Tag Archives: family governance

What Inhibits Change in Families?

David Lansky

Family leaders are in the business of promoting change in their families, yet change is often difficult to implement. Here are three reasons why:

The Principle of Inertia
Newton’s first law of motion states that to change direction, an object in motion requires the application of an external force. This is the concept of inertia.

Inertia: the property of matter by which it retains its state of rest or its velocity along a straight line so long as it is not acted upon by an external force.

Once set in motion in one direction, the universe doesn’t like objects to change direction. So inertia requires the application of an external force. Families are like that. Implementing new practices in a family requires the application of energy. And as we know, energy is at a premium when family members are active in their businesses, personal and family lives. I often hear people complain that introducing change in a family is difficult. Well it is. So the need to apply energy when introducing new practices is simply the natural course of events. Change takes time, energy and patience.

Fear of the Unknown
Nobody wants to step off the deep end without knowing what they will be stepping into. I worked with one family where we discussed a very important recommendation – restructuring their board of directors so that board members were there not to represent branches but to contribute to the business. The family was strongly resistant to the idea – “We have always done things this way”, one member said to me, “How do we know that your recommendation won’t make things worse for us?”

Worse than a constant battle over equal representation?

Well, as they say “Better the Devil you know than the Devil you don’t….”

Psychological Reactance
Psychological reactance occurs when a person believes that his or her choices are being restricted by others. Reactance will then cause a person to adopt or strengthen a view or attitude that is contrary to what is intended, and will increase resistance to persuasion.

Now this is very important: When people feel that they do not have a choice or that choices are limited, they are likely to react in two ways: – they push back against the change , or they spend lots of time thinking about how to remove whatever constraints they believe are being imposed.

That’s why it is so important in succession and wealth transfer planning for next generation people to feel that have had a voice in the planning process. This is the reasoning behind the principal of inclusiveness in family governance.

Should Family Council Members be Paid?

 

Amy Schuman
Amy Schuman

One family pays its Family Council President a salary comparable to that of the company President and CEO. The underlying theory is that both roles are equally important to the successful continuity of the family enterprise.

Another family has a young cousin that spends 20 hours/week on family council matters, but will not accept a salary. Her perspective is that she is not working actively in the business, but gains tremendous financial rewards from the business. She sees her participation in the Family Council as a way of ‘earning’ those financial benefits.

In another case, a family with a California-based retail business began paying Family Council members a small salary after years of intensive, unpaid work on family council activities. Instead of having a positive result, this practice led to widespread bad feelings. Family members that had worked on family council activities in the past – with no compensation – felt unfairly treated. If the current family council really cared, they reasoned, they wouldn’t accept any financial compensation for this service. Tensions in the family were heightened until the practice was discontinued.

So, once again, we are faced with a situation that has no clear ‘right’ answer. Paying a salary for Family Governance service is an individual decision, and each family will approach it differently.

It would be fascinating to hear your experiences on this matter – what is working for you?

Tensions in Family Governance

 

Amy Schuman
Amy Schuman

A large family business in the Midwest with an active – and highly effective – Family Council has been struggling recently with two nagging questions: 

  • Should the bulk of Family Council work be done by one designated leader, or should it be spread out among committees and committee chairs?
  • Should we pay Family Council leaders and committee members for their time and efforts? If so – how much pay is reasonable?

Clearly, on the first question, a ‘both/and’ approach is desired, but not always easy to accomplish. 

One strong, designated leader provides efficiency and clear accountability, but can also lead to a de-motivated and disconnected family.  Relying too much on one person for a long period of time may lead to their burnout, with no prepared successor. Others in the family may not fully develop their leadership abilities or have the pleasure of serving as leader. 

On the other hand, an active group of committee members and committee chairs provides a wider family connection and fosters family passion and commitment, but can take a lot more time to get things accomplished. It’s hard to hold a group accountable for results, and the Family Council can bog down in the face of multiple, often diverging approaches and opinions. 

This paradox – the need for both “Strong Centralized Leader and Strong Dispersed Group” – is probably very familiar to you. Although at first the two appear to be mutually exclusive, upon closer examination we can see that they actually support each other. A strong individual leader will foster strength in committees, and strong committees create conditions for strong individual leadership. 

Have you faced this common tension – and if so, what has been your experience? 

We’ll talk about Family Council compensation later this week… stay tuned.

Governance : Why is it so hard to define?

 

Amy Schuman
Amy Schuman

This week I’ll be speaking to a group of family business owners in the Milwaukee area, and the topic they chose was “Governance”.  When they requested that topic, first I felt excitement – but it was soon followed by a bit of dread.

I felt excited because governance is such an essential component in family enterprise strength and continuity. I also felt dread because, even after years of helping families reap the benefits of governance structures like Family Councils and Boards of Directors, I still find it difficult to come up with a simple, clear definition of governance.

Like most people, my mind immediately seizes upon Boards of Directors as the prime example of governance. Indeed, a web search on the term ‘governance’ quickly yielded the following:

That relatively simple (!) definition may work for public companies, but, the complexities of family enterprise can require more of a multi-faceted approach to governance.

For example, as families become larger and more complex, they also appreciate the benefits of more formal family governance, most often in the form of a Family Council.

Families that pursue their own foundations and other philanthropic efforts come to appreciate the benefits of strong governance in the form of Foundation Boards.

As families move into the cousin stage – and beyond – they seek governance structures to serve their larger, more dispersed ownership group. Often called Ownership Councils, these bodies provide a structure for balanced participation and oversight on behalf of shareholders.

Families with Family Offices also find significant benefits from the oversight and expertise of an objective governance group of some kind.

Given all this complexity – what’s a good, simple definition of family business governance? To inspire you, I will go out on a limb and offer my own working definition – as follows:

  • Family enterprise governance provides an established set of systems and structures that ensure sound and fair actions and decisions, often by a small number of well-qualified people on behalf of a larger number of stakeholders.

I know this definition has plenty of room for improvement – what’s missing? What’s your current working definition of ‘family enterprise governance’  – and how does it help you get the results you seek?