By Farida F. El Agamy, Attorney-at-Law, General Manager of Tharawat Family Business Forum

Anyone who is part of a family business knows how addressing important issues, or collectively taking decisions can sometimes be a difficult process. Whether it is because family members do not want to “open the can of worms” and risk long debates, or whether the opposing opinions are so clear that nobody believes that a solution can be found, the common denominator is that often business families do not have systems in place to open a positive dialogue. Understanding that this can damage the family cohesion and negatively impact the business, over the past decades, family businesses all over the world have worked on implementing structures allowing them to effectively manage their companies, take decisions as owners and govern their family relationships. The use of “Family Institutions” as a way to address these questions has greatly increased over the past years and appears to enjoy great success in many families.

The first rule when it comes to Family Institutions is that there are no rules. This characteristic greatly differentiates them from the dominant rules and best practice we find in corporate governance or the legal requirements of the ownership system – family institutions are hardly ever regulated, unified or codified. This means that each family can (and has to) decide for themselves, what set up and system works best for them. The structure will of course greatly be influenced by factors such as the:

  • age of the family business
  • number of family members
  • number of businesses that the family runs and owns
  • number of generations involved

As an example, a family with 10 family members from two generations, running a steel factory might just have one Family Institution, such as a Family Council. Whereas, a family with 80 family members, three generations, and a diversified portfolio of businesses might have various institutions, including committees, and family gatherings.

Family Institutions in the Governance System

Taking a step back, we can see that family Institutions are not just a communication tool for family members but can be an important part of the complex governance system that applies to a family business. The overall family business governance system comprises the sub-systems of corporate governance, ownership governance and family governance. Each of those sub-systems has its own rules and regulations and of course organs or institutions that are tasked with the continuous implementation and improvement of the systems.

SPECIAL FEATURE: Family Institutions - An Opportunity for the FutureIn general, the family business governance system comprises the following components:

Management of the Company
Governance rules: Corporate Governance, Codes and Handbooks
Top Institution: Board of Directors

Organisation of the Ownership
Governance rules: Shareholder Agreements
Top Institution: Shareholders Assembly

Organisation of the Family
Governance rules: Family Constitution
Top Institution: differs

Family Institutions – The Three Dimensions

There is somewhat of a “war” raging when it comes to defining family institutions. Terminology can differ according to country, to size of the family, and to the advisor working with the family. We have tried to break down the three key levels on which Family Institutions operate and to show the engagement and roles of the family members.

Dimension A: Decision Making & Cohesion

Possible Names:

  • Family Assembly
  • Family Forum
  • Family Meeting

Membership:

Meeting with all family members, both active and non-active in the business. These meetings can include in-laws or be restricted to blood relatives. Some families agree to have attendance and voting restriction on certain topics, or limit participation to family members of a certain age.

Possible functions:

  • Define the family vision and the family’s philanthropic values
  • Broadly discuss family issues and business performance
  • Social function for family networking
  • Information of the next generation
  • Election of family council and family committee members
  • Decision of important family policies (employment policy, compensation schemes, etc.)

Meeting Frequency:

Normally, Family Assemblies or Family Forums take place once a year and in large families they can coincide with Shareholder meetings.

Dimension B: Implementation & Communication


Possible Names:

  • Family Council
  • Family Executive committee
  • Family Supervisory Board

Membership:

The Family Council can be composed of family members elected or appointed by the Family Assembly, or of a certain branch or generation.

Possible functions:

  • In-depth discussion of issues facing the family business
  • Implementation of the rules and regulations in the family constitution
  • Link to the company and the business Board of Directors
  • Conflict resolution
  • Supervising philanthropic activities
  • Programs for the next generation
  • Communication with family

Meeting Frequency:

Often, Family Council type institutions meet quarterly or even more often. They can coincide with Board of Directors meetings to leverage on communication.