Some difficulties take us by surprise, but many issues can be considered in advance, and with time and patience, the chances of reaching a conclusion that suits everyone concerned is much more likely.
A family charter is a statement of intent or agreement entered into by family members in relation to their family business. More important than the physical piece of paper documenting the charter is the journey a family will take to arrive at it. Embarking on the process with an open mind and a determined willingness to listen to and take on board the views of others is essential to getting the most out of the process. However, such attributes do not always feature in the characters of self-made successful business owners.
As new generations emerge, there can be a large increase in the number of family members with a direct or indirect involvement in the business. Suppose two brothers found a family business, each has three children and each of their children has three children. By the time the members of the third generation have become adults, there will be a total of 26 family members who may have some sort of connection with the business. This can bring with it a number of different questions, problems and complexities.
Many families act as a steward and guardian of the family business, maintaining it so that they can pass it on to the next generation. They believe the family should bring value to the business and vice versa.
Maintaining staff morale is key to any business, and when employees include family and non-family members there is an additional dynamic to manage. Many believe it is important to run their family business as a true meritocracy, where responsibility and contribution are valued and rewarded, regardless of family membership.
Succession planning starts with educating all of the family about the business. Without such knowledge and pride in the business, there is little hope of passing the ownership successfully down the generations.
This can be achieved by setting entry qualifications for any family member who wishes to join the business. This might be a combination of formal qualifications, a certain number of years’ relevant experience gained working elsewhere and general life experience perhaps through charitable work or travel.
Governance
As a family grows it becomes increasingly likely that some members will want to pursue their careers elsewhere. This can give rise to resentment between those who work in the business and those who work outside it, particularly if they all benefit equally from dividend payments. A family council can play an important role in the governance structure of a family business. In particular, it can:
• Help to build family unity by bringing together different generations and branches of a family, and those who work in the business and those who do not;
• Provide a forum for debating answers to questions that family members might be asked to address as part of drawing up a strategic plan for the business or the family charter.
Financial reward is a notoriously difficult area to address, not least because historically significant profits may have been divided between relatively few shareholders providing them with higher remuneration than they would have received if they were employed elsewhere. Of course, those individuals are the ones who took all the risk early on and deserved the fruits of their hard work. Newcomers to a family business may have unrealistic expectations based on preconceived ideas. What is important is that family employees receive no more than the market rate for the job they do. Family and non-family employees alike should be subject to the same appraisal or performance review processes.
Shares tend to start out in the ownership of a relatively small number of individuals, but over time the ownership becomes spread among more people and often passes into trusts.
Key non-family employees may also have been incentivised by receiving small numbers of shares. This can cause issues following their death or retirement. Carefully thought through articles for the company can solve many issues surrounding share ownership. In particular, these could provide for a buy-back of shares in certain circumstances. The articles could also permit certain transfers of shares, for example, to defined relatives or to family trusts for the same restricted class of family beneficiaries.
One issue guaranteed to lead to a lively debate is how to deal with in-laws. If this discussion can take place before there are any specific objections to particular people, then it is likely to run much more smoothly.
Trusts can provide an efficient way of benefitting a large number of people, but restricting control and decision making to a smaller number of trustees. The key to making trusts work usually lies in trustee selection.
Disgruntled minor shareholders can cause a high level of nuisance. Using a trust as a vehicle to pass benefits on to people without giving them the rights of a direct shareholder can eliminate a lot of difficulties.
Without clear communication, expectations of dividend payments can be unrealistic. The dividend policy of a company must be linked to its trading performance rather than to the expectations of its shareholders. Also relevant to distribution decisions are the wider issues of the business’ long-term strategy and the necessity of building up reserves to invest in the business or to provide a degree of protection to the level of family dividends in the event of less profitable years in the future.
Communication between the company and the family, often through the family council, can ensure expectations are managed. Where there are relatively few family members and the business is still young, it may be possible for the family to draw up a charter itself. Where the family is larger and has formed a family council, it is often this body that is responsible for putting together a charter.
Independence
There can, however, be problems if a family attempts to draw up a charter without help from an independent third party. For example:
• There may be a dominant family member who tries to impose his views on the others. This can stifle a proper debate and result in a charter that does not represent a genuine consensus.
• There may be a number of hidden emotional issues or agendas among some family members that need to be brought to the surface.
An independent person who understands family group dynamics and is an experienced facilitator should be able to help in these circumstances. This individual could be an external family business consultant or there may be a suitable candidate for this role from within the family’s or company’s existing advisers.
Families need to recognise that drawing up a charter can sometimes force family members to confront issues they find difficult, particularly where succession is concerned. However, many families have described the process as invaluable in making sure the family is unified in its approach to the business and the company is being driven in the right direction.
A family charter can bring major benefits both to the family and to their business. At its best, the process leading to the charter can facilitate the success and the succession of the business for the benefit of the next generations of the family. Often, giving thought to and encouraging debate about foreseeable difficulties can prevent them from arising in the first place.
Frances Davies is partner and head of private client at law firm Gordons LLP
FAMILY CHARTERS
Family charters are not normally legally binding. Typically they will set out:
• How the family wishes the business to be run
• The family’s goals and long-term strategy for the business
• How different members of the family will interact with the business.
Key points
■ Problems can arise in family businesses and considering them from the outset can help to prevent them.
■ Financial reward is a notoriously difficult area to address from a family business perspective.
■ Communication between the company and the family, often through the family council, can ensure expectations are managed.
■ A well drawn up family charter can help to reduce conflict and aid the future success of a family business for generations to come.
