Charting your way to safer waters

The current economic climate has meant that businesses all over the world are concerned for the future. But family businesses may be able to find a lot more comfort in the shape of a family charter, says Sam Dunn

As the credit crunch continues to bite, inflation increases and recession looms, family businesses need to be prepared to bend whichever way the wind is blowing in order to prosper. For many, no matter how large they may be, that can be a hard task.

Whether it's a tortuous battle over the direction of a new business strategy to win back consumer confidence; arguing over which supplier should have costs cut; or debating how to trim staff numbers, it can be twice as difficult when you're negotiating with members of your own family – especially if it involves them directly.

Nevertheless, the enthusiasm and emotions of a family business can work in its favour, says Juliette Johnson, senior family business advisor at Coutts bank – as long as there's a common goal to which every family member has agreed.

"It's not ideal if family affairs are fractious, but those that don't get on can run very successful businesses," she says. "Success is much more about how aligned the family is towards the business's future; it's about the 'vision' for all the different members."

And the most effective way for families to agree on such a goal is to draw up a family charter or constitution, Johnson explains. "A charter is a document that outlines the vision of the family's aims and how they see themselves: a moral 'statement of intent' of how the family wants to work," she says.

It's also one of the most effective ways to draw up a "road map" for the family owners to follow, advises Grant Gordon, director general of the Institute for Family Business (IFB). "Typically, common areas to be covered by the charter include minimum education requirements for 'next generation' members of the family; a retirement policy; and an exit policy for those family members who wish to sell out."

Faced with the often-controversial hierarchies and salary sizes in normal corporate workplaces, it's also worth using the charter to make pay as transparent as possible, particularly with regard to regular dividend payments from family shareholdings.

It's also crucial that a charter establishes a regular series of formal meetings between family members, to make sure that there is openness and transparency between all – especially if naturally competitive siblings are involved.

Although charters tend to run smoothly when family businesses are small, their strength can come under intense stress if a degree of success lands the firm's owners with a new set of challenges such as global expansion.

It's therefore crucial to be able to review a charter or agreed direction to ensure that everybody's interests remain in line, says Baron Paul Buysse, author of Code Buysse – a corporate governance manual for non-listed companies – and chairman of the board at family-owned Bekaert.

"In these days of financial turmoil, globalisation and unprecedented opportunities but also threats, it is essential that the family business revisits its strategy on a regular, even constant basis," he says. "A static operational approach in today's economic world is unacceptable from a shareholder point of view, and therefore families should establish a culture whereby a medium-term vision is clearly defined and updated."

These updates will be crucial when negotiating a succession process: will the right leaders come from within the family or be outsiders? Setting up a vetting and interview process, agreed by all family members, will be vital to avoid bitter procedural recriminations.

Then there's the issue of family shares in the business – who owns what, when and with what voting rights? What happens if a family member divorces? Or a member of the family business leaves but continues to depend on dividend income despite having given up all commercial control of the shares?

Whatever the issues, Code Buysse has a final caveat: "It is highly recommended that the charter has a legally binding character" it states – prevention is clearly the better cure.