Quantifying the value of a family governance system

We were recently invited by a family to make a presentation and submit a proposal to undertake a family governance project. As usual practice, the Family Enterprise Consulting team highlighted the advantages of governance in regards to the family and the business and the impact this would have on their relationships, and collective wealth.

Once we submitted proposal, we presumed that it had been well received by the Patriarch and his family, and we awaited their invitation to prepare a letter of engagement, until we received the call that we receive on occasion“… the family has decided to put a hold on the family governance project, as they have more pressing concerns to focus on at this point in time.”

My heart sinks. I wonder what could be more important than trying to maintain a unified family and an effectively run family business or family office. It is not that the family has chosen to assume the project with another advisor or firm, but they have chosen that a family governance undertaking altogether is not a priority at this point in time.

Whilst it is clear that effective family governance has a key role to play in the future success of the business and unity of the family, it is not something that can be assigned an immediate monetary value, and the bottom line for many entrepreneurial families is that often there is no clear ROI after the implementation of the family governance.

Of course this is not to say that there are no financial benefits, as these are implicit in the sustainability and continued success of the business. As such, it is important to differentiate between the direct and indirect benefits for both the business and family.

It is also beneficial to recognize that as well as financial capital, family businesses possess human, social and intellectual capital which are just as important as financial capital to a family’s success in the long term.

The foundations of a family governance system

Key components addressed as part of family governance process include:

• Ensuring that the needs of all family members are addressed collectively
• Ensuring all family members and shareholders understand their roles and decision making authority within the governance framework
• Emphasizing the importance of collegiality within the family business framework
• Developing and educating the next generation
• Ensuring an effective ownership and leadership succession plan
• Defining the family identity and values which provide a renewed sense of purpose to the family vision
• Creating channels of communication to collect and share information
• Institutionalizing the business, in part to create less dependence on the individuals running the business
• Maintaining an equilibrium in balancing the needs of the family and the business

Building the family governance framework:

Based on the above, an effective family governance model will provide policies and processes to address the following:

• Decision making
• Communication
• Conflict management / resolution
• Succession planning and leadership development
• Continuity planning
• Transition planning
• Accountability mechanisms
• Ownership and stewardship development
• Next generation development

Therefore, a family governance system is a key aspect of devising a 360 degree plan for ensuring the security and sustainability of wealth within the family business and ensuring harmony among the family for generations to come.

An effective governance system is instrumental in equipping a family in navigating the challenges of the family, the business, ownership and legacy continuity, and as such while the immediate financial ROI may not be apparent, the benefits and value of an effective family governance undertaking are immeasurable.

On a final note, these benefits are not only applicable to western families, that is the beauty of building a bespoke family governance framework, where such a framework is tailored to suit the specific needs of the given family. In essence, an effective family governance framework is vital for a family business.

The views and opinions expressed herein do not represent nor reflect those of Deloitte & Touche (M.E.) LLP (DME). Opinions, conclusions and other information in this blog post which have not been delivered by way of the business of Deloitte & Touche (M.E.) LLP (DME) are neither given nor endorsed by it.