How parallel governance can guide generational transition

Clear communication and strategy between the family and the business creates capable shareholders alongside a sustainable enterprise.

In brief

• A family business transition is vulnerable to disruption, from an expanding shareholder base to unclear boundaries between family, ownership and management.
• Parallel governance enables the family and business to work side by side with a clear understanding of operations and joint responsibility for long-term success.
• Managing family and business needs with an eye toward tomorrow educates the next generation while reducing the transition risk.

In recent years, family businesses have made headlines following their acquisition by private equity investors. This turn of events has become increasingly common for family businesses in the US, where multigenerational companies are more the exception than the rule. In fact, EY research reveals that more than 65% of family business owners express a desire to transfer their companies to the next generation, but fewer than 25% succeed in doing so. But the untold story behind each sale is why the transition from one generation to another can be such a vulnerable period.

The risks of failure are extensive. As generations pass, the shareholder base becomes more complex, with diverging interests between those working in the business and inactive shareholders who may be more concerned with short-term wealth management. Uncoordinated financial demands on business profits can arise as the business and family grow, leading to tensions between the need for capital and the shareholders’ need for liquidity. Navigating these pressures requires clear boundaries between family, ownership, governance and management roles to prevent confusion and blurred decision-making.

Clear communication and strategy between the family and the business creates capable shareholders alongside a sustainable enterprise.

How parallel governance guides the family

The “family governance” portion of the strategy prepares the next generation to be good stewards of operating businesses and educates them on the roles and responsibilities of being affiliated with the business, whether actively working for the company or not. Here are key activities that can promote and encourage patient capital within the family:

How parallel governance guides the business

Business governance includes procedures for making sure well-qualified people are running the company by creating an effective fiduciary board of directors. The board then appoints qualified management, who are responsible for tasks such as transparently reporting on results and developing data analytics to better understand growth opportunities and risks. Providing operational confidence and guiding the business in the long term requires:

By focusing on both these family and business activities, owners can maintain a healthy parallel governance system that balances the needs of both. By anticipating and addressing the principal causes of disruption, parallel governance sets up family business owners for success as they navigate generational transition in pursuit of long-term sustainability.