Governance and the Family Enterprise

Family
Administration

Did you know that approximately 63% of all private sector firms in Canada are family-owned and that these family businesses account for about 50% of our GDP?(1) With statistics like these, it is obvious why there are many discussions around governance and how it applies in the family enterprise context.

Don’t think of governance in the corporate sense: “the collection of mechanisms, processes, and relations used by various parties to control a corporation.” Instead, think of it as “the right people doing the right things at the right time.” This is where families often trip themselves up when thinking through governance and decision-making.

To explain, let’s start with the Three Circle Model created by Tagiuri and Davis at Harvard Business School in 1978.  The Three Circle Model of family enterprises shows three overlapping groups: family, business, and ownership.  If you remember middle school math, it’s just a Venn diagram for family businesses.

The model helps identify how key people fit within the family enterprise.  Where the circles overlap is where family members have multiple roles.  The overlapping areas are where there is the potential for role confusion and, sometimes, conflict. When we work with families where roles overlap (and they almost always do), we often remind them to pause and consider which ‘hat’ they are wearing. Shareholders’ Agreements should be structured from the perspective of the Ownership circle and marital contracts from the Family circle.

With this brief introduction to the Three Circle Model, let’s revert to how families often trip themselves up when thinking through governance and decision making.  The confusion, or in a worst-case scenario, conflict, usually occurs when family members are contemplating a decision while wearing the wrong ‘hat’.  To help families ensure they are thinking about decisions and governance from the correct perspective, we compiled the following table of governance expressions and tools.

When contemplating governance for your family business, consider using the Three Circle Model to delineate goals into the three distinct areas.

The goals of ownership governance could include establishing the business’s vision and goals, establishing the company’s overarching strategy, and selecting and establishing the board of directors.

In the business circle, governance goals could include putting the owners’ strategy into action, measuring the results, and providing fiduciary oversight.

Finally, family governance goals might include maintaining family harmony, ensuring appropriate family education, and giving a voice to family members who are not involved in the business.

After all, “families are concerned with people’s emotional wellbeing…businesses are primarily concerned with economic success.” (2)  Families that develop governance goals and practices while using the Three Circle Model can support both their family’s continued harmony and business success.

References

  1. Family Enterprise Matters, Family Enterprise Xchange, 2019
  2. “Untangling the emotional knots in family business”, Financial Times, Dec 14th, 2016

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