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.
As we saw in the previous article, the family council plays a pivotal role in corporate governance by keeping family matters from interfering in business decisions.
While the spotlight there was on the “shoulds,” this piece will focus on the “should-nots.”
Ownership and business decisions are beyond its scope: The former fall under the purview of the shareholders’ meeting, while the latter rest with the board of directors or leadership team.
This distinction is more than a formality: It keeps the family council from becoming a parallel body vying for decisions that are not its to make.
Family, ownership and business: Three distinct bodies
Many business families confuse the family council with the shareholders’ meeting. The confusion is common in small, first-generation owner families, where the same people wear multiple hats.
If the two bodies were one and the same, the family council would rank above the board of directors in the company hierarchy. Not only would this structure be a design flaw, it could even run counter to corporate law, which in many jurisdictions treats the shareholders’ meeting as the supreme governing body.
It is worth remembering the “three hats” that each circle wears: The family council looks after the family, the shareholders’ meeting oversees ownership and the board of directors handles business and strategic decisions. Conflating these bodies complicates the family governance system.
Also worth noting is that the family council may include parents as well as children who are not necessarily partners or shareholders, further underscoring the need to delineate these spheres.
What does the family council do?
Some of the family council’s most common responsibilities are to:
- Develop the owner family’s vision
- Draft, update and enforce the family protocol
- Organize the annual family meeting or assembly
- Prepare next-generation family members
- Foster communication within the family
- Provide updates on critical company matters
- Decide on philanthropy, social impact and community outreach (what to do and how to do it)
- Listen to the family and understand its current needs and circumstances
- Champion and organize the family office
- Organize social gatherings, leisure activities and family trips
- Offer scholarships and funding for family members’ entrepreneurial ventures
The family council works as a team
Like the board of directors, the family council functions as a team, so it should have five to eight members: at least five for sufficient critical mass and no more than eight so everyone gets a chance to speak without meetings dragging on.
Ideally, all members should be blood relatives so they can discuss major issues and work through difficult family dynamics in private.
That said, when setting up the council or dealing with a serious conflict, it is a good idea to bring in an outside facilitator as an adviser.
As for who should sit on the council, members should generally be those who fit the profile laid out in the family protocol, with a minimum age that ensures more mature judgment and a genuine interest in contributing.
It also helps to include the main shareholders, as well as representation from two generations and different branches of the family.
Do most family councils meet expectations?
Unfortunately, the family council falls short in many family businesses. In a governance study I conducted in Chile, where respondents could choose more than one answer, the following issues were to blame:
- The council doesn’t meet often enough (44%)
- It doesn’t address the right issues (42%)
- There is a lot of discussion but no agreement (24%)
- Agreements are reached but later ignored (24%)
- Families don’t know what to address and don’t have a guide or facilitator (24%)
- There is no set meeting agenda (22%)
Taken together, these issues point to a lack of professionalization within the owner family. Addressing it is the first step toward a family council that fulfills its purpose and contributes to the company’s long-term success.
Homepage image: Carrie Allen on Unsplash