The importance of governance

Who needs governance and why? And when a family decides it needs to implement a little more rigour, how do they go about doing so?

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The importance attached to governance generally correlates with the age and size of a business. One example from our recent survey, was a successful business that had been created in the nineteenth century, sold off in the twentieth and now comprises 500 family members. It is clearly going to require more formal governance structures than a more modestly sized business which was started 10 years ago and is still being run by the founder.

​38% of our respondents had a constitution in place, with 56% having none (plus 6% saying they did not know if they had one or not)

69% of our survey respondents thought their current governance arrangements were either ‘entirely’ or ‘broadly’ fit for purpose. Only one thought it ‘entirely’ unfit for purpose and four did not know whether it was fit for purpose or not.

For those who do not currently have a constitution, the primary reason for this (40%) was that the family was too small, followed by the founder still being active and the prime or sole decision-maker. With the founder still in charge of the family ‘brand’, there appeared to be little danger of its values being lost.

More than half of those without a constitution thought they would need to implement formal governance structures in the next two years. This is an issue on most families’ ‘to do’ list. As we see it, a formal constitution and clear governance procedures is a well-established way to set out and embed the values of a business owning family. To our mind, this is important even in the early stages of a business.

A family constitution can be nothing less than the bedrock of family governance, but it needs characteristics and application to achieve this status. The constitution should be a guidance document created by the family to codify its values and resultant procedures and rules. Many would include the behaviours expected both from family members and employees, whether in a family owned operating company or single-family office. More families are now extending these areas to their investments (and potentially providers) and community engagement. 

More than half (55%) of those who had constitutions said they had been put in place by the first or second generation.

If an older (third or beyond) generation introduced the constitution, the family would probably not have been required to sign it, but was more likely to have a family council.

There was a strong consensus that any constitution (or equivalent document, the range of names included creed, protocol and charter) must not just be copied and pasted from another family. It needed to be unique to each family and reflecting that, be crafted from scratch. On the whole, professional advisers were seen as facilitators, prompting families to ask the right questions. Many participants felt the process was more important than the output.

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Rupert Phelps

Partner, Family Wealth Group

Family Wealth Group

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