Family governance: rules between family and business
In family businesses the greatest danger almost never comes from the market: it comes from within. As long as a single person is in charge, the boundaries are clear. But when ownership widens to siblings, cousins, spouses and heirs, a dangerous overlap is created between three worlds that speak different languages: the family, the ownership and the business. Family governance serves precisely to keep these three levels distinct, with rules written before problems break out.
Three overlapping circles
The clearest way to read a family business is to think of three intersecting circles.
- The family, where bonds, belonging and feelings count.
- The ownership, where shares, the return on capital and shareholders’ rights count.
- The business, where competence, results and merit count.
The same person can be in all three circles (the founder who is a shareholder and director) or in only one (the heir who owns shares but does not work in the company). Conflicts arise when these roles become confused: when a business decision is taken with family logic, or when tension among relatives is discharged onto management. Family governance brings order, clarifying with which “hat” each person decides.
The family pact
The central tool is the family pact, a written agreement among the members of the owning family that establishes the rules of the game. It is not a rigid legal document like the articles of association, but a shared pact that touches on the most delicate topics:
- who can be a shareholder and under what conditions shares may pass to people outside the family;
- how one comes to work in the company: whether and under what conditions family members can be hired, with what requirements and what treatment;
- how profits are distributed between reinvestment and dividends;
- how a share is valued and transferred for those who want to leave, with predefined criteria;
- how the most important decisions are made and how disagreements are resolved.
The value of the pact lies in defining these rules with a cool head, when relationships are good, instead of improvising them in the middle of a dispute when every solution appears biased.
The bodies of family governance
Alongside the corporate bodies provided for by law — the shareholders’ meeting and the management — structured families introduce their own bodies.
The family council is the forum in which family members discuss the topics that concern them as an owning family: the long-term vision, the values, the education of the new generations, relations with the business. It does not manage the company, but gives direction and maintains cohesion.
It is also useful to draw a sharp distinction between corporate roles: whoever sits on the management body of the GmbH or the AG does so by virtue of competence, not of surname. Opening the board to independent external members brings third-party viewpoints and reduces the risk that family dynamics paralyse decisions.
Separating family and business, in practice
Some practical principles help keep the levels distinct:
- Pay for work and remunerate capital separately: those who work in the company receive a market salary for the role, not as a family member; those who own shares receive dividends in proportion to their holding. Confusing the two generates resentment.
- Clear rules of engagement for family members: requirements, path and evaluation as for anyone else, to prevent the company from becoming a safety net.
- Information transparency: shareholders, even non-operating ones, have the right to clear information on performance. Opacity fuels suspicion.
- Exit mechanisms: providing for how a shareholder can transfer their share prevents a disagreement from turning into a permanent deadlock.
Prevent rather than cure
Family governance does not eliminate disagreements — that would be illusory — but it makes them manageable, providing a shared method for facing them. The family businesses that last over time are not those without conflicts, but those that equipped themselves in good time with rules to govern them.
The best time to build this structure is when it is not yet needed: when relationships are serene and the founder is fully in control. Waiting for the first crisis means negotiating the rules when everyone reads them as a move against themselves. And it is often the same work that prepares the ground for the generational transition, making it much less traumatic.
At SIH ONE we support entrepreneurial families in building their governance: family pact, consistent articles of association, bodies and operating rules, to keep the boundary line between family and business solid.
Do you want to give clear rules to the relationship between your family and your business? Let’s build the governance together.