The Family Business – Passing Power Down to the Next Generation

Ownership and Governance

Corporate and family governance is ever evolving and has been more widely considered in recent years with entrepreneurial families wanting to avoid becoming a “shirtsleeves to shirtsleeves” family but instead to be in control of their legacy. While governance in the sense of legacy may be seen as relatively new, some families have clearly developed a great skill in ensuring their family business lasts for centuries, leaving a significant and continuing legacy. For example:

• Kongo Gumi, the Japanese construction firm, founded 578.
• Antinori family, producing wine in Tuscany since 1385.
• Freudenbergs have run their Global group for ten generations.

To consider the family business we need to look at who is involved. Whilst we may think principally about control moving down generations, there are in fact many interested stakeholders that are affected by the business. For example:

• Family, non-working, non-owning;
• External investors;
• Management, executives and employees;
• Non-working family owners;
• Non-family owner-manager;
• Family employees;
• Working family owners.

The ownership and governance of the family business should be discussed and agreed upon well in advance of the need to shift power to the next generation. The family, whether through formal assembly or informally over dinner, should establish policies to govern issues where interests of the family and the interests of the business conflict or overlap.

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Some of the areas that should be covered are:

• What should the succession and wealth transfer policies be?
• Does the founder view the business as “value-out” (i.e. expect market returns to sell and re-invest)?  
• Alternatively, is ownership of the business purely a custodial role (i.e. to solely to provide a legacy for subsequent generations and to protect the interests of the  stakeholders)?
• Should ownership succession be restricted to bloodline or include spouses/partners? On the plus side, inclusion of the extended family provides financial security, fosters a feeling of inclusion and may be tax efficient. On the negative side, it will dilute family interest, and divorce may fragment ownership and spouses may not be as loyal to the family.
• Should ownership be restricted to working owners or non-working owners? If restricted, you may avoid conflict and resentment. However, family members may feel they have “golden handcuffs” and resent the restriction on their ability to pursue their careers. If family members do choose to pursue their careers, will they feel excluded from the family and be prejudiced?

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What is the employment and remuneration policy for working family members?

Will it be family first or business first? Depending on how this is considered, what will the effect be on the culture within the business, and how will non-family employees strive to develop their careers within the business?

Some basic questions for the family may be:

• Who is entitled to jobs in the business?
• What jobs are available?
• Consider the qualifications and experience required (do family members build from the ground up or come in at a higher level?
• How will family members be treated through interviews, appraisals, grievance and disciplinary procedures?
• Remuneration – will it be part pay and part dividend, will they receive lower relative pay or higher (i.e. will they be paid less as “all this will be yours in the future”, and your loyalty to the business should be higher, or do you get paid more because you are a family member and are tied to the business)?

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What is the dividend policy for shareholders?

A balance must be sought between generous remuneration packages which may leave little profit to distribute to shareholders and miserly remuneration, leaving significant profits to fund generous dividends. This clearly has a considerable impact when considering if owners should work in the business or not.

The other aspect this comes back to is whether the view of ownership is seen as “value-out” or “custodial”. Value out ownership will be looking for a market yield and expect dividends even when profits are low and cash-flow poor. However, custodians are content with whatever dividend the business can afford, often insisting that a certain level of profits and cash flow be retained to build a reserve and re-invest in the business activities.

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What is the policy governing management and control of the business, supervision and oversight?

Whilst there may be traditional balance of power it is likely owners may wish to reserve powers to control matters which represent a significant financial or reputational risk.  

• Financial; appointment and removal of directors, significant capital expenditure or borrowings.
• Reputational; change in corporate brand, use of the family name, closure of elements of the business, redundancies.

By discussing these areas and having a clear way forward, it will help with generating fair discussion between family members and provide a clear way forward for those both wishing to be part of the business in the future and those who want to follow a different path.

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