Mitzi Perdue

Family Governance Issues: Are You Struggling with Them

Family businesses resemble countries in at least one key way. When you get the governance right, people have a chance at prospering and thriving. If you get it wrong, the result can mean unending distress.

Babetta von Albertini, Ph.D., founder of the Institute for Family Governance, is an expert on governance. She is also a tax expert and has been advising international families and closely held businesses for more than 20 years.

Something she’s seen over and over again is that in multi-generational family businesses, governance issues can be fraught. After all, how decisions are made can be extraordinarily high-stakes issues.

In some cases, there can be hundreds of millions or even billions of dollars at stake. If decisions are made unwisely, the lives not only of the family members but also the employees and the tax base of the community can be harmed.

The kinds of issues that multiple-generation family enterprises must deal with include such things as:

Who gets to vote?

• All stockholders?
• Stockholders with voting rights?
• Family members only?
• Blood line only?
• Only family members who work in the family business?

Who gets to be on the board of directors?

• Exclusively blood line?
• Family members including married-ins?
• Some family members and some outside directors with professional expertise?
• Exclusively outside directors?
• What professional criteria need to be met to be able serve on board?

Legal Tools for the Governing Documents

Von Albertini is an attorney, and wearing her lawyer’s hat, she recommends considering some of the following practical approaches for dealing with these difficult decisions:

1. Create a committee for certain topics that provides recommendations to the board. If possible, create a board committee headed by a person whom all sides respect and who provides recommendations to the board. That way, discussion on difficult topics is limited and can be taken offline.

 

2. Have a lawyer prepare a summary of all the relevant governance provisions. Have a “cheat sheet” that summarizes how decisions have to be made and what behavior is appropriate (based on existing decision and information rights). This will also help identify when someone is about to overstep his or her authority.

 

3. Create a list of requirements for NextGen family members to serve on Board. This may not be of immediate use but will provide a framework for the future. Many families have stringent requirements as to what mileposts have to be achieved in order to be able to serve on the board. If the agreed upon requirements are transparent and sufficient notice is given, NextGen family members can actively work towards achieving these requirements, which is empowering. The list of requirements will also let everyone know what it really takes for someone to serve on the board. Both bloodline and non-bloodline could work toward achieving these requirements. In von Albertini’s experience, “There is no reason why the ‘bloodline’ requirement cannot be de-emphasized over time and become just one of multiple criteria that are taken into consideration when selecting a board member; many families with operating businesses have deemphasized this requirement over time.”

4. Create a Junior Board. “One of the oldest Spanish wine producers (currently in its 18^th generation) has created a junior board and uses it for securing the involvement and training of the next generation. Certain (minor) decisions have been delegated to this junior board”. She goes on to say that, “This way the next generation get to know each other and learn how to make decisions together. In this particular family, the regular board also invests some time to get the junior board up to speed on company issues such as financials, employee matters, strategy, and so forth”.

Von Albertini says the Junior Board, “…..has been very beneficial for them.  It brought in fresh ideas and in the process helped identify and train the next generation of leadership.”

To contact Babetta von Albertini, visit her website at: http://www.ifgworldwide.org or e-mail her at: bvonalbertini@atmcap.com.