As the private client industry in Jersey seeks to attract clients from the emerging jurisdictions it is likely to become increasingly involved with putting in place succession planning and asset protection structures that relate to family businesses.

For this reason, it is important to understand a little about the importance of family businesses to the global economy and the sort of governance structures that are likely to be of interest to a family looking to manage the future succession of a family business. Armed with this knowledge we can tailor the structures that we are already familiar with such as trusts, foundations and family partnerships to meet the needs of family businesses globally.

A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business' overall well-being. In some countries, many of the largest publicly listed firms are family-owned. A firm is said to be family-owned if a person is the controlling shareholder: that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders. Some of the world's largest family-run-businesses are Walmart (United States), Samsung Group (Korea), Tata Group (India) and Foxconn (Taiwan).

For the first couple of generations, many family businesses operate through an informal system of natural or organic governance. However, as the family demographic expands and the roles of different family members becomes more complex it is often necessary to introduce a more formal governance structure which will determine the balance of power between the owners, the wider family and those who manage the family business.

Family Constitution

One of the most popular structures implemented in a family business is a family constitution which governs the family's stance in relation to the future of the business. A basic family constitution can conveniently be broken down into three chapters. The first of these outlines the family's values, mission and vision and is essentially a statement of why the family are in business together. This is extremely important as ultimately the success of any family business will be judged by how it measures up to the family vision. Initially different members of the family may identify different visions. Some will be more concerned with lifestyle whilst others will be more concerned with responsibilities to employees and attachments to a particular industry. These visions are not immediately consistent but upon further exploration other visionary factors may be identified that do unite a family. These include:

  1. providing financial security to future generations;
  2. pride in the family name;
  3. providing career opportunities;
  4. keeping a growing family in touch with each other.

Having identified a family's core visions it should be possible to put together a mission statement that reflects the family's values. This is where it is key to ensure the wider family understand the history of the business and the sacrifices that have been made to get the business where it is today. This becomes increasingly more difficult as the business is handed down through the generations. For this reason the benefits of educating and mentoring the younger generations at an early stage cannot be underestimated.

Ownership Issues

The next chapter of the family constitution focuses on ownership governance. Questions that need to be addressed include whether the family want to be value-out owners or custodians, whether ownership should be restricted to blood-line family members or extended to spouses and partners and whether ownership should be restricted to those who work in the business. Often looking at the values, mission and vision of the family will help to answer these questions, but failing this it becomes important to test the family's reactions to questions such as how shares in the family business should be valued for sale and how the family wish to manage long-term decision-making. Once again, family members may have very different views on this. Quite often this is simply because some members of the family have lost sight of or do not fully understand the values of the business. If irreconcilable differences exist however consideration may need to be given to buying out the shareholdings of certain family members.

Most family governance models will contain a dividend policy as it is in everyone's interests for there to be transparency in terms of return on investments. An effective dividend policy will help to manage people's expectations. One example of this is that a dividend policy avoids concerns on the parts of the non-working owners that they are being prejudiced at the expense of their working owners who are receiving generous remuneration packages.

Decision making is at the heart of any family business and a family business that does not have a mechanism by which decisions can be made and implemented is likely to grind to a halt. It will usually be advisable to ensure that the decision making capabilities lie with those persons responsible for running the business on a day-to-day basis. However, this will not necessarily receive the support of the non-working members of the family and to achieve harmony it may be necessary to permit the family owners to retain some decisions. Examples of the powers that a family may wish to retain include decisions that may impact upon the family's reputation, pose a significant financial risk for the family or concern the appointment, removal and remuneration of key employees.

Conflict Resolution

The final chapter of the family constitution will deal with family governance and seeks to optimise all forms of a family's wealth including financial, intellectual and social. Historically, it does not appear that many families have communicated very well when in business together and for this reason conflict can often emerge. This conflict can quickly lead to the decline of the business. The aim of a family governance system is to avoid conflict arising in the first place. This is often done through the establishment of a family assembly or council where family members can voice their opinions.

Establishing a family assembly council to facilitate decision making amongst family members is just one aspect of family governance within a sophisticated family. There are many other aspects of family governance that a family assembly can assist with and it may be prudent to set out policies for these matters in the family charter. One of the most important of these is the employment and remuneration of family members in the family business. Other policies that may need to be devised include education, philanthropy, new ventures and media and public relations.

Having only lightly touched upon the issue of governance in a family context it will hopefully be immediately apparent how a Jersey foundation or private trust company structure could provide a family with an ideal vehicle within which to establish the ownership and governance aspects of the family business (foundations are also available in some of our other jurisdictions including Isle of Man, Guernsey and Mauritius). These structures provide a highly respected legal framework within which the family's interests can be held and disputes resolved. At the same time however they also provide the essential degree of flexibility that a constantly expanding and changing family needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.