Financing family governance: how much and why?
Family governance is a cornerstone for ensuring the sustainability of family businesses. It structures decision-making, preserves foundational values, and fosters harmony among family members. However, to be effective, it requires dedicated funding, often seen as a cost but actually representing a strategic investment. How much should be invested, and for what purposes?
Why finance family governance?
Funding family governance is more than just a line item in the budget. It addresses strategic objectives critical to the longevity of the family business:
1. Family cohesion: Family councils and assemblies facilitate open discussions about expectations, potential conflicts, and joint projects. These activities help avoid costly tensions or legal disputes.
2. Ensure a smooth transition: Businesses often struggle during generational transitions. Investing in education and mentorship for younger generations improves the likelihood of success.
3. Strengthen long-term strategy: Well-funded family governance helps formalize a clear charter and ownership strategy that aligns family objectives with the strategic imperatives of the business.
4. Attract talent and partners: Professional governance inspires confidence among non-family employees and investors, enhancing competitiveness and positioning the business as a desirable partner.
« Family governance, often perceived as a cost, is in fact a strategic investment in sustainability. »
The hidden costs of neglecting family governance
A lack of family governance upstream from corporate governance can result in significant financial and commercial losses.
From a financial perspective, misaligned family dynamics and the resulting inconsistent decisions can lead to poorly coordinated strategies and inefficient resource allocation, hindering investment in high-potential projects. Prolonged internal disagreements may also lead to unforeseen expenses, such as legal fees during disputes or mediation costs to resolve conflicts.
On the commercial side, misalignment can hurt the company’s agility in responding to market opportunities. Family disagreements over strategy may delay product launches or key partnerships, allowing more agile competitors to gain market share. Additionally, unclear roles and responsibilities can demotivate non-family executives, leading to costly turnover and loss of expertise.
The company’s reputation may also suffer, discouraging financial and commercial partners and limiting its ability to raise funds or secure strategic deals.
« Well-funded family governance aligns family objectives with strategic imperatives, enhancing competitiveness and cohesion. »
How much to invest in family governance?
So, how much should you invest? The funding required depends on the size of the business, the complexity of family dynamics, and the objectives pursued. On average, family businesses allocate 1 to 2% of their annual net income to these activities.
This budget may include:
1. External Experts: Engaging specialized consultants and legal advisors to formalize a family charter or resolve conflicts.
2. Structural costs: Setting up and maintaining a family council, organizing family meetings or assemblies.
3. Training and Coaching: Educational programs to prepare family members for shareholder responsibilities or succession.
4. Communication Tools: Developing written or digital materials to facilitate intergenerational exchanges and preserve a shared vision.
Costs may rise for larger families or when managing complex processes, such as succession planning or investment diversification.
Conclusion: A strategic investment
Financing family governance is a proactive approach that safeguards the interests of both the family and the business. An investment proportional to the business’s needs ensures not only cohesion and harmony but also economic sustainability and intergenerational stability. Over the long term, it is a crucial lever for transforming a family vision into a high-performing and sustainable business strategy.