The Cousin Consortium Stage: Complex and Dangerous Part 2

By Prof. Enrique Soriano

In my article last week, we explored the strategies that helped a family business successfully transition to the 3rd and 4th generations. Now, let’s delve deeper into the practical strategies and learnings that can help other family businesses thrive during the cousin consortium stage, a critical phase where governance, professional management, and family cohesion become paramount.

Establishing formal governance structures early on was one of the critical steps the family took. They created a family constitution, a family council, and a shareholder agreement. These documents clearly defined roles, responsibilities, and decision-making processes, which helped reduce the risk of conflicts and provided a clear framework for governance.

The family constitution served as the charter for how the family would interact with the business. It outlined the family’s values, vision, and mission, providing a roadmap for future generations and ensuring that all family members understood the principles guiding their involvement in the business. The family council acted as the governing board for the family side of the business. It typically included representatives from different branches of the family and focused on family-related issues such as education, communication, and conflict resolution, ensuring that family governance was separate from business operations. To institutionalize rules with a legal mandate, the shareholder agreement governed the relationship between the family shareholders and the business. It covered critical aspects like share transfers, dividend policies, and exit strategies, ensuring that all shareholders were on the same page regarding their rights and obligations.

Embracing Professional Talent

Another cornerstone of their success was the emphasis on professional management. The family hired experienced non-family executives to run day-to-day operations, allowing the cousins to focus on strategic direction and long-term vision. Professional managers brought an unbiased perspective to business decisions, reducing the influence of family dynamics on operations. Their extensive industry experience introduced best practices and innovative ideas to the business. Additionally, professional managers ensured operational continuity, especially during times of family transition or conflict, providing stability and consistent performance.

Establishing a Working Board with Independent Directors

The family also established a working board that included independent directors and board advisors. This board provided objective, unemotional, and expert insights, crucial for maintaining balanced decision-making processes. Independent directors brought diverse perspectives and expertise, helping the business navigate complex challenges and capitalize on new opportunities. Their objective viewpoints helped mitigate potential conflicts arising from family dynamics, ensuring that decisions were made in the best interest of the business. Board advisors offered strategic guidance and industry-specific knowledge, further enhancing the board’s effectiveness in steering the company towards long-term success.

For family businesses not ready to embrace the inclusion of independent directors, they can start by engaging a board advisor with a deep and strategic knowledge of the business environment. This step can provide valuable insights and gradually ease the transition towards a more formalized governance structure involving independent directors.

Strengthening Family Bonds

To ensure that business matters did not strain personal relationships, the family held annual retreats. These gatherings included team-building activities and discussions about the business’s future, reinforcing trust and understanding among family members. Team-building exercises promoted teamwork and communication, helping family members work better together in a business setting. Future planning discussions allowed family members to share their visions for the business, aligning everyone’s goals and expectations. Recognizing and celebrating the business’s milestones fostered a sense of pride and accomplishment among family members.

To be Continued