Why set up family governance?

Family wealth often has it foundations in entrepreneurial success, and this puts the maintenance of a successful business at the heart of a family’s estate. A thriving company is different from other assets. Steps have to be taken to ensure it continues to prosper and that its assets are managed well, as well as family ownership structures needing to be well defined. 

"When personal considerations come into contact with the corporate and professional sphere, when the family comes to play a role in company management, it is essential to put in place well designed governance rules", said Pierre Le Pahun, Senior Estate Planner at Degroof Petercam Luxembourg.

Adopting a sustainable approach

As the main shareholder and/or decision-maker in the company, it is the family's responsibility to ensure the sustainability of the structure and its business activity. Some family members may be called upon to play an active role in operational management. Others may not be willing or able to contribute in this way, perhaps preferring to play a more passive shareholder. "The first objective when creating family corporate governance structures is to ensure that the interests of all parties involved are aligned long term," said Mr Le Pahun.

This can often be a relatively straightforward process of inheritance from the founder to the second generation. Matters can become more complex over time as the number of parties involved increases. When fifth or sixth generations are involved there can be several dozen shareholders, with their expectations and interests often varying considerably depending on their personal situations and outlooks.

Asking the right questions

“A key challenge is to ensure that all relevant questions and potential issues are raised. Challenges can be technical in nature, or relate of a range of personal preferences such as the role of the family and individuals in the company, business vision, share liquidity, dividend policy, valuation, effective management, weighting of decision making, remuneration, preservation of the common interest and more," said Mr Le Pahun. These are just the kind of questions this private banking specialist raises when advising families who want to implement governance structures. 

“It is a relatively long process, often lasting from 6 to 24 months,” he said. “Most often we start with a blank page, allowing all interested parties the opportunity to set out their expectations and objectives. This requires several sessions working together and individually on strategic topics. With this framework in place, thoughts can then turn to creating governance structures that will ultimately satisfy everyone.”

Set rules, but ensure necessary flexibility.

Most often, the family will want to keep control of the company, while potentially also opening share ownership or management to others. Well-designed governance rules take these considerations into account, applying appropriate limits. "Often the company is the most important asset in the estate if it is the source of the family's wealth. Steps must be taken to ensure its continuity", comments Mr Le Pahun. 

Supervision and control

On the operational level, elements can be considered to enable one or more family members to play an active role in business management.

Family business governance goes far beyond simple questions around succession planning: the legal transmission of capital. For example, governance might also ensure the company's control and management bodies feature representatives of the family, with appropriate rules related to appointments and renewal. "Governance is about establishing a certain number of rules to ensure the effective management and supervision of the company. Questions include how managers are appointed, how all branches of a family are represented, how the continuity of the business could be ensured in different circumstances, how future generations can be gradually involved in management, and who has access to information and in what way," Mr Le Pahun added.

By considering these governance questions at an early stage this helps avoid or defuse possible future disputes that could negatively affect how the company is run.

Articles of association, shareholders' agreements, family charters, etc.

Once all interested parties have agreed to the governance principles after the initial phase of reflection, these must be set down on paper through company articles of association, a shareholders' agreement, and a family charter, along with advice received from within and outside the company. These rules or guidelines can be more or less restrictive depending on their nature. "Establishing a family charter enables long-term vision and values to be set, which helps to give a degree of unity reflected in the day-to-day workings of the family and the company,” said Mr Pahun. 

“This can also lead in the creation of joint projects, including philanthropic ventures carried out by the family or through the company. In this way the values of the company and the family can be aligned, helping to stimulate the interest of family members, even those who feel somewhat distant from the company. This compares to articles of association or shareholders' agreements which most often feature restrictive legal provisions.”

Although governance rules are generally fixed for the long term, they can be adapted in response to major changes. The rules for changing governance frameworks must be determined in advance, such as requring a qualified majority of family members.

Questions about your company and its family governance? Contact Pierre Le Pahun, Senior Estate Planner: p.lepahun@degroofpetercam.lu