During a recent meeting of family members, all of whom are shareholders and some of whom are senior managers of a second generation, family-owned motion picture distribution company, the complexities of governing a family business were very apparent.

The annual meeting of shareholders had turned toward a discussion of the focus of the business’s distribution activity. Younger members of the family who were not involved in management were concerned about management’s continuing focus on feature motion pictures that are exhibited in theaters, particularly given the fact that the younger generation of viewers increasingly go online to view an array of programming, including feature motion pictures.

Putting aside the issue of whether a change in the business model needs to be considered, the meeting illustrated that governance of a family business is more complicated than for a non-family business, given the central role of the family that owns and typically leads the business (“Governing the Family-Run Business”, Professor John Davis, Harvard Business Review, September 4, 2001). In a family business, governance must focus on the business, the family and the ownership groups (see “Governing the Family-Run Business”, Professor John Davis, HBR, above).

Effectively integrating the concerns of these three groups requires communication and decision-making within and across these groups (see “Governing the Family-Run Business”, Professor John Davis, HBR, above). Though there is no “one-size-fits-all” model for reconciling the interests and concerns of the three groups, by the second generation (and in some cases, before that), decision-making and communication among these groups is often accomplished through the following bodies:

    1. Board of Directors. The Board must set policy pertaining to the operation of the business, evaluate whether management is efficiently and effectively operating the business (in terms of planning and budgeting, analysis of problems, use of good management systems, prudent allocation of resources and providing performance feedback to key employees (see “Governing the Family-Run Business”, Professor John Davis, HBR, above). These Board functions speak directly to the maxim that much of business success is about good execution, i.e., getting the job done well, on time and on budget. The Board may also make recommendations to the family in matters that concern the business (e.g., hiring and firing of key members of the senior management team).

    2. Family Council. While an effective Board is critical to the operation of a family business, the inherent advantage of a successful family business is that it evolved out of a clear vision and sense of purpose on the part of the founder and the founding family.  Its continuing success is due in large part to its unique corporate culture, consisting of a continuing shared mission and purpose, as well as a common set of values, ways of doing things and viewing things.  Accordingly, the “family council” is vital to the continuing stability and success of the business, even though some or all of the family members on the “family council” may no longer be directly involved in the management of the business.  While the Board sets policy for the business, the family council will set policy for the family (e.g., regarding employment in the business; etc.) and also make recommendations to the Board on matters of importance to the family (see “Governing the Family-Run Business”, Professor John Davis, HBR, above). The Board and family council need to coordinate their input and also avoid overstepping one another’s domains (see “Governing the Family-Run Business”, Professor John David, HBR, 2001, above) Absent the influence and collective memory of the members of the family council, both the Board and senior management may meander off track, taking the business down a course that is out of kilter with the things that made the business unique in the first place.

    3. Shareholders’ Council /Annual Shareholders Meeting. By the second and subsequent generations, it is possible that non-family members (e.g., former non-family Board Members; key employees; etc.) may own shares of stock of the business.  Even if this is not the case, relationships among various family members may become more attenuated (i.e., involving cousins, rather than parents, aunts, uncles, brothers and sisters). Furthermore, those members of the family who continue to own shares of stock and be active in management may have very different view points from family members who own shares but are no longer active in management. Accordingly, a “shareholders’ council” is sometimes formed, consisting of the holders of significant blocks of shares. Its primary purpose is to discuss and attempt to reconcile significantly conflicting viewpoints, so that the members of the Board elected at the Annual Shareholders’ Meeting do not end up being a conflicted and dysfunctional group.

Ultimately, the effectiveness of communication and interaction among the above three “bodies” will determine the extent to which the business continues to be operated with a common purpose and vision for the future. Absent this sense of common purpose and vision for the future, the stability of the business will begin to erode.

Joel Fishman has worked almost four decades as a business lawyer and mediator of business disputes. Representing large, middle market, and entrepreneurial businesses in a broad range of industries including entertainment, communications, new media, and technology, Fishman represents clients in the formation, financing, operation, and expansion of businesses, as well as with the leasing, purchase, development, financing, and sale of all types of real estate. Fishman is active in the Southern California community, and he frequently writes for the Los Angeles Daily Journal on mediation as well as corporate and real estate legal topics.