One size doesn’t fit all

• The family plays a dual role in family businesses, serving as both an asset and a potential liability that requires careful management to ensure business success.
• A family governance document, often called a "family charter" or "family codex," serves as an operational manual for the family, outlining their values, goals, and conflict resolution mechanisms.
• The completion of a family governance document is a significant achievement for business families, but they should recognise that it requires ongoing attention and revisions to remain relevant.

The family can be both an asset and a liability to family businesses. It is no surprise that many business families work hard to mitigate the disadvantages and to strengthen the benefits of their family businesses in order to achieve superior performance. With respect to setting up their firm, they can also learn a lot from non-family firm role models. Best corporate governance practices teach them, for instance, about how to set up incentive and monitoring systems. Yet this is not enough for family firms. Prominent examples from the media show how sibling conflicts or disputed adult adoptions disrupted family harmony and split over from the family to the business system, ultimately harming the family firm's competitiveness and prosperity. 

What can business families do in order to avoid such conflicts? Many business families have found a solution in the last decades: family governance. Just as corporate governance determines the rules of how the business is run and steered, family governance determines the rules of how the family works together. 

A family governance document (often also called a “family charter”, “family codex” or similar) is generally an inconspicuous document of only a couple of dozens of pages, signed by all members of the business family. But it is very powerful; it can be seen as the operation manual of the family. To get to the family governance document, the family needs to sit together and discuss what is important to them, what the guardrails of future decisions will be and how they will handle conflicts in case they emerge. Typically, this discussion process spans multiple weekends, up to a year or longer, is characterised by intense discussions, and often requires an experienced moderator to navigate through all the passages that the family governance document contains.

Family governance documentation

What is typically in a family governance document? Well, it often starts with a vision of what the business family wants to achieve and how it sees itself. Is the sole purpose to maximise wealth? Or are there further, non-financial goals such as giving back to the community in which the family business is embedded? How important is it for the business family that the business will remain in the hands of the family in the future? And are there any markets, industries, or technologies that are considered taboo? Once these high-level questions are debated and a consensus has been achieved, further topic areas have to be discussed. 

First, the business family needs to agree on who can be considered a family member and who can become a successor. Often, there is a further distinction between who can become a shareholder and who can work in the family business – and how the procedure, or assessment centre, would look like in these cases. 

Many families define prerequisites for joining the family firm (such as certain education or leadership experience) and set rules if successors need to work their way up in the family business or whether they only allow them to work at the top. In this topical field, business families need to agree on how to deal with spouses and also how to deal with adopted children. 

Many European families set age rules in their governance documents, stating for instance that kids that are adopted below the age of 12 or 14 will be given the same succession rights as biological kids as it is assumed that they are socialised the same way. Very often, family members are rather comfortable with finding a compromise as long as the issue of “family membership” or “succession” is rather abstract. 

The more concrete the issue becomes, the harder it is to agree on certain aspects. For instance, as long as the kids are in pre-school, the parents might have no problems agreeing to certain educational thresholds for succession. Yet once the kids get older, and potential educational challenges become evident, emotions will prevent finding a compromise. Hence, early agreement on family governance will avoid many conflicts.

Yet not all potential conflicts can be foreseen and avoided a priori. As such, family governance also needs to deal with decision-making within the family and issues of disagreement among family members. In any case, it needs to specify what questions need to be agreed on unanimously and for which a two-thirds or majority vote is sufficient. Yet there might be conflicts that cannot be solved via voting but that need a facilitator who is able to calm down emotions and bridge divergent perspectives. A thoroughly developed family governance document can specify who such a mediator should be or how they would be chosen in case of conflict. 

Besides those central topics, business families need to agree on who communicates within and outside the family, and how. Also, education and philanthropic issues are often clarified within a family governance document. While it is impossible to foresee all potential family-related issues of the future, free resources from the internet might help business families to cover the most important family governance aspects. 

Sometimes business families wonder what the right timing is to set up a family governance. For sure, a sole founder or founding couple might not see the need to set up a family governance. Yet once the family business has reached a double-digit number of shareholders and/or the cousin consortium state, governance can facilitate smooth processes within the family. As such, it is advisable already for siblings of family businesses to think about their desired future family governance. 

Yet of course, as the family grows the family governance requirements change. Not only are some aspects more complex, but also new issues arise. Once the family has more than 50 or even 100 family members, it becomes paramount to think about family cohesion to foster identification with the family business and further family committees that increase the participation of a broad range of family members.

Family goals

It is not just the case that family size might differ among business families, it is true for goals too, (family vs. business first), values, needs, resources and so on are often unique. As such, there is no one-size-fits-all solution. Other than for corporate governance, where there are often best practices (such as the DCKG in Germany), there is no such ultimate best practice for business families. What might fit one, might not fit the other. The members of the business families need to identify these solutions that fit their own business family solution best. And even when the outcome is just a small booklet, so is already the process extremely helpful to foster insightful exchange among family members. In this process, it is important to involve as many family members as possible. 

Cases where family governance was not successful in avoiding conflicts among the family, can often be traced back to governance being dictated by patriarchs, with the Next Gen being excluded. While the family governance document is non-binding, it is advisable to ask a lawyer afterwards to check which of its parts can be transferred into a legally binding, additional document. 

Many business families feel enormously proud, once their family governance document is completed, signed, and printed. And they should do so! Yet they also must know that the work is not fully done. A family governance document is not set in stone for eternity. The environment, industry, and businesses change and so does the family. As a consequence, business families should regularly come together to scrutinise and, if needed, update their family governance, making it a living document. 

Nadine Kammerlander has been a professor at WHU – Otto Beisheim School of Management since 2015. She was previously an assistant professor at the University of St Gallen. She holds a degree in physics (TU Munich) and a doctorate in business administration (Otto-Friedrich University Bamberg). She worked at McKinsey & Company for several years, advising international companies in the automotive and semiconductor industries on product development projects, primarily in the US and Mexico.