FORUMS CREATE OPPORTUNITIES
Forums create opportunities for each group to become educated about the business and the Core Capital, and for its voice to be heard.
The Owners Council, which includes all the owners of the business, is responsible for articulating the Shared Purpose and Vision for the business and for the broader Core Capital.
The Board of Directors is the overseer of the business. It is composed of directors elected by the owners. Generally, the Board is responsible for serving as the liaison between the business and the owners, for hiring and overseeing the CEO, and for approving the financial and strategic plans of the business.
The Family Assembly, which includes everyone who is considered “family”—whether or not they are owners—is responsible for maintaining effective family relationships and strengthening the “glue” that holds the family together.
When ownership is held in trust, the Beneficiary Council, which includes beneficiaries and trustees, is responsible for enhancing communication between beneficiaries and trustees and educating both about the business.
In most family businesses, members will belong to multiple groups. Those who wear multiple hats within the family-business system will want to ask themselves, “Which hat am I wearing when I consider this particular question?”
OWNERS COUNCIL
What is our Shared Purpose and our Vision for the future of the business and the Core Capital?
The purpose of the Owners Council is to create a forum for all the owners of the business to come together to consider matters of importance to them—as owners.
Who are the owners of your business? These are the members of your Owners Council. Note that when the business has voting and non-voting stock, some business owners limit participation in the Owners Council to those who own voting interests in the business.
The owners as a group are responsible for articulating the Shared Purpose and Vision for the business and for the wider Core Capital. This information is critical to the successful functioning of the Board of Directors and management of the business, because it lets them know which goals to aim for.
Shared Purpose drives strategy! There are potentially infinite strategic choices a business can make in planning its future. Owners who articulate their Shared Purpose and Vision narrow the scope of choices in ways that reflect their Vision and values, thereby providing a critical sense of direction to the Board and management.
THE OWNERS COUNCIL WILL:
Exercise the responsibilities of the owners set forth in the Bylaws.
Articulate the Shared Purpose and Vision for the future of the business and the Core Capital, (and communicate the Shared Purpose and Vision to the Board of Directors).
Create other forums to ensure effective decision-making: Board of Directors; Family Assembly; and—where some or all of the ownership of the business is held in trust—Beneficiary Council.
Allocate decision-making power among forums.
Develop and maintain policies to guide decision-making by and among the forums.
Review copies of the agendas for board meetings. Do the agendas provide a framework for ensuring that the Shared Purpose and Vision are achieved?
How frequently should an Owners Council meet? Many meet quarterly, with calls in between, often in alignment with the meeting schedule of the Board of Directors.
Topics that an Owners Council might address in their meetings include:
Articulating Shared Purpose and Vision.
Discussing estate planning and inter-generational ownership transfer objectives and strategies.
Educating the owners about aspects of the business (for example, growth plans, branding strategy, the business’s position in its industry, industry and market developments).
Reviewing financial reports and understanding the business’s financial performance.
Preparing the next generation to be effective owners, through education and exposure to ownership decision-making, over time.
Working with other forums to develop effective policies (for example, a family employment policy with the Family Assembly or a compensation, reinvestment, and distribution policy with the Board).
BOARD OF DIRECTORS
How will the business deploy its Financial, Human, and Enterprise Capital to achieve the Vision set forth by the owners?
The purpose of the Board of Directors is to represent the owners, and oversee management. The Board has a fiduciary duty to act in the best interests of the owners and the business.
Businesses have options for structuring the Board. Members might include:
One or more owners, representing the Owners Council.
One or more members of the senior management team, representing the business.
One or more advisors with deep understanding of the business as well as outside perspective, such as the business’s outside council or accountant.
One or more independent directors with relevant experience in the industry or expertise in a key aspect of the business (marketing, operations, industry regulation) or in family business.
It is the owners’ prerogative to decide whether to have advisors as well as directors. What is the difference? A director has a legal fiduciary duty to act in the best interests of the owners and the business. An advisor provides perspective and expertise to the Board, but has no legal duty to the owners or the business. Some family businesses feel more comfortable having a group of family owners and managers as directors, and independents in an advisory role only. Others believe that decision-making is more effective when independents serve as directors and vote along with insiders.
THE BOARD OF DIRECTORS IS RESPONSIBLE FOR:
Reviewing the strategic plan for the business as presented by management, and making sure it is in keeping with the Shared Purpose and Vision as articulated by the Owners Council, and with any relevant policies that have been established;
Approving the financial plan, and making sure it is in keeping with the Shared Purpose, Vision, and any relevant policies;
Hiring and overseeing the chief executive of the business; and
Other responsibilities as delegated by the Owners Council.
How often should the Board of Directors meet? Typically, the Board of Directors meets quarterly; committees may meet in the interim.
How is the composition of the Board determined? The general composition of the Board of Directors should be determined by the Owners Council, given that the Board’s purpose is to oversee the business on behalf of the Owners Council. While every board is different, the Owners Council may wish to get input from advisors and other family businesses about what has worked—or hasn’t—for them.
FAMILY ASSEMBLY
How will we preserve and strengthen our family and steward our Core Capital?
The purpose of the Family Assembly is to maintain effective family relationships—for strengthening the family glue. The Family Assembly provides an opportunity for a growing family to come together to discuss matters of importance to them. Those matters may include the business, but may include many others as well, such as: family philanthropy; use and maintenance of family vacation homes or compounds; family investing; management of family financial wealth; care of aging family members; education and preparation of younger family members.
Who are the members of the Family Assembly? Anyone you define as “family.” Some family members include in-laws or significant others of long standing, while others do not. Arguments in favor of limiting membership to bloodline descendants tend to focus on confidentiality and privacy; arguments in favor of including spouses and significant others tend to focus on the importance of inclusion and education, and the recognition that they are parents of the next generation.
Responsibilities of the Family Assembly will vary based on the size and geographic scope of the family and may include:
Organizing family retreats and gatherings.
Articulating and promoting family values.
Maintaining family records and history.
Educating next-generation family members about the family’s history, values, philanthropy, business and other ventures.
Mentoring next-generation family members.
Some families—particularly small families—combine the Owners Council and Family Assembly into a single forum. This combination can be efficient and effective. However, families who do so should be careful to manage their “hats”—is a specific topic important to them as owners, or as family?
BENEFICIARY COUNCIL
How can we best facilitate communication and understanding among trustees and beneficiaries?
As a result of estate planning by family business owners, many businesses are now owned in part or in full by a trust. Trusts bring greater complexity to family business governance, because trustees must balance their role as shareholder with their obligations to the beneficiaries of the trust. A trustee has a fiduciary duty to act for the benefit of the beneficiaries.
When a trust owns shares in a family business, the purpose of a Beneficiary Council is twofold:
To provide a forum for educating and informing trustees and beneficiaries about the business.
To promote effective communication among the trustee and beneficiaries.
The trustees, because they are shareholders, will also belong to the Owners Council. However, there is substantial benefit to educating the beneficiaries about the business and helping to manage trustee and beneficiary expectations about employment, distributions, and other aspects of the business.
Furthermore, because a trustee becomes privy to substantial amounts of private and confidential information about beneficiaries (for example, about beneficiaries’ income level or personal health issues)—which is important for trust decision-making, but not relevant to business decision-making—conducting trust-level discussions in a forum separate from the Owners Council can help ensure confidentiality. This is why a Beneficiary Council can be such a helpful forum.
WHEN CREATING A BENEFICIARY COUNCIL, CONSIDER THE FOLLOWING:
How often will we want to meet, so that all parties can remain informed?
What are the provisions of the trust document? Does it constrain the actions of the trustees or beneficiaries in any way, such as prohibiting the sale of the shares or restricting distributions?
What is the best way to determine the interests, desires, and needs of the beneficiaries?
Trusts can be exceptionally useful tools in fostering ownership of a family business over generations, and they can be tailored to very specific needs and goals. However, families (and their advisors) often think their work is done once the trust has been drafted and funded. Don’t forget that trusts exist over generations, and the success of a trust over time depends on effective communication among all the participants on a regular basis. There is no single “best fit” form for a Beneficiary Council to take. Each should be built to reflect the family’s Shared Purpose, the particular needs and goals of the beneficiaries, and the provisions of the trust document.
IN SUMMARY
Establishing forums within your family enterprise can greatly improve the communication and decision-making among the groups in your business—owners, family, Board, and management. Forums are critical to the success of family business governance as the family and the business grow and become more complex. Forums create the opportunity for each group to develop consensus on critical topics and speak with one voice to other forums. You can design your forums to suit the specific circumstances, interests, and needs of your family and your business.