Understanding the concept of family governance: Practical structures and recommended practices under the Small and Medium-Sized Enterprises (SME) Corporate Governance[...]

Introduction

The concept of corporate governance was introduced to establish the way and manner a company is governed. It is recognized that thriving companies are managed based on policies, principles, and structures that have aided their success and ensured their commercial sustainability over the years. Just as corporate governance is to companies, family governance provides a guide on how families and family-owned entities are managed and operated to achieve profitability and sustain family wealth, beliefs, and values across generations.

What is Family Governance?

Family Governance refers to the methods by which families and their enterprises are operated. It is a structured set of agreed-upon rules and procedures for the management and coordination of the affairs of a family. Family governance helps family members develop strategies to steer their affairs and ensure the maintenance of well-established values and wealth across multiple generations.

An effective family governance structure would typically address the following issues: decision-making, communication, management of family wealth, succession, and conflict resolution. The introduction of good governance practices in the operation of families has over the years turned out to be beneficial in the preservation of family values, and traditions, and ensures smooth generational succession and transition in ownership of the family business. It also helps promote accountability and transparency in the management of family wealth

Practical Family Governance Structures

The implementation of governance structures in the management of the affairs of a family can be done in any of these practical ways:

a. Establishment of Family Purpose, Vision, and Values: Purpose is the bedrock of family governance. The founders/patriarch of the family have the responsibility of setting the purpose and vision of the family which is to be defined, codified, and embedded in how the affairs of the family are run. The codification of the purpose can be done in the family mission statement which can always be referred to in making decisions that affect the family.

b. Creation of a Family Council: Akin to the Board of Directors of a company is the family council (the "Council") which is saddled with the responsibility of overseeing and managing the affairs of the family. The Council is made up of key family members elected by other members to attend to the family affairs and represent the interest of the family. The Council serves as a link between the members of the family, the managers of the family enterprises, and other stakeholders that interface with the family. The members of the Council are at all times expected to act in the best interests of the family - like the fiduciary duty imposed on directors of a company.

c. Scheduling of Family Assembly: The family assembly is a meeting of family members where the affairs of the family are discussed and key decisions are made. The assembly is essential as it serves as an avenue for members of the family who are not involved in the running of the family business to receive updates and reports on the activities of the business. The assembly provides an atmosphere for effective communication among eligible attendees and is typically necessary for large, multi-generational families. The Family Assembly is like the General Meetings in companies, save that for effectiveness, the assembly should be held more frequently than a general meeting.

d. Creation of a Family Constitution: Another important structure in ensuring effective governance in the management of family affairs is the existence of a family constitution. The family constitution is essentially the rule book by which the family and its enterprises are managed and operated. It is the ultimate codification of family values and goals as well as contains the procedures for the constitution of a family council and assembly. The family constitution would cover areas such as ownership and management of the family business, succession, composition of the family council, conflict resolution, roles and responsibilities of key family members, sharing/distribution of profit, etc.

e. Use of Family Office: Families may also engage the service of professionals to manage their wealth. The family office provides an avenue for professional management of family wealth. It is a group of professionals responsible for administering and managing the investments and businesses of a wealthy family. In addition to acting as the investment advisory firm of family wealth, a family office also performs non-financial functions and administrative functions such as daily bookkeeping, scheduling of travels, and handling the education of family members. Family offices are of two types: the single-family office (SFO) and the multi-family office (MFO). The SFO caters to a single wealthy individual or family while the MFO services more than one family. The key responsibility of a family office is to provide professional support to ensure that the family's personal and business expectations are met and the wealth is sustained.

Recommended Practices Under the SME Corporate Governance Guidelines 2024

In June 2024, the Financial Reporting Council of Nigeria (FRC) released Corporate Governance Guidelines for SMEs (the "Guidelines"). The Guidelines recognized that a high proportion of SMEs in Nigeria are family-run enterprises that run a risk of failure of succession and sustainability due to the mix of family relations and business. To navigate the challenges, the Guidelines advises managers of family-run entities to focus on ensuring succession in the transfer of wealth across generations, the engagement of non-family executives based on well-defined policies, and careful financial planning to ensure sufficiency of capital without dilution of family control.

Principle 8 of the Guidelines provide that family governance formulates a framework setting out the family's relationship with the business. It therefore recommends as practice a constitution that sets out the vision, values, and policies that guide the relationship between the family and the business. The Guidelines state that the constitution should provide for clear lines of authority and decision-making.

Additionally, the Guidelines recommend the establishment of family governance with written procedures to facilitate effective communication in family-run entities. It further recommends the establishment of a family governance structure such as the "family council" which institutionalizes cooperation in large families and serves as a bridge between the family and the business.

Conclusion

From the perspective of family businesses, effective family governance plays a crucial role in managing both wealth and organizational affairs. It clarifies decision-making processes and delineates roles and responsibilities among family members, helping to mitigate the complexities that arise from intertwining family relationships with business operations. The Guidelines mark a pioneering effort in formalizing governance structures within family enterprises. The practical steps outlined above are essential for wealthy families aiming to sustain their wealth and preserve family traditions across generations.

Public link

Please use the above public link if you want to share this noodl on another website.