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Owner? Director? Manager? Employee? Defining roles in your family business

Family Governance
Succession planning
Family governance
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Family business

Owner? Director? Manager? Employee? Defining roles in your family business

Feb 4, 2021

As your family business grows, the boundaries between business and family roles may blur. Clarity on relationships, rights and responsibilities is essential to business longevity and will help to make the most of the experience, knowledge and skills within your family.

Some of the world's most successful family businesses started as nothing more than a single spark – an individual with an innovative idea and endless ambition. But as a family enterprise grows, numerous combinations of family members, including husbands and wives, parents and children, and extended families across multiple generations, may take on various business roles as shareholders, directors, managers and employees.

While family businesses often benefit from the shared passion and efficiency of a group of related founders, it can also create challenges.

The boundaries between business and family roles may become less clear, and issues – family members attempting to influence decisions outside their remit, nepotism or the perception of favouritism – may start to emerge. 

Successful family businesses clarify the roles, rights and responsibilities of family members involved in the business, which, in addition to assisting with day-to-day business operations, will:

  • Aid smooth transitions and business longevity
  • Ensure your enterprise is managed professionally and responsibly, and owners are equipped to be responsible stewards of the family wealth
  • Position your family business to make the best use of the human capital – the experience, knowledge and skills – within your family

"With clear rules in place, family enterprises can incentivise family members to actively contribute their ideas and younger generations to be 'intrapreneurial' by innovating within the family business," says Amy Lau, Director, Family Governance and Family Office Advisory, Wealth Planning and Advisory at HSBC Private Banking. "Meanwhile, the family business still retains the ability to attract talented non-family member employees and outside investors, if desired."

Here are some common considerations to map out the involvement of family members in your family business:

1. Establish clear and consistent rules for recruitment and promotion

The key consideration for recruitment and promotion is meritocracy, with selection based on qualifications and compatibility for the role, rather than on family ties alone.

Nepotism or perceptions of favouritism can ruin the credibility of a business and discourage non-family employees. 

Eligibility and experience are therefore reasonable hurdles for family members seeking to join the business. Gaining experience outside the family business can serve as an objective benchmark, and there is an added benefit in that the family member then brings a valuable skill set back into the family business.

2. Set up a framework for appraisals, rewards and remuneration 

It's also essential to define how you will evaluate performance of family members in your business.

"Key performance Indicators might not be set for family members and might sometimes be viewed as unnecessary,'" Lau explains. "But expectations need to be clear, and appraisals need to be objective. We also recommend not having family members as direct reports to keep boundaries in place." 

Setting remuneration packages for positions held by family members can be tricky and lead to difficult discussions and potential conflict. It is therefore advisable to base this decision on established human resources policies and industry benchmarks.

Some families may choose to set up a committee with representatives from each of the family branches alongside independent family advisers to set reward packages for family members. When rules are agreed in advance, it's difficult to argue that decisions are down to favouritism. 

3. Educate future owners 

The need to prepare family members to be responsible stewards of the family business can be a blind spot for many families.

Owners must understand the remit in which they can operate, and to what extent they can extend their influence. "Management should be allowed to maintain sufficient autonomy," Lau says.

Family members as owners will also need to agree on dividend policies. This can be a challenge, for example, if family members working in the business want to see earnings reinvested but also feel pressured to generate higher returns. Developing a transparent and practical policy that strikes a balance between returns to owners and reinvestment into the business will enable your business to thrive over the longer term.

Clarity around recruitment and selection; appraisals, rewards and remuneration; and owner education for family members should form part of your plan to sustain the prosperity of your family business. HSBC Private Banking's expertise in family governance and succession planning can help to professionalise your family business, mitigating conflict, encouraging growth and ensuring seamless transitions. We work with global families to get the best out of their family businesses, equipping you with the tools you need to thrive – whatever the future may bring. For more information, please contact us or your Relationship Manager.

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