01/06/2014

Could a family charter improve your family business?

Family harmony can sometimes seem like a pipedream. Throw a family business into the mix and the issues multiply exponentially. All too often, problems arise which are entirely predictable but addressing them is put off until they become critical. Of course, some difficulties take us by surprise but many issues can be thought about in advance and with time and patience on your side the chances of reaching a conclusion which suits everyone concerned is much more likely.

WHAT IS A FAMILY CHARTER?

A family charter is a statement of intent or agreement entered into by family members in relation to their family business. They are not normally legally binding.

Typically, a family charter will set out:

  • how the family wishes the business to be run;
  • the family’s goals and long term strategy for the business;
  • how different members of the family will interact with the business.

 

Of much greater importance than the physical piece of paper documenting the charter is the journey which a family will take to arrive at the charter. Embarking on the process with an open mind and a determined willingness to listen to and take on board the views of others is essential to getting the most out of the process. However, these attributes don’t always feature in the characters of self-made successful business owners!

As new generations of a family emerge, in a relatively short period of time there can be a substantial increase in the number of family members with a direct or indirect involvement in the business. For example, suppose two brothers found a family business, each brother has three children and each of their children has three children. By the time the members of the third generation have become adults, there will be a total of 26 family members who may have some sort of connection with the business (assuming the founders are still alive). Even this figure excludes any spouses who may have become involved in the business.  This can bring with it a number of different questions, problems and complexities.

FAMILY VALUES

Many families take the view that they are acting as a steward and guardian of the family  business, maintaining it so that they are able to pass it on to the next generation. They believe that the family should bring value to the business and the business should bring value to the family.

Maintaining staff morale is key to any business, and when employees include family and non-family members there is an additional dynamic to manage.  Many believe that it is important to run their family business as a true meritocracy, where responsibility and contribution are valued and rewarded, regardless of family membership.

Succession planning starts with educating all of the family about the business. Without such knowledge and pride in the business there is little hope of passing the ownership successfully down the generations.

One way of ensuring that this happens is to set entry qualifications for any family member who wishes to join the business. This might be a combination of formal qualifications, a certain number of years’ relevant experience gained whilst working elsewhere and general life experience perhaps through charitable work or travel.

THE BENEFITS OF A FAMILY COUNCIL

As a family grows in size it becomes increasingly likely that some family members will want to pursue their careers elsewhere. This can give rise to all sorts of resentments between family members who do work in the business and those who don’t particularly if they all benefit equally from dividend payments. A family council can play an important role in the governance structure of a family business. In particular, it can:

  • help to build family unity by bringing together different generations and branches of a family and by bringing together those who work in the business and those who don’t;
  • provide a forum for debating answers to questions which family members might be asked to address as part of drawing up a strategic plan for the business or the family charter.

 

REMUNERATION

Financial reward is a notoriously difficult area to address not least because historically significant profits may have been divided between relatively few shareholders providing them with higher remuneration than they would have received if they were employed elsewhere. Of course, those individuals are the ones who took all the risk early on and deserved the fruits of their hard work. Newcomers to a family business may have unrealistic expectations based on preconceived ideas. What is important is that family employees receive no more than the market rate for the job they do.

Family and non-family employees alike should be subject to the same appraisal or performance review processes.

SHARE OWNERSHIP

Shares tend to start out in the ownership of a relatively small number of individuals and as time goes on the ownership becomes spread amongst more people and often passes into trusts.

Key non-family employees may also have been incentivised by receiving small numbers of shares. This can cause issues following the death or retirement of those individuals. Carefully thought through articles for the company can solve many issues surrounding share ownership. In particular these could provide for a buy-back of shares in certain circumstances. The articles could also permit certain transfers of shares for example to defined relatives or to family trusts for the same restricted class of family beneficiaries.

One issue which is guaranteed to lead to a lively debate is that of how to deal with in-laws. If this discussion can take place before there are any specific objections to particular people then this conversation is likely to run much more smoothly.

Trusts can provide an efficient way of benefitting a large number of people but restricting control and decision making to a smaller number of trustees. The key to making trusts work usually lies in the selection of the trustees.

Disgruntled minor shareholders can cause a high level of nuisance. Using a trust as a vehicle to pass benefits on to people without giving them the rights of a direct shareholder can eliminate a lot of difficulties.

DISTRIBUTION POLICY

Without clear communication, expectations of dividend payments can be unrealistic. Clearly, the dividend policy of a company must be linked to its trading performance rather than to the expectations of its shareholders. Also relevant to distribution decisions are the wider issues of the business’ long term strategy and the necessity of building up reserves to invest in the business or to provide a degree of protection to the level of family dividends in the event of less profitable years in the future.

Communication between the company and the family, often via the family council, can ensure expectations are managed.

DRAWING UP THE CHARTER

Where there are relatively few family members and the business is still young, it may be possible for the family to draw up a charter itself. Where the family is larger and has formed a family council, it is often this body which is responsible for putting together a charter.

There can, however, be problems if a family attempts to draw up a charter without help from an independent third party.  For example:

  • there may be a dominant family member who tries to impose his views on other family members. This can stifle a proper debate and result in a charter which does not represent a genuine consensus.
  • there may be a number of hidden emotional issues or hidden agendas amongst some family members which need to be brought to the surface.

 

An independent person who understands family group dynamics and is an experienced facilitator should be able to help in these circumstances. This person could be an external family business consultant or there may be a suitable candidate for this role from within the family’s or company’s existing advisers.

Families need to recognise that drawing up a family charter can sometimes force family members to confront issues which they find difficult, particularly where succession is concerned. However, many families have described the process of drawing up a charter as invaluable in making sure that the family is unified in its approach to the business and the business is being driven in the right direction.

A family charter can bring significant benefits both to the family and to their business. At its best, the process leading to the charter can facilitate the success and the succession of the business for the benefit of the next generations of the family. Often, giving thought to and encouraging debate about foreseeable difficulties can prevent them from arising in the first place.