FAMILY BUSINESS AND STRATEGIC MANAGEMENT 13
2 Setting Up a Family
Governance Structure
The most common mistake committed by families who own business is that they focus only on
managing the business. What they don’t realize is that in order to do this successfully and professionally, it
is just as important that they learn to manage family issues, which often encroach upon the business
environment, causing confusion, disorder and, in some cases, even collapse. If the family is the entity that
will govern the business, it is very critical that they must have a governing structure just like any other
organization.
The success of a family business will depend not only on how a business is managed, but also on
how the family is governed.
It is very important that the family first learn to accept that business, ownership and family issues
should be addressed separately. Each area requires its own structure, system and plans for governance. But
since most families are familiar only with management structure, i.e., a board of directors and corporate
management, it is often the case that all three issues are addressed through the same structure, which causes
a lot of confusion and eventually leads to the disruption of harmony within the family, as well as the
ineffective and inefficient management of the business.
To avoid this, the family must set up a structure to discuss family issues separate from the structure
that takes up strictly business issues. The core components of this proposed conflict management
mechanism are a Family Institution and a written Family Statement. These evolve or vary over time as the
family business moves through the various stages.
THE FAMILY INSTITUTION
The process and mechanism for putting into practice an evolving family value system is the family
institution, which may vary over time from an informal to a highly formal body, depending on the firm’s
stage in its life cycle.
For very small business, or those that are at the infancy stage, holding informal family meetings will do.
For larger family firms, however, there is usually a need to establish two family institutions -- the more
formal Family Council, which is the decision-making body that handles major business-related issues, and
the less formal Family Assembly, which provides a venue for the rest of the family to discuss family and
business concerns.
SETTING FRAMEWORK 14
GOLDEN STAR BAKESHOP
Fely Bermudes was 35 when her husband Tony died, leaving her with four young children and scarcely
enough money to pay bills. Having been a full-time housewife throughout her married life, Fely knew she
had little chance of finding a decent job that could support her family.
At first she considered selling their two-storey house in Tondo and moving to her hometown in Bohol, but
she knew she had a better chance of earning a living in the city than in a small fishing village. Besides, she
did not want to cause her children any more grief by uprooting them from their home.
Their house was along a busy street where countless people passed every day. Fely considered opening a
small shop, but she was not sure what kind it should be. There were already a number of sari-sari stores and
carinderias in the neighborhood, along with a handful of coffee shops and a couple of mini-groceries. There
were two barbershops, four fruit stalls, two magazine stands and even several small clothes shops. But there
was only one place from which everyone bought their bread --- a small bakery that sold hard, tasteless pan
de sal and a variety of equally low-quality buns and baked goods.
Fely was an excellent baker who enjoyed whipping up fancy cakes and pastries for her children’s birthday
parties. She decided to experiment with a number of low-cost ingredients until she came up with a batch of
really tasty bread. She then promptly sold her husband’s old Toyota Corolla and had a section of their
roadside garage transformed into a small commercial space, which she simply named “ Fely’s bakery.” She
then hired a baker who basically functioned as her assistant, while she supervised all the baking and
alternated with her children in minding the small shop.
Fely’s soft, plump, delicious pan de sal, which she sold at the same price as that of the other bakery, became
an instant success. Her big, luscious pan de coco and coco buns (an original recipe) also became favorite
merienda fare among the locals. Soon even people from the neighboring towns came to sample Fely’s cheap
but delicious breads and pastries.
Fely’s eldest son Alex had just graduated from high school at the time. It was to him that Fely entrusted the
management of the bakery while she was busy running the household and finding other sources of income.
Alex was a brilliant young man who had inherited his father’s flair for business. He handled the stores
finances well, and eventually was able to save enough to extend the small store to occupy the whole length
of their garage, in order to accommodate its growing number of patrons. He also encouraged his mother to
come up with other low-cost recipes. She came up with three types of rolls (cheese, peanut butter and coco
jam) and what she called “ ube-pandan squares “ ----all were cheap and delicious, and were soon added to
their list of bestsellers.
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 15
By the time he acquired an electrical engineering degree, Alex had set aside enough money to start thinking
seriously about expansion. Eventually he opened a shop in the busier, more prosperous district of Sta. Cruz.
This new store was larger and classier, with big shelves, wide counters, large glass windows and air
conditioning. It also boasted a new name --- Golden Star Bakeshop. Big banners and posters advertised the
family’s special low-cost breads outside the shop. Again, Fely’s special pan de sal and other breads became
instant hits.
Three years later, Alex was able to open three shops --- one in Quiapo, another in San juan and a third in
Cubao. But he surprised everyone by suddenly announcing that he had been accepted as a
telecommunications engineer in a big company in Dubai, and was leaving soon. Apparently, he wanted to
save enough money to be able to set up his own business --- the bakeshops were, after all, still a family
affair. His family was devastated --- who was going to manage the bakeshops now? The responsibility fell
once again into Fely’s hands, but even though she was an outstanding baker, she was no businesswoman.
She relegated the task to her two younger children --- her eldest daughter Rowena, a mass communications
graduate, and her younger son Jessie, a political science student.
Predictably, after Alex left, things quickly fell into chaos. His brother and sister were never interested in
the business --- they had always looked to Alex to handle everything. Jessie, because he was still studying,
expected Rowena to take on most of the work, but Rowena felt overwhelmed by the huge responsibility,
and she insisted that her mother take the helm.
All three --- Fely, Rowena and Jessie --- called Alex overseas for help. Alex realized that he had made a
huge mistake by not preparing his siblings for the task of managing the bakeshops. Each of them had their
own complaints and their own requests. Finally Alex decided to call a family meeting --- he was going to
preside, online. Using PCs and webcams, the family was able to sit down together and discuss for the first
time how exactly they should run Golden Star. Eventually it was decided, by popular consent, that Alex
should still handle the major decisions for the business, but that Fely, Jessie and Rowena should have equal
responsibility for carrying out his instructions at home. These net meetings --- which eventually the
Bermudeses held at least twice a week --- thus became integral to the survival and success of their business.
SETTING FRAMEWORKS 16
Three Types of Family Institutions
The Family Meeting
The simplest and most common family institution is the Family Meeting, which is normally established
during the Controlling Owner stage of a family business. As the family matures, especially when the
business reaches the Sibling Partnership stage, these meetings become more formal and structured. If there
is resistance to this move, there is very little chance of the family remaining together. If there is no
resistance, the meetings will be relabeled as Family Assemblies.
The Family Assembly
The more formal and more organized Family Assembly can function as a temporary body for facilitating
the transition from an informal Family Meeting to a formal Family Council. The assembly could function
as an electoral board that will select the members of the Council. Otherwise, it could function as the Family
Institution for discussing relevant family and business issues. However, when the Family Assembly reaches
a certain critical mass and becomes too unwieldy to do all the work necessary to govern the family and play
a positive role in the interface between the family and the business, then the family has to create a formal
Family Council.
Note that the Family Assembly and the Family Council can coexist. Because only a select group of
family members get to participate in the Council to discuss the more relevant business-related issues and to
make major decisions, it might be necessary to establish a separate Family Assembly which could provide
a venue for the other family members to discuss issues, thresh out family conflicts and air their opinions.
This usually becomes necessary during the Cousin Consortium stage, when there are a large number of
family members involved in the business. All members of the family could attend and participate in the
Family Assembly.
The Family Council
For family issues that are business-related, most family business experts recommend the organization of
a formal Family Council. If successful, it can provide the rock of stability that will ensure the survival of
the company from one generation to the next.
A very interesting success story is that of the Ahlstrom Corporation based in Finland. Founded by Antti
Ahlstrom in 1851, it has grown to become a $3.3-billion technology-based, diversified multinational firm
serving markets in Europe, North America and Asia. Today it is still entirely owned by approximately 200
of Ahlstrom’s descendants, and although very few family members actually work in the firm, the family
continues to control the board.
The Ahlstrom family created a Family Assembly which in turn elects a five member Family Council.
This structure provides a forum for family members to discuss any business issue that is bothering them
without intervening in the official management structure. It is the Family Council members then that take
up these issues with the board of directors, if necessary.
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 17
Functions of the Family Council
The primary purpose of the Family Council is to facilitate free and open communication between family
members in a formal and organized forum. Well-designed and effective Family Councils can help a family
minimize internal or interfamily conflict and hostility.
Aside from serving as a forum, the Family Council can also serve as a vehicle for mediating conflicts
that occur within all families. Lansberg says that the Council can also be a forum for discussing issues of
continuity and succession. It can also be responsible for preserving and carrying on the family legacy and
instilling a sense of stewardship in the younger generation. He suggests that the Council be used to
undertake the following activities:
Articulating family values for the guidance of the board, top management and the family’s philanthropic
activities
Developing a challenging vision of the future of the family and the company that all members can share --
- a Shared Dream
Planning educational programs and events for family members
Creating policies to regulate relative’s entry into or exit from the business
Establishing standards of behavior for family members in the community
Developing a family mission statement or credo
Furthering the development of young family members, for example, by setting up scholarships and/or
venture funds
Organizing celebrations of the family legacy
Establishing a distinct office to handle the family’s portfolio of investments related to the family’s main
business
Establishing and overseeing the family’s philanthropic initiatives
Coordinating measures to protect the personal security of family members
Providing fun and leisure activities for the family
Establishing policies to regulate conflicts of interest among different business activities of family members
All over the world, many family companies, ranging from small to medium-size to multinational, have
found it useful to organize Family Councils. Some multinational companies that have such Councils are the
New York Times and SC Johnson in the US, the Bonnier Group in Sweden, Tele media in Canada and
Hermes in France. The Family Council is an effective tool for preserving and enhancing family business
and family legacies.
SETTING FRAMEWORKS 18
Organizing the Family Council
The process of organizing a Council will obviously vary from family to family. However, it is advisable
that a small committee be designated that will be responsible for organizing the Council. The Family
Assembly could function as such a committee. A Family Council is similar to the Board of Directors of a
corporation. Therefore, not all the family members have to be included in the Council. If all the family
members want to have some form of participation, then a Family Assembly similar to a shareholders
assembly can be organized.
It is important, however, that a formal structure be organized with procedural rules for meetings.
In his book The Successful Family Business, Scott Friedman suggests that it would be a good idea to use a
professional consultant or facilitator to help establish a council. Such a person can be especially effective
in introducing the Council concept to a family at a retreat. For establishing an effective Family Council,
Friedman offered the following four suggestions for consideration:
Membership in the Council should be open. Unlike a corporation’s Board of Directors which should not
include all family members, the Family Council and Assembly should be open to all family members who
have reached an agreed-upon minimum age.
Designate Council representative for the Board of Directors. Not all Family Council members should be
involved in the business. Instead, the Council should designate one several of its members to serve on the
family business Board of Directors. This ensures that while the family perspective is considered, it does not
dictate their business decisions.
Don’t be afraid to start slowly. Families may encounter initial difficulty in engaging in open and candid
discussion on sensitive subjects. Many families have found that they first addressing relatively
uncontroversial matters, they can pave the way for later discussions of difficult subjects. It may be desirable
to retain the services of a professional to facilitate early Council discussions.
Establish ground rules for your Council. Effective Councils are those that have ground rules designed to
ensure that all family members understand how the Council operates. This is the reason why a Family
Constitution goes hand in hand with a Family Council.
It also important that the members of the Family Council meet on a regular basis and not only when there
is a specific problem to solve.
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 19
The composition of a Family Council
The composition of a Family Council should depend on the ownership stage of the business.
In the Controlling Owner stage, the Family Council should be composed of the founder and the spouse.
The children should be included as they enter the business. Children who do not enter the business but have
ownership should also be included in the Family Council.
In the sibling partnership stage, the Family Council should be composed of the sibling partners and their
spouses. In-laws should be excluded if they are working in competitive firms.
In the Cousin Consortium stage, a separate Family Assembly should be organized. This should be a forum
for discussion, while the Family Council remains the decision-making body. All relatives, who by now will
include cousins, should become members of the Family Assembly. The Family Council, which should be
a smaller body, should be made up of representatives from the various family branches and different
generations of the now extended family.
Langberg recommends that for larger families, Council members should report to a constituency of 10-15
family members, including people from different branches of the family. However, similar to the election
to the Board of Directors, Council members should be elected through the vote of the entire family with a
cross-section of the family represented. Council members should also have fixed terms. The typical formal
Family Council is organized into working committees with specific areas of responsibility, such as “ hiring
and firing policies, the family office, education and family development, trust issues, family histories,
family recreation, family philanthropy and the Family Constitution. “
For families that would like to have a formal governance structure for its Family Council, the following
offices reporting to the Family Council are recommended:
Family Office. This is a centralized financial planning group that enables the family to invest their wealth
as a group. The family office should be a separate operation from the business. Professional managers may
be hired for specific functions such as investment management, taxation and estate planning.
Family Foundation. A single central foundation that will centralize the family’s philanthropic initiatives
can be set up. These foundations can confer tax advantages while enhancing the family’s reputation and
structure in the community.
Internal Stock Market. The family may set up an internal stock market that will manage the buying and
selling of shares among family members. This will not only facilitate the selling of shares by family
members, but will also ensure that ownership remains within the family.
Redemption Fund. A fund can be built by contributing a percentage of profits to it each year. This can be
used for shareholders who want to cash in their stock at a fair price for personal reasons. A committee of
the Family Council can oversee the fund.
SETTING FRAMEWORK 20
Scholarship Fund. This is established to promote one of the council’s most important functions, which is to
support the career development of the younger generations. A scholarship program can help qualified or
needy young family members to complete university and postgraduate education.
When and where to organize a Family Council
Normally, families that are in business together will discuss family issues during business meetings or
during family affairs like Sunday lunches or vacations. These two venues are in fact the worst for discussing
family issues. The appropriate venue is the Family Council Meeting. A Family Council should be organized
as soon as the children are old enough to enter the business. This marks the beginning of the transition of
the business from being “Daddy’s business “to being a family business.
Each family can best determine how to start the Family Council. One ideal way of inaugurating a Family
Council is to have a one-or-two-day family retreat at some quiet place away from the business.
It should be emphasized that the retreat should be seen as the beginning rather than the end. Therefore, you
should not expect to resolve all issues during that retreat.
The Importance of Family Business Meetings
Conflicts can become very serious when, for instance, contending siblings use the family business as the
arena for their rivalry. This creates an environment with tragic consequences for the enterprise. The most
visible manifestations of this situation occur during business meetings where hostilities are publicly shown
and discussions veers from business topics to personal recriminations.
One of the most effective tools in managing family conflicts is the organization of a Family Council. The
key, however, to the success of this type of organization are the actual family business meetings. After all,
meeting regularly to thresh out conflicts and discuss major issues is really the main of the Council.
Family business experts realize that the success of a business strategic plan is intertwined with the
successful resolution of critical family business issues that will affect the implementation of the plan.
However, the resolution of these issues requires discussion among family members, which again highlights
are critical importance of family meetings.
A family meetings serves the dual function of resolving family business issues and helping maintain social
relationships among the members of the family. Most important, it is through these meetings that family
conflicts are resolved and decisions are made that can be supported by the whole family.
When a family does not hold regular meetings, it will have no forum to resolve family issues. The
temptation then is to use business forms, i.e., boards or executive committees, which becomes a hindrance
to the formulation of business plans for these bodies. Furthermore, when business bodies are used as
substitutes for family meetings, there will be a reluctance to include non-family management professionals
in these decision-making groups, thus hindering the introduction of professional management to the
company.
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 21
It is a clear sign that the family will be unable to stay together in the business if the members are not able
to participate together in a family meeting. There could be many different reasons for this failure, but the
conclusion will be the same --- that if the members cannot agree to meet regularly, there will be no venue
for conflict resolution and a breakup is inevitable.
How to Organize and Conduct Successful Family Meetings
Based on several readings and personal experiences, the requirements for successful family meetings are
as follows:
Organizing the Meeting
Ensure that everyone acknowledges the need for meetings. There must be expressed willingness on the part
of all family members to participate in the meetings as a recognition of the importance of this activity.
Predetermine membership. Before the meetings begins, there should be an agreement as to who should
attend. A group of elders can assume this responsibility.
Organize a planning team. A planning team that will set the ground rules should be identified to save
embarrassment, encourage participation, create the necessary structure and ensure that the meetings are
conducted in a professional manner.
Draw up an agenda. An effective meeting requires a well-planned agenda. A family member should be
assigned to solicit agenda items from the other members and ensure that these topics are of common interest
to the group and are of significance to the family within the context of the family business.
Establish a permanent meeting structure. There should be a chairperson, a secretary to take the minutes and
a fixed schedule just like for board meetings. In case there is no recognized head of the family, a facilitator
may be invited during the first few meetings until the family has agreed on a more permanent structure.
Conducting the Meeting
This is the most difficult task since family discussions are often emotional. Oftentimes, feelings
become a substitute for logic as a basis for discussions. Nevertheless, meetings should be conducted as
professionally as possible. The topics should be limited to items on the agenda and participation should be
the basis for decisions.
Here are some guidelines for successfully conducting family meetings:
Prepare an action plan. Decisions on family issues are often not implemented because there is no ready
structure for implementation, unlike in business firms where there are departments and divisions that handle
this. Therefore, an action plan that identifies persons responsible for implementation together with deadlines
should be formulated for each family decision.
SETTING FRAMEWORKS 22
Ensure family fun. In order to strengthen family ties, some family meetings should be in the form
of recreational activities. During these times, business concerns should not be discussed. Perhaps, the elder
members can tell stories of how members helped each other or give examples of how family members have
demonstrated their affection for each other.
The foundation for managing conflicts in a family business is communication. Without this, there
will be no trust and no means of discussing or resolving sensitive issues. Open communication is necessary
for conflict resolution and, therefore, for the continuity of the family business. The only venue for this is
the family meeting. Successful family meetings are essential for the survival of a family enterprise.
THE FAMILY STATEMENT
For governance to be effective, family institutions need to have an explicit, written document
containing the framework for governing the organization. For corporations, this is the Articles of
Incorporation and By-laws, and for stockholders, we sometimes see a Shareholder’s Agreement. For family
business, this written is called the Family Statement. It declares what the family stands for, its expectations,
its fundamental values, and the differentiation of roles in the family and in the business.
According to the book The Family Business: Its Governance for Sustainability by Fred Neubauer and Alden
G. Lank, Family Statements may take a variety of forms and bear a wide range of titles as follows:
Family constitution
Family strategic plan
Family vision
Family mission
Family code of conduct
Family protocol
Family principles
Family values
Family policies
Family culture
Family creed or credo
Family objectives
Family programmes
Code of understanding
Family charter
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 23
THE FAMILY CONSTITUTION
Although few families see the need for a written framework, I would strongly recommend that if
you made the effort to organize a Family Council, you should also take the time to prepare a written and
comprehensive Family Constitution. This is a critical requirement for Family Councils to succeed.
Langberg says that the Constitution defines the family’s vision of the future and its core values and
beliefs. It spells out the purpose and responsibilities of the Family Council, the Family Assembly and the
Board of Directors. There are many other components of a Family Constitution. These may include the
family’s fundamental values and beliefs, a code of behavior, policies regulating the relationship between
the family and the business, and policies governing family members working in the company.
An example of such a policy is: ‘During the first five years after entry into the business, family
members will be assigned only to line positions in which their performances can be reliably measured.
“Other constitutions have even more specific provisions, such as a retirement policy for family members,
stock redemption policies for members wanting to sell their shares or for when the family needs to maintain
a balance of power among family branches, and a dismissal policy that will allow supervisors to fire family
members only after they have informed the Family Council.
The Constitution should also spell out the structure, including the size, composition and
organization, of the Council.
Wal-Mart, S.C. Johnson, Cargill, McGraw Hill and Ahlstrom are some examples of successful
family business with an effective, functioning Family Institution (Family Assembly and/or Family Council)
and Family Statement (i.e. Family Constitution). Perhaps the journey towards organizing a formal family
structure and writing a Family Constitution will be a difficult one for most Filipino family corporations.
But if we are to achieve an economic takeoff and if these families want to leave a lasting legacy, then they
must consider the journey as well worth the effort.
The Components of a Family Constitution
Several books on family business management contain recommendations for the components of a
Family Constitution.
Although there are variations, the different proposals are substantially the same. Lansberg’s model
of a Family Constitution includes the following components:
A Mission Statement defining the family’s fundamental desire to be in business together. This is a necessary
declaration because without that desire, there is obviously no need to write a constitution.
A statement of the family’s fundamental values and beliefs. This should express the family’s commonly
accepted values which they would like to ensure are preserved in the business arena. This can spring from
the family’s shared experiences, for example: “Maintaining a low public profile for the family is essential
for business success. “ Another source would be the family’s ethnic and religious roots. For example: “ it
is better to have a good name than to be well-known.” or “ Our family name is our most important asset.”
SETTING FRAMEWORKS 24
A family Code of Conduct. This specifies the family’s expectations with regard to how the members should
treat one another and conduct themselves. For example: “Family members should not argue in public. “or
“ Family members should defend criticisms of other family members by non-family members.”
Policies for regulating the relationship between the family and the business. These should include critical
issues such as employment of family members in the business. For example: “A member of the family who
hopes to work for the company must have a college degree or should at least have worked in another
company for five years.”
Performance policies. There should be rules governing the performance evaluation of family members,
such as: “ If there are first two years of work they are not performing well, i.e., they are not included in the
top 25 percent of the company’s executives, they will be asked to leave. “ or “ Family members should not
report to another family for the first three years.”
A retirement policy. There can be a rule such as: “All family members should automatically retire at age
60 and can serve on the board of directors only until the age of 70. “
A dismissal policy. This is a sensitive issue that should be addressed directly. For example: “The authority
to fire a family member rests solely with his or her direct superior. However, prior to dismissing a family
member, the general manager should inform the Family Council, so that the ramifications of the dismissal
can be anticipated and properly managed,”
Stock redemption policies. The Constitution can specify the process under which the family members can
sell their stock with a minimum of family disruption. Goals for a liquidity policy may be established, such
that all transactions should continue to maintain the balance of power among the family branches.
A non-competition agreement. There should be restrictions on competition for family members who decide
to leave and set up their own businesses. This can include restrictions on commercial uses of the family
name.
Job descriptions for the key positions in the governance structure. This should spell out the duties, terms,
responsibilities and privileges of the Chairman of the Family Council, Chairman of the Board and other
positions occupied by other family members.
Succession policies. The Constitution should spell out the specific process by which the leaders of the
family and of the business will be chosen. The process should also specify how family members who serve
on the Board of Directors are to be selected. In addition, it should also specify the responsibilities of the
Family Council for training and developing members.
The process of writing a Family Constitution is a powerful way to motivate family members to work
together because the authority of the Family Council depends entirely on the willingness of the family
members to abide by its mandate. It is critical to understand that a Family Council and Family Constitution
can be effective only when there is trust.
FAMILY BUSINESS AND STRATEGIC MANAGEMENT 25
Finally, everyone should realize that the foundation of trust is built on the ability of the family members to
learn how they can openly communicate their feelings and ideas with one another.
The failure to manage conflict leads to the splintering of family business firms. The two key elements of
Family Institution and Family Statement are the necessary cornerstones in the governance of a family in
business. Not only are they requirements in the success of a family business, but also essential elements for
a family business to continue existing.
