Governance of Family Companies: Family Council, Supervisory Board, and Independent Directors

Three Levels of Governance in Family Business

Effective management of a family business requires distinguishing among three levels of governance:

1. Family bodies: Family council, family assembly, family constitution
2. Ownership bodies: General meeting of shareholders, Holding Company Board
3. Business bodies: Board of directors, executive management

Mixing these levels is the main reason for governance failures in family business.

Family Council (Family Council)

What is it and why?

Family council is a body representing the interests of the family as owner. It does not manage the business directly, but defines the connection between the family and the business.

Functions:

• Formulation of the family’s vision and values
• Managing family members’ expectations regarding the business
• Resolving intra-family conflicts (before they escalate into the business sphere)
• Educational programs for the next generation
• Formation/oversight of the Family Constitution

Composition: Representatives of different branches of the family, different generations. Not necessarily only top managers.

Frequency: Quarterly (business issues), annually (family strategy, constitution review).

Family Assembly (Family Assembly)

If the family is large (20+ members), a broader body is established.

Family assembly: All family members (including spouses, in some cases adult children). Frequency: 1–2 times a year.

Functions: Communication about the state of the business, education, maintaining family identity. Does not make managerial decisions — only information sharing and discussion.

Board of Directors in a Family Company

Evolution of the Board as the Company Grows

Stage 1 (small business): No formal Board. The founder makes all decisions.

Stage 2 (medium business): Board consisting of family members and senior managers. Often informal.

Stage 3 (large business): Formalized Board with independent directors. Clear regulations, regular meetings.

Stage 4 (public/institutional company): Independent directors are the majority. Committees (Audit, Remuneration, Nomination). Full compliance with corporate standards.

Independent Directors (Independent Non-Executive Directors)

A key element of mature governance in family business. They bring:

• Professional outside perspective (industry experience, M&A, finance, legal)
• Protection from family tunnel vision
• Trust of minority shareholders and creditors
• Accountability for the CEO (even if the CEO is a family member)

Independence requirements:

• Not a family member
• No substantial financial relationship with the company (except director’s remuneration)
• Not a former employee of the company (minimum 3 years since departure)
• No conflict of interest (client, supplier, partner)

Compensation for independent directors (UAE, large family companies):

• Retainer: $50,000–200,000 per year
• Per meeting fee: $2,000–5,000
• Equity-based compensation: controversial for family companies (risk of conflict of interest)

Board Committees

Audit Committee: Oversight of financial statements, internal audit, and risks. Must consist of independent directors. One member must be a financial expert (CFO/CPA background).

Remuneration Committee: Determines compensation of the CEO and top managers. Critically important for family companies — prevents inflated salaries for relatives.

Nomination Committee: Criteria for selecting new directors and CEO candidates. Formalizes a meritocratic approach to appointments.

Family Constitution (Family Constitution / Family Charter)

Family constitution is a document regulating the interaction of the family and business.

Key Sections

1. Mission and Values

• Why does the family keep this business?
• What values does it embody?
• What is the long-term vision (25–50-year horizon)?

2. Membership and Participation

• Who is considered a family member (including spouses)?
• What are the employment conditions in the company?
• Minimum qualification requirements for managerial positions (MBA? Experience outside the company for N years?)

3. Dividends and Distribution

• Dividend payment policy
• Buyback mechanism (how a family member can “exit” the business)
• Prohibition of selling shares to third parties without a right of first refusal

4. Governance Structure

• Composition and powers of the Family Council
• Board rules: share of independent directors, term limits
• Conflict resolution mechanism (mediation, arbitration)

5. Education for the Next Generation

• Financial education programs for heirs
• Entry requirements to the Family Council (age, education)
• Mentoring programs