Family governance. How is it beneficial for your family?

Rūta Gadeliauskaitė

For some time now in Lithuania we have been hearing and finding articles on the topic of family governance. As Lithuania counts more than 30 years of independence, not only have private businesses grown, but families themselves have also grown and developed. It is natural that, having raised businesses, we turn back to the family and consider how much the family has contributed to the success of the business, how much the business can contribute to the well-being of the family, and how to preserve the business or accumulated assets so that family members can enjoy the fruits of long and hard work.

The three-circle model of the family business

Family governance in the modern world was first methodically explained when, in 1982, at Harvard Business School, Renato Tagiuri and John Davis presented the three-circle model of the family business. The model remains relevant today, as it simply and clearly depicts the relationships and interdependence between the family, the business and ownership of the assets.

For a family business to function properly, each element of the model (family, business and ownership) has to operate with regard to the other elements. Individuals acting within each of these elements need to understand which decisions fall within their competence and how the decisions they take affect the other elements of the model. This interaction between the elements, their mutual support and the taking of appropriate decisions with regard to the other elements of the model is considered (called) governance under the above-mentioned three-circle model of the family business.

Family governance

Family governance is the governance element that takes place within the family, but it undoubtedly affects the other elements of the model – the business and ownership. It is within the family that key decisions related to the business and ownership are made. For example, the family decides what conditions apply to family members who wish to take up management positions in the family business, or what conditions are set for future owners of the family assets (the ownership element).

From another angle, family governance is a certain structure, a defined process that enables the education of family members and facilitates communication within the family. It is like a forum where constructive discussions take place, problems are solved and decisions are made that are related to the family, the business, the assets and the ownership of the business (assets).

Properly structured family governance allows many goals important to families to be achieved:

• to clarify the family’s values, define the family’s vision and set boundaries for how far the family is (will be) dependent on the family business and the family business is (will be) dependent on the family;

• to disseminate information within the family about the family’s assets, the business and the links between them;

• to educate family members about their rights and obligations related to the family, the family’s assets or the business;

• to prevent various conflicts related to family members’ rights and obligations, and to the family’s assets or the business;

• to ensure continuity by paying attention to the transfer of leadership of the assets and the business;

• to support and nurture future generations so that they feel confident in the family, in the business and in the management of the assets;

• to bring family members together and maintain family harmony.

What type of family governance is suitable for a particular family depends greatly on that family’s individual situation. Before structuring the governance of a specific family, it is important to assess how many family members there are, how many generations, what assets the family has, whether the family owns a business, how involved family members are in the business or in managing the family’s assets, and how decisions are taken in the family that relate to the family itself, the family business or the family’s assets.

Formalising family governance

It should be noted that family governance changes as the family and/or business grows. While the family and the business are still young, issues relevant to the family are often discussed as the occasion arises, frequently at the lunch or dinner table. As children grow up and start their own independent lives, it becomes increasingly important to consciously plan family meetings and the discussion of important issues. As the family and business grow, the need arises to formalise family governance.

For many families, family governance starts from organising family meetings. At the first family meetings, discussions are held about what the family is, what the family’s goals are, and what the vision of that particular family is. Later, such important issues are discussed as the involvement of family members in the family business or in the management of the family’s assets, and preparing the younger generation to take over the family business or assets. Finally, the agreed principles are laid down in some form of family document (constitution), and the family meetings and other family governance instruments are formalised.

At first glance, the formalisation of family governance may seem like an overly complex and excessive task. However, as several decades of Western experience show, rules established by the family itself help to maintain open dialogue between family members, prevent potential conflicts and make it possible to consistently nurture the younger generation. In this way, it is ensured that what has been created – whether it is a family business or simply significant accumulated capital – is preserved, and that all family members, including future generations, can benefit from the opportunities provided by the family’s assets.