The Role of Formalized Governance and Next Generation Development in a Family Business Transition

To round out my series of blog posts on the six key elements of a family business transition (see previous posts in the series here, here, and here), I wanted to address two final items – instituting a formalized governance process and developing the next generation of leaders.

The process of formalizing governance in a family business takes time and commitment to implement. In many businesses, governance starts off with small accomplishments like designing a family employment policy and establishing a family charter. As the family becomes more comfortable with the process, they begin to tackle bigger and more sensitive issues like setting family compensation and creating family boards. Then, as the family business passes through generations, creating formalized governance becomes a more critical and strategic issue to tackle. Not only does implementing governance make navigating family dynamics easier, but it also directly impacts the value of the business. If the family ever decides to sell the business to an outside party, an outsider will place more value on it knowing the business isn’t wrought with unproductive family members and dissent.

Next generation development is often overlooked in family businesses. Most intend to pass the company along to future generations, but a good number do not spend the time or resources to prepare their future successors. Families that have spent time developing the next generation usually ask their future leaders to participate in a variety of professional development activities, from educational seminars and peer groups to mentoring relationships and advanced degrees or online training courses.

As the number of family members involved in the business grows, many companies form next generation boards. These boards are used as a development tool and often consist of several younger generation family members. These “junior” boards review and discuss similar agenda items as the more formalized advisory board, but are typically asked to abstain from any voting. Rather, they are there to get exposure and to learn.

The succession of a family business involves many facets to not only adequately prepare the current ownership for their departure, but to ensure the company and its successors are ready as well.

Steven E. Staugaitis is a director at Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.

You may also like:

• ESOPs and Family Business Can Be a Great Mix
• Resources to Prepare the Next Generation of Your Family Business
• Family Business Value Drivers - The Numerator Side of the Equation