Running a family business can be daunting at the best of times. In India’s complex environment, the pulls and pushes of business prerogatives and challenges, new opportunities, familial stand-offs, competing for individual ambitions and a stubborn love of the business at times can tear a business apart.
That’s why many family-owned businesses have resorted to ‘family charters’ to guide and govern the relationship between family members, and the family and its businesses. Charters are a guidepost, a north star to the family business, and they have become popular.
Pandemic triggered increased appetite for family charters
Family charters are common in India but Covid-19’s existential threat has fueled an explosion in their popularity. An important trigger has been the urgency of insulating a business from a sharp depletion of cash flows and no visibility on future revenues in an economy that at one point in the pandemic had sort of shrunk by a quarter. This was an extraordinary shock - and risk - too many family businesses, the leveraged ones as well as those that disdain debt. Family businesses have seized this moment to review and reorganize their governance structures.
Technology-led disruptions were already creating challenges and opportunities for businesses across sectors. The current pandemic and the ensuing new normal has accentuated these urgent calls to action for business families, especially requiring the younger generations to step up to the occasion.
Often referred to as the family constitution, the charter lays down a vision and defines ethics, family history and values, family members’ status, approaches to wealth creation and preservation and legacy planning. Critically, the charter binds family members to the vision and its execution. It may also identify a Family Council, which is primarily responsible for non-business-related matters like usage of family funds, portfolio investments and/or philanthropy, and a Family Board, who oversees and provides guidance on existing and new business owned and managed by families.
The Family Board is key for decision making and may acknowledge how family members would be identified in actively running existing businesses, managing/overseeing family office and investments portfolios, seed capital for funding new ventures, dividend policy, etc. We´ve also seen some families document a list of industries/sectors in which they will never invest in, irrespective of the return/reward factor from such sector. Guidelines may also be laid out on how to build accountability and/or incentives for these active family members in their respective roles, create backups and invest in professionalizing over time.
For good measure, it also lays down rules for arguing - no interruptions when one family member moans about another at monthly ‘air your differences’ meetings for example.
The charter creates checks and balances to guard against reckless deviation from agreed strategy while also acting as a beacon for a polarized family in uncertain times. Many promoters of these businesses attribute their survival to the charter’s invisible but powerful status as a backstop, arbitrating disputes and shining a light on values and ethos.
Managing the environment
A second trigger fanning the adoption of family charters has been the increased scrutiny by regulators, driven by the fact that though a majority of family businesses are privately held, yet some entities in these businesses are listed, thus inviting regulatory oversight. Pressure is also increasingly being applied by investors demanding disclosure and adherence to, say, ESG standards.
In these circumstances, family businesses lacking internal mechanisms feel vulnerable, and it’s here that a family constitution can help align different parts of the business into a common position on uncommon threats. While investors now tend to reward businesses that adopt ESG standards, family businesses recognize that by acting like a ‘public company’ on ESG, they too can command valuation premium.
Allied to this vision is the rise of sustainable and impact investing. In a rather dystopian view of the world, there seems to be a forced trade-off between making money and making a difference. But that’s a false trade-off as many promoter-led businesses are now beginning to realize.
Charters ensure that family members can coalesce around new ways of doing business, such as sustainable and impact investing, and an increasing and happy realization is that making money and making a difference do not necessarily need to be mutually exclusive. Family offices can contribute here and help to make this a smooth transition.
Intergenerational wealth transfer and legacy planning
Family charters are not new even if they feel new after the attention heaped on them by the pandemic. In fact, some of India’s most prominent business families are experienced users of family charters. A key aspect of the rise of family charters is the seamless pathway that it typically creates for legacy planning.
This means planning for the transfer of wealth for the next generation while maintaining the businesses as cohesive and growing entities. This is true not just in India but globally as well. In fact, according to a report by Wealth-X, a global leader in wealth information, over the next decade, the world’s wealthiest individuals are expected to transfer to their families more than $15 trillion - a sum greater than China’s GDP. The report also reveals that a whopping 57 per cent of the originators of wealth are concerned about their inheritors’ ability to manage the family business. A charter as a guiding post is thus handy to assuage such concerns.
It seems clear that a family charter is also viewed as a vehicle to reshape and restructure a business to achieve strategic objectives such as diversification of both business and wealth.
The charter is thus an important governance lodestar for family businesses, but their use also relies on selecting the right model for its effective delivery, which can include a combination of family trusts, shareholders’ agreement and the setup of a family office to ensure its desired implementation. Selecting the right model depends on the size and complexity of the family structure, the need for global mobility amongst family members as well as on the underlying businesses, new ventures and overall wealth.
This requires families to assess the complexity, costs, talent and sustainability of such delivery vehicle in order to decide on the right model and mix between in-house and outsourced/externally managed functions.
(The writer is the Head of Trust & Fiduciary Services, and Narayan Shroff, Head of Investments for Barclays Private Clients, India).