The benefits of having effective governance within your family business

Award-winning legal firm, Cartmell Shepherd Solicitors consider the principles of good governance in family firms and why it pays to find the best structure for you.

“Family businesses are different from corporate companies and from one another. Therefore, it’s important to find the right governance structure for the specific circumstances of your family business”, says Sam Lyon – Head of Corporate and Commercial at Cartmell Shepherd Solicitors.

“Family businesses need family governance as well as corporate governance” adds Sam. “Any particular family considerations or areas of vulnerability or sensitivity need to be thought about too. These are my underlying principles when it comes to effective governance for family businesses.”

There are many benefits to having effective governance in place, but it is an area that can often be overlooked or left outdated, particularly in multi-generational family businesses. Essentially effective governance requires parallel family and business thinking in order to safeguard and encourage the development of the business, whilst at the same upholding the family values and harmonious family involvement.

Some of the key benefits of achieving good family business governance include:

  • Ensuring that the business operates according to the family’s values and long-term goals
  • Creating an environment that supports family participation and fairness, and addresses any family conflict
  • Having a structure to nurture any next-generation family members entering the business
  • The ability to manage income expectations of family members
  • Understanding the business’ management needs to avoid danger of a “family vacuum” ie. having the right balance of external skills and experience through NED’s.
  • Clarity over the role or influence of family members not working in the business to avoid feelings of exclusion or meddling
  • Supporting smooth generational successions or transitions in ownership
  • Supporting positive relationships between family members and non-family members

Sam comments, “We tend to see family businesses in the early stages starting off with very simple governance structures where few people are assigned to lots of roles.  As family businesses grow, then comes the need to split out roles such as CEO and Chair to create that good governance.”

He adds, “In larger multi-generational family businesses, having a Board of Directors which includes senior management, family members and independent NED’s working alongside a parallel Family Board or Council often works well”.

It is particularly important to consider the governance structure in place when approaching transitional periods in the family business lifecycle, such as senior appointments or retirements.

Cartmell Shepherd Solicitors are often called upon at these times to capture the governance arrangements through legal documentation, such as Shareholders’ Agreements, Articles of Association, Partnership Agreements, Directors Service Agreements and Employment Contracts, Board Terms of Reference and Delegated Authorities, the setting up of Family Councils, Family Charters and Holding Companies.   

Sam adds, “It’s always advisable to implement the correct legal documentation from the outset to avoid difficulties down the line.  We are sometimes asked to help remedy circumstances where that hasn’t happened, for example where non-family senior employees are appointed and gifted shares, but then leave the company.

“If not correctly documented at the outset, there can be no obligation for the outgoing employee to sell or give back the shares, which can lead to costly commercial negotiation to buy them back, often at inflated prices. Correct shareholders’ agreements, articles of association, employment contracts and option agreements can prevent this.”

Should you require any legal advice or an assessment of your family business governance structures, you can get in touch with Sam directly via sam.lyon@cartmells.co.uk or telephone 01228 516634.

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