Every family enterprise is different in many ways but they all face a common challenge: how to balance the competing demands for resources – such as time and money – from different stakeholders, mainly the owners, the wider family and the enterprise itself. Like any group of individuals those involved in a family enterprise generate politics and their own agendas, but ultimately they mostly want to get on with their lives with as few distractions, or anxiety-escalating episodes, as possible.

Enterprising families seek to achieve this balance of interests by creating what we call ‘natural governance’. However, some commentary on family enterprise governance seems to start from an assumption that there is an absence of governance where there are no formal structures and policies in place. In the rush for formality, natural governance is carelessly swept aside as irrelevant rather than being respected as the source of the family’s success, which then needs to be adapted to cope with the challenges of increased complexity as the family grows and ownership and leadership of their enterprise pass down the generations.

What goes into a system of natural governance?

It could be described simply as,’the way we do things around here’ but that would not be very helpful.

Boundaries

It involves establishing boundaries. Every family naturally creates a boundary between the family and their enterprise, or between work life and family time. ‘We don’t discuss business matters during family time’ is an example of this boundary, as is ‘we don’t discuss family matters in the boardroom’. Another would be an employment policy for a family firm that says everyone will be hired on the basis of talent and family candidates will not be afforded any advantages.

Not all boundaries, however, segment a family and their enterprise into separate domains as in the above examples. A family might believe it is a good idea to import some business practices into family life and, for example, hold ‘formal’ family meetings. Many like to integrate aspects of family life into their enterprise, such as pictures of family members hanging in the boardroom to bring a semblance of familiness into the work environment. A family that prefers integration over segregation would likely prefer their employment policy to favour family members because ‘they bring more to the business’.

There are also very important boundaries that affect relationships among family members; for example how do we treat spouses in the family enterprise (are they insiders or outsiders?) and when am I meant to call you Uncle John and when is it appropriate to call you boss?

Whether a strategy of segmentation or integration – or a little bit of each – is followed, the quality and effectiveness of boundaries is affected by the way in which they are established, or negotiated. The ideal would be that the various boundaries are expressly understood and accepted by all the key individuals, but because boundary setting is often a random activity there is a good chance that this is not achieved, such that in the same family one person feels that hanging portraits in the boardroom helps create a unique family atmosphere, while another feels that this crosses a boundary and family influence should be kept out of the business domain.

A consequence of this ambiguity is that individuals frequently reshape boundaries as time goes by and ignore them in particular instances; for example, ignoring the rule that we do not discuss business over dinner, or the practice that is meant to govern the employment of family members. The process of shifting boundaries is an organic characteristic of natural governance, but throughout the family and other stakeholders are constantly striving to achieve an overall balance of interests that enables life to go on at a tolerable level of anxiety.

Structures

Family businesses and family offices are notorious (at least that is how their critics would describe them) for creating informal structures. Important discussions concerning the family enterprise often take place informally, for example during a regular monthly get-together rather than in a more formal meeting environment. Informal structures like this may be denigrated, but what is the problem with informality if it helps an enterprising family to achieve their version of success?

Norms/Values

The next feature of a natural governance system is a set of norms/values that are acknowledged by the family as a guide when assessing other people, evaluating situations and justifying their actions and which are imparted and enforced through day-to-day interactions at all levels in the family enterprise. These reflect the family’s innate beliefs and attitudes in relation to a wide variety of important matters, such as the following:

  • Wealth
  • Gender
  • Education
  • Family harmony
  • Respect for elders
  • Work
  • Entrepreneurship
  • Relationships
  • Individual expression
  • Philanthropy

These norms, of course, are connected with how the family set boundaries. For example, one family’s beliefs about philanthropy could be executed through their enterprise – integrating a family value into the enterprise – while another feels that these should be segmented and family members should fund their philanthropic ambitions from personal resources.

The boundaries, structures and norms of natural governance inter-relate with each other and generate the set of understandings, assumptions and expectations that were summed up earlier as ‘how we do things around here.’ The last element of natural governance is the roles that people perform in order to maintain the equilibrium that is the overall goal of natural governance.

This can mean some individuals having to do things – or perform roles – against their wishes so as not to rock the boat, such as attend a family event they would prefer to miss or even set aside their own career aspirations in favour of a role in the family enterprise. In reality, compromises and trade-offs are part of this process, which may occasionally lead to conflict when someone is unwilling to do what is expected of them or accept the role that maintains the overall balance of interests.

It is important to recognise that the tangible structures, legal agreements and other regulations that formally constitute a family enterprise, such as the board, often do not supplant behaviour based on natural governance. In reality, natural governance, comprising a combination of boundaries, structures, norms and roles can operate effectively as a shadow system of governance. It does not matter that this means that the governance that sustains the family enterprise is likely to be opaque to outsiders, just as long as it is clear enough to those insiders who need to know.

Although a system of natural governance will help to achieve a balancing point that creates stability, life in a family enterprise is never static. Natural governance has to adapt and change but since most successful family enterprises dislike having to deal with major change to the way we do things around here, the inclination when change is needed is to adapt the natural governance, without overhauling the main boundaries, structures, norms and roles. A tweak or incremental change keeps the natural governance intact and explains why phrases like, ‘if it ain’t broke, why fix it?’ and ‘we’ve always done it this way’ are often used in enterprising families when change is being contemplated.

Which brings us to the topic of succession planning. During this period many people cross boundaries and change their roles and the natural governance that holds the family enterprise together may have to be redesigned to cope with the greater complexity of the family and their enterprising activities. An adaptive tweak or change here and there may not be enough to keep everything moving forward and there is now a need for more formal structures like a family council and transparent polices to govern sensitive areas like who can be an owner. However, this does not mean that natural governance needs to be swept aside and replaced entirely by more formal structures and policies. In fact, that approach is very likely to fail for an obvious reason.

A family enterprise needs any plan for the future to connect with their past. Therefore, succession planning should begin by tapping into the natural system of governance that the family has already established and which has supported their success so far. The new system of governance involving more formal boundaries, structures, norms and roles needs to make sense to the family, so the best place to start is surely with how the family govern their enterprise already. This approach is far more likely to be effective than pressing a family to adopt an alien set of formal structures and policies that do not fit with how we do things around here.

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