Family governance and family strategy - what are they for and who should deal with them?

Family businesses are the backbone of the German economy and are regarded as the epitome of stability. The challenges often increase with the handover to the next generation - not only from a tax and legal perspective, but above all in terms of interpersonal relationships. This is where professional family governance, also known as a family strategy, can help: a structured organisational framework that secures the interaction between family and company in the long term.

Family governance - what is it?

Family governance describes the entirety of the rules, values and structures that govern the relationship between the family and the company. The focus is not on company law regulations, but above all on the shared values, goals and rules of the business family, which are typically set out in a Family constitutionalso Family charter are laid down in the Code.

The aim of family governance is to create a sustainable basis so that the family, as a community of owners, can manage or support the company in a stable manner - across generations. This creates prosperity for the owner family, the company's employees and the communities in which the family businesses are based.

Who should be involved in family governance?

Every business family that wants to involve several family members or pass the company on to the next generation. At the latest when the family grows in subsequent generations or external management is involved, coordination becomes more complex - and regulations are indispensable.

Building blocks of sustainable family governance

An effective governance framework for a family strategy consists of several interlocking elements:

• Values and goals form the guideline for all other regulations: Common principles for dealing with the company and with each other - from responsibility to innovation.
• The Family constitution - or also Family charter - is the core element of family governance: a central document that sets out the principles, roles and decision-making processes of the family - without being legally binding, but with a strong moral impact. in addition to the aforementioned values and goals of the business family, it usually contains the following elements:
  • Rollers and Responsibilities must be clearly defined. Successful governance thrives on clarity: Who can decide what? Who becomes a successor and under what conditions? Who takes care of the deputy in an emergency? By defining roles and decision-making paths at an early stage, uncertainties can be avoided - even in emotionally difficult situations.
  • Family days & communication formatsRegular meetings promote mutual understanding and prevent information gaps.
  • Conflict managementBusiness families want to prevent disputes from becoming public. They therefore agree procedures for disputes in order to bring about a solution before they escalate. Internal arbitration by family members or a mediation procedure are suitable. This avoids legal disputes, which usually take place in public.
• Memorandum & Articles of Association implement the principles of the family constitution in the company: Clearly regulated responsibilities, rights and duties at shareholder and management level.
• Advisory BoardIn particular, if a member of the family is no longer represented in the management, an advisory board made up of family members and external advisors can help to ensure that the company is controlled by the family with the involvement of external expertise.
• Voting trust agreements can simplify the decision-making process for large shareholder families with several shareholders by pooling votes. In the case of shareholdings in corporations that do not exceed 25 %, a pooling agreement is also required for inheritance and gift tax reasons in order to achieve the preferential treatment for business assets within the meaning of Sections 13a and 13b ErbStG.
• Marriage contracts & dispositions on deathThe partners often undertake to conclude a marriage contract or to exclude business assets from gains. In addition, company shares should generally only be inherited within the family.

The main objective is to Ability to act and make decisions of the family as owners of the company. Functioning family governance makes the family capable of acting. Decisions can be made quickly and in an organised manner, even in times of crisis. Procedures are defined, communication channels are open and responsibilities are clarified.

The process of developing a family strategy usually brings hidden conflicts to light, which can be resolved in an assisted process and thus unites the family or at least strengthens mutual understanding. In addition, the involvement of family members who are not shareholders prepares successors for their role and thus strengthens the family. Company succession initiated. Ideally, the joint development process will result in the family standing behind the company as a strong team - with a shared understanding of responsibility, foresight and cohesion.

Family governance is not an individual measure, but rather a continuous process. After development comes implementation, which is followed by adaptation. It is essential in order to secure the future of the family business - legally, economically and interpersonally. The earlier you start, the better. Because if you are prepared, you can act - especially when it counts.

Would you like to develop a family strategy or revise an existing one?

Lawyer and tax consultant Markus Schenk advises family businesses and entrepreneurial families at TAXGATE in Stuttgart. He is both a mediator and coach and provides holistic support - legal, tax, strategic and interpersonal. Please feel free to contact us!