The Ten Commandments for family business
In my 30-odd years of accounting practice, I have lost count of the number of times people have said to me, “My son hasn’t got the skills to carry on the family business.” Others grumble, “My children are irresponsible with money – they wouldn’t know how
is the CEO of Marin
It’s important to remember that a family business – and its assets and wealth – should be the glue that holds the family together and the fuel that propels it towards happiness and success. However, if succession planning from one generation to the next is not managed properly, it can become the catalyst for blowing the family apart.
Australian family businesses generate around 50% of GDP and employ almost 50% of the Australian work force. Given the potential catastrophic consequences it is frightening how little attention is paid to succession planning by family and business leaders.
The Ten Commandments
structures are put in place to facilitate this process. Thus the SECOND commandment. “Thou shall establish structures.” 3 Be objective, not subjective: families are an amalgam of power, love, money, jealousy, pride and a host of many other emotions. Each family business must develop its own objective systems and structures to ensure that these emotions are not imported into the business. Hence the THIRD commandment: “Make business decisions for commercial reasons and NOT for family reasons.” This is especially the case when it comes to employing family members. 4 Employ family carefully: family members employed in the business need to feel that they have earned their position. Also, family members not employed in the business have a right to know that the family assets have not been squandered on ‘ jobs for the boys’. Nepotism is an unhealthy message for all concerned. So the FOURTH commandment is: “Establish an objective job selection and employee policy.” 5 Plan: all business involves risk. But if you run a business in a professional manner, you minimise the risk. Therefore, the all-important FIFTH commandment: “Create a business plan.” Do so after careful consideration. Build in a process to review and monitor this plan on a regular basis. 6 Use independent directors: families do not have a monopoly on knowledge, so the SIXTH commandment is: “Appoint arms-length and independent managers and directors.” They not only contribute to the ongoing activities of the business but also add objectivity and commercial reality to the decision making process. 7 Don’t pressure that independence: it is critical for family members to avoid putting unwarranted pressure on independent directors. Over-involvement by the family can result in the ‘tail wagging the dog’. Instead of the Board making decisions, family members do so, to the detriment of the Board’s abilities to carry out its business in a professional and effective manner. The SEVENTH commandment is therefore: “Respect your independent directors and do not coerce them.” 8 Succession planning: the EIGHTH commandment is critical to the longer term: “Create a succession plan.” The absence of a constructive succession plan has the potential to destroy the business and cause major disruption within the family. 9 Transparency: this is also critical, to ensure that all relevant decisions are made openly and communicated to the entire family. The NINTH commandment therefore is: “Have regular family retreats.” A retreat should run for one or two days and preferably, all generations of the family should attend. It should encourage family members to table their aspirations, discuss their differences, develop policies and review all relevant matters. 10 The Family Constitution: finally, the TENTH commandment of family business: “Write a family constitution.” All family members (say 13 years and over) should sign the constitution. The document should include the business objectives, the terms of employment for directors, managers and family employees, an outline of the Board’s decision-making process, and the way the business is managed. It should also set out clearly the shareholders’ obligations.
Over the past 10 years, Australia has moved onto the leading edge of world’s best practice when it comes to family and private wealth management. Now we just have to get more families better organised to help ensure the smooth transition of wealth to the next generation. Bernard Marin is the founder and CEO of Marin Accountants, a firm specialising in advice for individuals, investors and family businesses.