family member directors and other leadership roles. Information is a crucial building block to setting family members up to be effective stewards. Continuous learning sessions, including leadership training, are beneficial for family member participants and help build a robust pipeline of potential candidates for leadership roles. Establishing an equitable means of identifying and selecting future leaders that has broad support among family members can also mitigate future conflict.

4. Guiding principles

Family governance structures should be customized to reflect the family’s historical approach to governance as well as its goals and objectives for the future, enabling evolution. Given the multigenerational nature of family governance structures, it can be helpful to document a set of guiding principles or shared values to act as a touchstone. Guiding principles should be designed to stand the test of time and reflect an accepted good governance approach, although they need not be stagnant—indeed, it can be productive for the family to revisit the common principles periodically.

5. Shareholder agreement advance planning

Families may consider putting in place a shareholder agreement that can address various future eventualities, including possible exits from the structure. Allowing family members who want to exit the structure to do so can alleviate pressure and bring stability.

Often, a key goal is to keep the enterprise within the family if possible. Common provisions include call/put rights on certain triggering events (like death and family law or bankruptcy proceedings where shares are at risk of being transferred outside the family), buy/sell rights, forced distribution/reorganization transactions, and share transfer restrictions. While exit and liquidity structures are not always top of mind when establishing family governance structures, they can be difficult to craft after years or decades of complex corporate, trust and tax planning transactions.