Author: Jon Martínez Echezárraga
Visiting professor at IESE Business School and a professor at ESE Business School, Universidad de los Andes in Chile, where he also leads the Center for Business Families.
Pedro is a third-generation member of a family-owned firm founded by his grandfather. He lost his job 10 months ago, and his mother, María, who owns a third of the family business, is worried.
With no job in sight and a family to support, Pedro decides to start a movie distribution business modeled on the video rental stores of the past. Backed by his mother, he presents the idea to the family firm’s board of directors.
The other two shareholders, María’s brothers, have little faith in Pedro and even less in his venture, which they consider doomed from the start.
Yet they struggle to tell their sister and nephew that they won’t invest without generating a family conflict, especially since they need María’s support for a capital increase to fund another family business project.
What’s the best way to handle this dilemma?
In this two-part series, we’ll explore how the family council can help balance these competing interests while preserving family harmony and safeguarding the business’s long-term continuity.
When governance falls short
In the realm of family business, situations like this are more common than one might think. They often arise when governance structures are incomplete.
Bringing Pedro’s proposal before the board of directors is a mistake, as it risks turning a family matter into a business decision. The board should focus on the interests of the company, not on resolving family members’ personal issues.
Addressing one family member’s problem may serve an individual interest, but it could come at the expense of the collective good, which encompasses not only the company’s profitability but also the harmony and unity of the family as a whole.
So what’s the best way to help Pedro?
Ideally, María would help her son launch his own venture, perhaps with the dividends she receives from the family business. If she can’t provide the support he needs, the family council could explore other ways to help.
This is the missing piece in the governance of a family business.
The family council keeps family matters from interfering with the board’s business decisions, which must remain professional, objective and impersonal.
At the same time, it must ensure the family adds value to the business—that it’s an asset, not a liability. That calls for a structure built for the purpose: family governance.
Within the family business’s governance framework, the family council is the executive body responsible for developing the family protocol, refining it over time and ensuring it is implemented and upheld.
Three functions of the family council
The family council has three core functions, which work best when understood as a self-reinforcing cycle:
1 – Reconcile: Foster harmony and unity within the business family by preventing conflicts and resolving them when they arise. Without this foundation of trust, the other two functions lose their effectiveness.
2 – Educate: Instill the values the family wants to preserve and prepare family members—especially the next generation—to navigate the complexities of governing a family business, while keeping them informed about the key issues that affect them.
3 – Regulate: Define how the family will conduct itself across the three overlapping spheres of the family business system. In other words, set clear rules of the game by developing a family protocol or constitution that formalizes the agreements reached through the other two functions.
Just as important as what the family council should do is what it should not do, a question we will examine in more detail in the second installment.
Homepage image: Dane Deaner on Unsplash