What Is Family Governance?

Every company has a board, a management team and shareholders. A family company has all of those plus a group of people who are related to each other, who didn't all choose to be in business together, and who will still be at the same table at the next wedding. Family governance is the system a family builds to handle that second layer: who speaks for the family, what the family expects from the business, and how it settles disagreements before they reach the boardroom.

This article defines family governance, separates it from corporate governance, and lays out the layers most families use, from the assembly at the top to the family office at the edge. It then shows how the system changes as ownership moves from a founder to siblings to cousins, sets out the IFC framework, and ends with the ways governance goes wrong.

What Family Governance Means

Family governance is the framework of rules, bodies and processes that define family members' roles and responsibilities and govern how the family interacts with its business. The UK's Institute for Family Business, in its practical guide Building Family Governance, describes it as one of two facets of governance that successful owners learn to manage. The other is corporate governance, which covers the direction of the business's operations and strategy.

Three things are worth holding onto from that definition.

• It's about relationships and rights, not just decisions. Who may work in the company, who may own shares and how those shares can be sold are family questions long before they're legal ones.
• It's about communication. The IFC Family Business Governance Handbook lists keeping family members informed, especially those outside the business, and giving them formal channels for their ideas and concerns among the main aims of a family governance structure.
• It's about trust. The same handbook says a well-functioning structure builds trust, especially between family members inside and outside the business, and that this raises the business's chances of surviving.

If you haven't mapped who sits where in your own family and company, start with the three-circle model of family business. Governance is largely the work of giving each circle a place to make decisions.

Family Governance vs Corporate Governance

The two are often mixed up, and mixing them is how family arguments end up in board minutes.

The IFC handbook quotes IFC's own definition of corporate governance as the structures and processes for the direction and control of companies, covering the relationships among management, the board, controlling shareholders, minority shareholders and other stakeholders. Corporate governance answers: who sets strategy, who oversees management, and how do owners, directors and executives relate?

Family governance answers a different set of questions.

The institute's guide states the goal plainly: separating family and business decision-making. It also admits this is complicated because individuals often hold dual roles in family firms, and that it isn't possible, or desirable, to eliminate every personal interest. Governance procedures make conflicts easier to spot and handle with reasonable objectivity.

Key Facts: Family Governance

• The IFC handbook's family governance section names two major constituents of a family governance structure: a family constitution and family institutions such as the assembly, council and committees (IFC).
• The IFC handbook says most family companies don't have a formal constitution, though they usually have informal rules and customs, and that a written one becomes crucial as the family grows (IFC).
• John Davis names three components of family governance: periodic assemblies, council meetings and a family constitution (Davis, 2001).
• A family assembly typically meets annually, lasts one to two days and includes all adult family members, in-laws included (Davis).
• Davis suggests a family with fifteen or fewer adults may be able to make plans and policies in the assembly itself, and that larger families generally benefit from a council (Davis).
• The IFC handbook describes three ownership and management stages: controlling owner, sibling partnership and cousin confederation. It says the cousin stage involves most family governance issues (IFC).

The Layers of a Family Governance System

Families don't adopt governance as one package. They build layers, usually in an order driven by pain. The Institute for Family Business guide lists the components: a family constitution, shareholder agreements, a family assembly, a family council, council committees and a family office. Here's how they fit together, with each one covered in its own article.

The row on frequency is general practice, not a rule. Each family sets its own.

The assembly is the widest circle. According to the IFB guide, it's especially valuable in larger family businesses, helping manage the diversity of interests and demands. Davis describes assembly activities as learning about the business, discussing (not deciding) direction and getting updates on changes in the family and in ownership. The full picture is in the family assembly.

The council is the working body. In the IFB's description, it's a group of representatives normally chosen or elected, giving the family a decision-making forum for developing vision, values and policy, and acting as the conduit between the family and the board. See the family council.

The constitution is where the family writes it down. The IFC handbook says it covers vision and values, the family institutions, the board, senior management, the relationships among them and policies on issues such as employment, share transfers and CEO succession, and that it's a living document. It binds morally rather than legally, a point the article on the family constitution explores.

Policies and agreements turn principles into rules. A family employment policy says who can work in the company and on what terms. A family shareholder agreement is the legal contract that often codifies parts of the constitution, such as which decisions owners can make instead of the board, and rules on share transfers and valuation.

The board belongs to the business circle, not the family circle. A family business board with independent directors is the main counterweight to family influence on company decisions. The council feeds it; it doesn't replace it.

The family office sits at the edge. It provides wealth management services to the family, acting as an investment, liquidity management and administrative resource, according to the IFB guide. The family office matters once a family holds significant wealth outside the operating company.

One note of restraint from Davis. He writes that the rare family may need a more elaborate structure, with separate meetings for family owner-managers or a separate council for family shareholders, but that he prefers the simplest structure that does the job, and that assembly, council and constitution are all most families in business need. A family of eight doesn't need what a family of eighty does.

How Governance Changes by Stage

Governance that fits a founder doesn't fit cousins. The IFC handbook, drawing on Gersick, Davis, McCollom Hampton and Lansberg's Generation to Generation (Harvard Business School Press, 1997), describes three stages in the evolution of ownership and management. The family business lifecycle article in this collection covers them in depth. Here's what each demands of governance.

Three points follow.

Founders need less structure, but not none. The IFC handbook says the first stage has limited governance issues because control and ownership are with the same people, and that the most important one is succession planning. The institute's guide adds that it makes sense to organize governance early, while the family is small and relations are usually harmonious and big issues like succession are distant.

Siblings should write things down. The handbook says that once the business reaches the sibling stage, families should formalize employment policies. Informal understandings that worked between parents and children tend to strain between brothers and sisters, as the IFB guide notes: what works for a founder and nuclear family is less likely to serve a group of second-generation siblings.

Cousins need the full system. In the handbook's words, conflicts that existed among siblings are likely to be carried into the cousin generation, and the stage involves most family governance issues. This is also where the family often can't all meet in one room, so a representative council becomes necessary.

A real example of a late-stage system is Clarks, the UK shoemaker. The IFB guide reports that in 1993 the sixth-generation company came close to being sold because family shareholders' perceptions and aspirations had drifted from management's. Afterwards the family built a family shareholder council and strengthened the board. By the guide's account, the council represents virtually all of the 350 family shareholders, who together own around 80% of Clarks, has 16 members elected for four-year terms, meets four times a year with the chairman, CEO and finance director presenting, and can nominate two family non-executive directors. The guide also notes that the family reviewed its governance code and constitution repeatedly, treating the work as never complete.

The IFC Framework

The IFC handbook is a free practical reference published by IFC, a member of the World Bank Group. The fourth edition lists a 2018 copyright and was originally produced in 2008. It was written for IFC staff working with family business clients, and the foreword says it's meant as a concise, practical guide rather than a comprehensive reference.

It has five sections: family member roles, family governance, the board, senior management, and going public. The handbook starts from the fact that family members hold multiple roles, as shareholders, directors, managers and family members, and that each role comes with different motivations. It then builds a governance system for the family (section 2), then for the board (section 3) and management (section 4). Its conclusion says responsibility for corporate governance in a family business is generally shared among the owners, the board and senior management, but that family members carry more responsibility for ensuring the business is governed in a way that makes it viable in the long term, and for governing the family itself.

The handbook's practical contribution is the two-part family governance model: a family constitution (the written statement) plus family institutions (the assembly, council and committees that operate it). Everything else, such as employment policy, dividend policy and share transfer rules, hangs off those two.

Where Family Governance Fails

Governance rarely fails because a family had no structures. It fails in more ordinary ways.

• Informality that outlasts its usefulness. The IFC handbook notes most family companies run on informal rules and customs, and says a written constitution becomes crucial as the family grows. The trouble starts when a sibling-stage or cousin-stage family still relies on understandings only the founder remembered.
• Overbuilding. A family that adopts an assembly, council, three committees and a 40-page constitution before it has real issues to resolve creates meetings without purpose. Davis's advice to prefer the simplest structure that works is a warning about this.
• A council that acts like a board. The IFC and IFB both place the council as a bridge between family and board, not a replacement. When the council directs management, the board stops functioning. Our article on the family council covers this boundary.
• Documents without process. A constitution that was drafted by two advisors and handed to the family is a file, not a governance system. The constitution article argues the process of agreeing it matters more than the text.
• Fairness of process ignored. The IFB guide frames governance as applied fair process: family members rarely all agree an outcome is fair, but if they believe the process was fair they can usually accept a decision they disagree with.
• Concentrated control with no counterweight. The guide flags ownership concentration and chair-CEO duality as features of family firms that can threaten board oversight if not managed well.

Where to Start

For a family in a Southeast Asian owner-managed company, where several relatives often hold roles and ownership is still tightly held, a sensible sequence looks like this:

1. Map the roles. List every family member connected to the company and what each holds: shares, a job, both or neither.
2. Hold a family meeting. Begin with a simple annual gathering. Share how the business is doing and ask what each person expects from it.
3. Write the first policy that hurts most. For many families that's employment of relatives or share transfers.
4. Add the council when the family outgrows one room. Davis's fifteen-adult marker is a rule of thumb, not a law.
5. Draft the constitution after you've practiced. A document that records habits the family already follows holds up better than one that invents them, and the IFC calls it a living document to be updated regularly.

Related Reading

• Family council
• Family assembly
• Family constitution
• Family business board
• Family employment policy
• Family shareholder agreement
• Family office
• The three-circle model of family business
• What is a family business?
• Sibling partnerships in family businesses