Design Family Business Governance

---
name: design-family-business-governance
description: Use when a family-owned business needs governance structures addressing the specific tension between family dynamics and business decision-making — establishing a family council separate from the operating board, a written family charter or constitution, and defined succession criteria, rather than relying on informal family relationships to substitute for genuine governance structure.
source: International Finance Corporation (IFC), "IFC Family Business Governance Handbook"
tags: [business, leadership, family-business-governance, family-council, succession-planning, organizational-clarity]
related: [design-ceo-succession-plan, design-nonprofit-board-governance, design-organizational-structure]
---

# Design Family Business Governance

Establish governance structures addressing the specific tension between family dynamics and business decision-making — a family council separate from the operating board, a written family charter or constitution, and defined succession criteria — rather than relying on informal family relationships to substitute for genuine governance structure.

## Why This Is Best Practice

**Adopted by:** The International Finance Corporation's "Family Business Governance Handbook" documents structured family governance — including a distinct family council alongside (not merged with) the business's operating board — as standard practice among family enterprises that have successfully navigated multi-generational transitions, based on IFC's advisory work with family businesses across emerging and developed markets.
**Impact:** Family businesses without a distinct governance structure separating family matters from business operations are documented to experience measurably higher rates of conflict during leadership transitions and lower rates of successful transition to a second or third generation, compared to family businesses with formal governance structures addressing this specific tension proactively.
**Why best:** Family relationships and business governance operate on genuinely different logics — family relationships are typically unconditional and lifelong, while business roles require performance-based accountability and can require difficult decisions (removing an underperforming family member from an operational role) that family dynamics alone tend to resist; a distinct family council and written charter is what creates space to address family-specific concerns (fairness among branches, family employment policy) separately from the operating board's business-performance-focused decisions, rather than letting family dynamics inappropriately override business decision-making or vice versa.

Sources: International Finance Corporation, "IFC Family Business Governance Handbook"

## Steps

### Step 1: Establish a family council distinct from the operating board

Establish a family council — a body representing family members' interests and addressing family-specific concerns (family employment policy, dividend expectations, next-generation development) — as a structure distinct from the business's operating board, which should be able to include non-family, genuinely independent directors focused on business performance.

### Step 2: Draft a written family charter or constitution

Draft a written family charter (sometimes called a family constitution) documenting the family's shared values, its policy on family member employment in the business (qualification requirements, whether outside experience is required first), and the family's expectations for the business's long-term direction — providing a documented reference point rather than relying on unstated, potentially conflicting assumptions among family members.

### Step 3: Define explicit, merit-based criteria for family members in operational roles

Define explicit, merit-based qualification criteria for family members seeking operational or leadership roles in the business — required outside work experience, specific credentials, or a formal application and evaluation process — rather than an implicit assumption that family membership alone qualifies someone for a role.

### Step 4: Establish a defined succession planning process integrating family and business considerations

Establish a defined succession planning process that integrates both business-performance criteria (per `design-ceo-succession-plan`) and family-specific considerations (managing expectations across family branches, addressing sibling or cousin rivalry for leadership roles) — since family business succession carries dynamics beyond what a purely business-focused succession framework addresses.

### Step 5: Establish a defined conflict-resolution process for family disagreements affecting the business

Establish a specific process for resolving family disagreements that could otherwise spill into and disrupt business governance — family mediation, a defined escalation path through the family council, or an independent family business advisor — since unresolved family conflict is documented as a leading cause of family business governance failure.

## Rules

- Establish a family council as a structure distinct from the operating board — don't merge family-specific governance with business operational governance.
- Document family employment policy, values, and expectations in a written charter, rather than relying on unstated, potentially conflicting assumptions.
- Define explicit, merit-based qualification criteria for family members in operational roles, not an implicit assumption that family membership alone qualifies.
- Integrate both business-performance criteria and family-specific dynamics into the succession planning process explicitly.

## Examples

**Family council resolving a dispute without disrupting business operations:** A disagreement among second-generation family members about dividend policy is raised and resolved through the family council's defined process, without ever reaching the operating board's agenda or disrupting the business's ongoing operational decisions — illustrating the value of a distinct venue for family-specific concerns.

**Merit-based criteria preventing an unqualified appointment:** A family member seeking a senior operational role is required, per the family charter's documented policy, to have first gained several years of relevant experience outside the family business — a requirement that, in this case, leads the family member to gain valuable outside experience before returning to a role they're then genuinely qualified for, rather than being appointed based on family membership alone.

## Common Mistakes

- **Merging family governance and business operational governance into a single body** — this conflates two genuinely different decision logics and tends to produce either family dynamics inappropriately overriding business decisions, or vice versa.
- **Relying on unstated, informal assumptions about family employment policy rather than a documented charter** — unstated assumptions tend to surface as conflict precisely when they diverge between family members, often at the least convenient moment.
- **Assuming family membership alone qualifies someone for an operational role** — this is documented as a common source of both business underperformance and family resentment among members held to different standards.
- **Addressing succession purely through a business-performance lens without accounting for family-specific dynamics** — family business succession carries additional considerations (sibling rivalry, branch fairness) a purely business-focused framework misses.

## When NOT to Use

- For a business with no meaningful family ownership or involvement — this practice specifically addresses the distinct governance tension present in family-owned enterprises.
- For a very small, single-generation family business where formal governance council infrastructure is disproportionate to current scale — a lighter, less formal approach to family-business tension may be proportionate until the business or family reaches greater complexity.
- As a substitute for the business's own operational governance and succession planning — family governance addresses the family-specific dimension; business-performance-based succession planning remains a distinct, necessary complement (see `design-ceo-succession-plan`).