In the initial stage of a family business, most of the governing decisions are taken by the owner / founder. However if he or she brings in family members, and with the expansion of the business, it is required to have a very clear family business governance structure. Right governing structures at the right stage of the growth of your business is the key to solidity. Therefore, let’s find out the current stage of your business and the necessary governance structure to be implemented accordingly.
Stage 1: The Founder(s)
At this stage, the business is owned and managed by the founder(s) with a solid responsibility towards the success of their organization. They will make most of the decisions by themselves. During this stage, almost all the decisions will be taken by one person or a small group of people who are constantly in touch with each other. There might be rare incidents where they will seek advice from specialists in certain areas such as banking, finance, etc..
Even though the business is still in its infancy, it is never too early to start planning for the future of it. This is the right time to bring up a succession plan. Identifying potential leaders and grooming them over time will ease the transition of leadership in the future.
Stage 2: The Next-Gen
Also called the “sibling partnership”, this is where the board and ownership are being moved to the next generation, maybe more than one person. The new leadership will flourish during this stage as they expand the market share and come up with new ideas and products along with the individuals who have a personal interest in the growth of the business. However, as more family members are actively engaged in the management of the organization, conflicts and administration issues will, in general, become common. Favoritism and familiarity are two such common issues that may arise. During this stage, it is important to formalize the business processes, develop efficient communication strategies, and expand the succession plan. This is also the stage where the business should start looking for external resources beyond the family for the management roles of the company.
Stage 3: The Family Legacy
Family Legacy is also called the Cousin Confederation, Cousin Consortium, or Family Dynasty. At this stage, the business’s administration turns out to be progressively intricate as more people are associated with the business, directly or indirectly, including children, cousins and in-laws. Since a large number of these individuals hail from different parts of the family, they may have different thoughts on how the organization ought to be run and how the general procedure ought to be set. Also, any conflicts that existed among the family in in prior generations would in all likelihood be conveyed to the cousin generation too. As an outcome, this stage generally includes most family administration issues that have to be addressed. Hence, several policies have to be adopted during this stage. These may include,
- Family member employment
- Family shareholding rights
- Shareholding liquidity
- Dividend policy
- Family member roles in the business
- Family conflict resolution
- Family Vision and Mission
While these stages imply that business development is a linear process, not all organizations will fundamentally experience these three phases of advancement or growth. Some businesses will never develop past being an owner-managed one, while others may be eventually opened up to external parties. Further, some listed companies might also be run by a family that collectively owns a controlling stake. Therefore, depending on the nature of the business and the applicable regulatory frameworks, it is essential for a family-controlled business to adopt the right governance framework.