In the last article article that I wrote, I shared my thoughts on the importance of having formal structures to govern families that run businesses.
This is crucial because family ties can either break or make a business. Businesses, especially family businesses, face more complex challenges, from taxation to legal issues.
More of our clients at Bank of Singapore have been raising this issue, making a point to note that having formal structures in place to set out proper roles for family members is crucial to ensuring long-term success.
But here's the difficult part: How and when should they even begin to tackle this potentially very sensitive issue?
In the beginning, there is always Values
The very short answer to the question is: At the very start.
One of the first things to do early on is to establish the kind of values that the family stands for. These need not be the same as the businesses they run but often, it is likely that they will coincide.
For instance, a family that believes in environmental issues is very likely to espouse a similar worldview in the businesses they run.
Take family-run giant retailer Walmart, which is owned by the Walton family, as an example. The Walton family foundation lists environmental protection as one of its key areas of focus. Unsurprisingly, in 2009, Walmart launched its sustainability index, which evaluates suppliers on key sustainability measurements
There should be consensus on these values because they will be enshrined in a document called the Family Constitution.
This Constitution is the main document that will set out the key rules governing the family, such as succession planning, conflict resolutions, family loans and dividend distribution policy.
Alongside the Constitution, families should also establish a Family Council. Think of this group of people as the directors of a company, or a panel of seniors in the family. They are the decision makers and ensure that the rules in the Constitution are closely followed.
The Constitution and the Council sit at the heart of family governance. They form the foundation for the family’s legacy - its business, philanthropic and financial legacy.
This process can take anywhere between a year and as long as five years, based on the interactions with our clients.
These two key facets - a Family Constitution and Council - of family governance are probably the most difficult to achieve, partly because seeking consensus is a difficult thing to do, particularly if the family has grown to a large size.
That is why planning for family governance should preferably start as early as possible, hopefully when the first generation of leaders is still around. This way, the patriarch or the matriarch set out the long-term plan and vision for the family, which is likely to be followed by the subsequent generations.
For families that are into the third or fourth generation, the process can be particularly daunting.
In one instance, one of the brothers of a multi-generational family wanted to take his company global, expand it and turn it into a major force in the industry. But many of his relatives were not keen on taking the risks, and were happy to maintain the business, drawing from its dividends.
They were locked in a battle which became a bitterly fought one. Eventually, he decided to buy out his family members with his own money. That meant that he became the new patriarch and was able to pursue his dream of expansion while laying out firm foundations for family governance to avoid future family conflicts.
Family first
To be sure, this structure is not new. Families in Europe and the United States have practised family governance for decades now, recognising that rules are crucial for maintaining order and clarity in family affairs.
But it does not mean that families become legal entities overnight, dealing with each other only over a contract written down in black and white.
The family council is also likely to organise family activities, ensuring that family members remain in touch with each other, especially the younger generations.
In fact, what is probably even more important is regular contact between family members, so that information is relayed promptly and discussions are communicated openly and objections aired in a transparent manner.
Still, for families facing this challenge of putting in place a structure for governance, it might be useful to contact a wealth planner for advice. This is what many Asian high-networth families have been doing, as we have seen a spike of queries on this issue over the past year.
A wealth planner can help to convene a team of professionals such as lawyers and accountants to help with complex issues such as tax regulation, immigration, wealth management and corporate governance. This is what we have been doing for our clients.
Families should recognise that setting up a family governance structure is not an event, but a process that ultimately serves to preserve and grow the family legacy.
Running a business may be difficult but keeping a family together is even harder.
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