Family Business Governance for a Company Your Size

Family business governance is how a family company decides where each decision gets made and who makes it. Some decisions belong to the family, some to the owners, and some to the business. Governance gives each kind a home.

Much of what ranks on the topic comes from Harvard, the big law firms, and the private banks. They write for multi-generation families with family offices, constitutions, and five-to-eight-person boards with an outside majority. That advice is sound for its scale. For a 40-person company with two generations in the building, it's overbuilt, so many owners read it and skip governance altogether.

This article sizes family business governance for the company you run: three circles, three forums, and a path for adding structure as the company and the family grow.

Doesn't governance sound like bureaucracy?

It does: a binder of bylaws, a board that approves what the owner already decided, a calendar of meetings nobody wants. When the owner can walk the floor and see everyone by lunch, that looks like overhead with no payoff.

Grant all of that. Decisions still get made: in the hallway, at Sunday dinner, in the car on the way back from a customer, or in the leadership meeting while a non-family VP sits through a conversation about a cousin's job. Informal governance is still governance. It has no calendar, no record, and no agreed rule about who gets a say.

Its cost lands in two places. One is conflict - a sibling who learns about a capital decision after the fact, a spouse who feels shut out, a next-generation leader who can't tell whether a call is hers to make. The other is stalled decisions. The building purchase stays "under discussion" for two years; the dividend policy waits for a Thanksgiving where nobody raises it. Quiet...until it isn't.

Much recurring conflict in family companies traces to a decision with no home, as the Family Business Conflict Resolution article argues. Governance is the work of giving it one.

Every decision belongs to one of three circles

Every family company sits where three systems overlap: family, ownership, and business. Renato Tagiuri and John Davis drew this as the three-circle model at Harvard Business School starting in 1978. It's still one of the most useful maps of why family companies are harder to run than other companies.

Each circle produces its own decisions:

• Family decisions. Who in the family can work in the business, and on what terms. How the family talks about the company at home. What it expects of the next generation.
• Ownership decisions. How much profit to distribute and how much to reinvest. Whether to take on debt or buy the building. Who can own shares, and how shares move between generations.
• Business decisions. Pricing, hiring, which customers to chase, which leaders to promote.

Trouble starts when a decision gets made in the wrong circle. Let a dividend debate leak into the leadership meeting, and non-family managers end up in the middle of an ownership question. Decide a nephew's hiring at the dinner table, and you skip the people who will manage him. Hold a pricing call until the next family gathering, and the market moves without you.

The circles also explain why one person can feel pulled three ways. A daughter who works in the business, owns part of it, and belongs to the family holds three roles at once, and governance helps her see which hat a conversation calls for.

A 40-person family company needs three forums and some outside voices

At this size, you need one forum per circle, plus outside perspective. None of it requires a lawyer.

The leadership meeting already exists in many Second Stage companies. It belongs to the business, includes the non-family leaders, and runs operations and strategy. The governance move here is subtraction: family topics come out. Once a non-family VP stops sitting through talk about whether a cousin deserves a raise, the meeting gets faster and the VP can trust that decisions turn on merit.

A 75-year-old retail company I work with started meeting as a leadership team, and that let it separate business discussions from family ones. Part of what made it work: I led the business meetings and kept driving the agenda back to business issues.

The owners' meeting belongs to the ownership circle. It runs on a calendar (two to four times a year suits many companies this size) with a written agenda: results, distributions, capital needs, debt, the buy-sell agreement, and ownership succession. With a single owner, it can be the owner sitting down with the CFO and an outside advisor to make ownership calls deliberately instead of by default. With several family owners, it's where they all get the same information at the same time.

The family meeting belongs to the family circle. It gives family topics a better home than the dinner table and keeps them out of the leadership meeting. Typical agenda items: the employment policy, expectations for the next generation, and what non-working relatives want to know. The family employment policy is a governance document, and this meeting is usually where it gets written and revisited.

An outside advisor or an advisory board brings outside judgment before you commit to a fiduciary board. At the smaller end of this range, many family companies start with a single advisor who works with the owners and the leadership team (that's the role I play for many of my clients). As the company grows toward the larger end, they step up to an advisory board: three or so outside people, meeting quarterly, asking the questions nobody inside will ask. A fiduciary board carries legal authority and legal duties; an advisor or advisory board carries neither. Either one costs less, can be reshaped or dissolved, and teaches owners to be challenged in a room before that room has a vote.

A 100-year-old transportation company I worked with formed an advisory board. It brought outside perspective about the market, gave a stronger push to make "30-degree change" decisions, and gave a leader among the third-generation siblings in the business a forum to contribute more.

How does family business governance grow with the company and the family?

Governance should fit the company you have today and leave room to expand, and it tends to move through recognizable eras.

During start-up, governance lives in the founder's head. All three circles meet at one kitchen table, and that works because one person owns the company, runs it, and leads the family.

In a Second Stage company, the circles start to separate. A second generation enters the business, non-family leaders join the leadership team, and ownership may begin to move through gifting or a buy-in. This is the era for the three forums above and outside perspective: an advisor first, then an advisory board. (What Is a Second Stage Company? describes the era in more detail.)

As ownership spreads across siblings or branches, the owners' meeting formalizes and a fiduciary board starts to make sense, often with independent directors. Family meetings may give way to a family council, a smaller group that speaks for a larger family. Owners outside the business need information and a voice without a seat in operations.

In a multi-generation family enterprise, you reach the governance structures for family enterprises that the large firms write about: family assembly, council, outside-majority board, sometimes a family office.

Where does a family constitution fit? Late. It's a written statement of the family's values, policies, and rules for its relationship with the business, and many companies at the 40-person size can grow into one later rather than start with it. Your family meeting and employment policy serve as its working drafts.

Order matters more than speed. Put a fiduciary board in place before the owners have learned to meet on a calendar, and it tends to rubber-stamp. Write a constitution before the family has held three honest meetings, and it tends to sit unread.

Governance puts the right judgment in front of the right decision

Inside any family company, the judgment a decision needs often exists somewhere: in a non-family CFO, a next-generation leader, an outside advisor, a relative who doesn't work in the business. Whether that person is in the room when the call gets made is a governance question.

The Judgment Application Framework calls the failure misplacement: someone has the judgment a decision needs, inside the company or outside it, but isn't part of the decision. Family companies are prone to it. The CFO who understands debt capacity misses the conversation about buying the building, because that's "an owner thing." The daughter who runs operations doesn't own shares yet, so her read on capacity never reaches the owners weighing an expansion.

Each forum settles who attends, what reaches the agenda, and what information arrives ahead of time. Get those right, and judgment reaches the decisions that need it more often.

Where should a family company start?

Four steps carry many companies a long way, no binder or retreat required.

1. Sort last year's major decisions by circle. Mark each one family, ownership, or business. Then mark where it got made. The mismatches show you where the work is.
2. Put the owners' meeting on the calendar. Pick dates for the next year and send each agenda a week ahead. A calendar does more than any document.
3. Write the family employment policy. Many families need this governance document first, and writing it forces the family meeting to happen.
4. Bring in outside perspective. Start with a single advisor, or a small advisory board if you're on the larger side. Seats and formality can come later. (A family business advisor can help design the forums and lead the first few meetings.)

Succession sits on top of all this: governance is the underrated piece of succession readiness, as Family Business Succession Planning argues. For the wider view, the Family Business Strategy article looks at the handful of variables that decide outcomes where family, ownership, and business overlap.

Frequently asked questions

What is family business governance?

Family business governance is how a family company decides where each decision gets made and who makes it. It gives family, ownership, and business decisions each their own forum, with agreed rules about who attends and who decides.

Does family business governance require a board of directors?

No. At 20 to 100 employees, many family companies start with a single outside advisor and step up to an advisory board as they grow. Both bring outside perspective without legal duties or liability. A fiduciary board tends to make sense once ownership spreads across several family members, especially owners who don't work in the business.

Does family business governance need a family council?

Not at first. A family council is a representative group that handles family policy and communication with the business. Smaller families can usually start with a regular family meeting that includes everyone. A council earns its place once the family grows too large for an in-depth conversation in one room.

How is family governance different from family business governance?

The narrower term, family governance, covers the family circle. At this size, a family governance structure usually means a family meeting or council, the employment policy, and eventually a family constitution. The broader term, family business governance, adds the owners' forum and the board or advisory board.

When should family business governance start?

Before you need it. Good moments are when the second generation enters the business or the first non-family leader joins the leadership team. That's when the circles start to separate, and setting up forums is easier before a disagreement than during one.

Governance at this size is a calendar and a few written answers

At your size, governance means an owners' meeting with dates on the calendar, a family meeting that keeps family topics out of the leadership meeting, a written employment policy, and an outside advisor or advisory board to ask the hard questions. That's modest, and it can keep many decisions from landing in the wrong room while giving you a base to build on.