Only 40% of family-owned businesses reach the second generation, 13% get to the third, and just 3% are passed down to a fourth generation and beyond. To build legacy, creating an effective governance structure that serves the family and the business is critical.Conflict around who makes the decisions in a family-owned business can destroy that legacy before it gets started.

For owners of a family business, “Governance” is an emotionally loaded word. For many founders and G2 owners, their biggest fear is the mistaken belief that governance means an outsider is going to start telling them what to do. Or, worse, someone else in the family will be looking over their shoulder second-guessing everything.
This article will discover:
- What Governance really is
- Generational Phases and how they impact governance structures
- How to build a governance structure that serves the business and the family
What Governance really is:
Have you, or any members of your family ownership team, ever held any of these beliefs?
- “I don’t need someone else to tell me what to do.”
- “This is our business, we’ll run it our way.”
- “Our company is too small to need a board of directors.”
- “An outsider will just steal our business secrets and go somewhere else.”
“Governance” is often a dirty word in family-owned businesses. However, “Governance” simply means “Decision making.” It’s an accepted legal and business term for the processes you put in place to make sure things get done properly within your given range. Those processes are critical for the long-term survival and growth of your business, and they’ll get done even when you’re not involved in every decision.
Within an effective governance structure, owners are free to concentrate on the actual path of the business. You get to answer the questions: Where are we now? Where are we going? How are we going to get there? What are our next steps? Who’s going to do what? And Who will be in charge in the event of [fill in the blank]?
Creating this structure is no different from writing a new-employee manual. Governance helps family members, owners, investors, and employees understand how to run your business. Most importantly, whether you’re involved as an owner, manager, or board member, if you’re part of the operational team then you control the process of governance. That’s the watershed moment, when an owner understands that they’re already doing governance; they just didn’t know what to call it.
Governance provides the framework so owners and managers can navigate the different phases of their business. This includes approval levels, strategic discussions, and business reviews. It means understanding what you should do going forward, regardless of whether you do it yourself or someone else does it for you.
Governance is about helping you manage the business, so things get done correctly. For example, when there’s an approval level required to make an expenditure, it’s usually a matrix. If it’s this much, it goes to so-and-so; if it’s that much, it goes to so-and-so. If it’s above a certain dollar amount, then it’s always communicated to so-and-so for approval. Maybe you have a rule about pricing, the way car salespeople must “get my manager’s approval” on the deal. Or the rule says you can’t make a capital acquisition, buy a building, or buy a company, without approval.
Generational Phases and how they impact governance structures:
“Generational Phases” are simply the evolution and succession of various business members. These stages include starting, managing, owning, and investing.
Throughout that evolution, there is a potential for conflict between generations. Putting the business first can create tension between family members. That’s why it’s so important to pay attention to the family architecture and engage as many generations as possible. Consider the impact it should have on both succession planning and developing the family architecture that fits best.
How can you apply this? As yourself:
- What phase do you believe you’re in?
- Are you ready to move to the next phase?
- When will you be ready, and who will take over your old role?
- What skill(s) do you have to add or let go of to move to the next phase?
- Who can help you do that?
Keep in mind that the phase of the business drastically impacts governance structure. It can affect the overall point of view, individual roles, and long-term expectations of different family members.
Entrepreneurial, first-generation owners need reassurance that “governance” won’t mean someone else is telling them what to do. Founders should understand that they will be part of shaping the initial governance, and maintaining its form and application. The evolution of good governance is a continuous journey, even in a 100-year-old family business.
How to build a governance structure that serves the business and the family:
This process of developing an effective governance structure that positively serves both the business and family can be challenging. Family governance structure, business governance structure, and the intersection of the two, must be considered when building the next phase of your legacy. The Board of Directors, management, and shareholders will also be a vital component to this process.
Let’s dive into the process: How do you build a governance structure?
- Family Values (these are defined by the Founder and should be aligned with the entire family)
- Purpose
- Direction
The process evolves into a set of rules for oversight and processes for decision making, which ultimately create the approval matrix.
To mold this process to your family and business architecture, consider these critical questions about communication:
- How does the family communicate its desires or expectations to the management of your company?
- Do you feel that the communication between the family and the business is open and respectful?
- Do you believe that members of the family feel that they have an opportunity for their voice to be heard?
- Do you have effective family employment and development policies and processes?
When a family understands that governance is the key to building legacy, then the business will thrive and can grow into its next phase. Ultimately, the quality of decisions equals the quality of data. An interesting example of this concept comes from Rockford, IL from a company in the craft & hobby industry. The business was a supplier to big box stores such as Walmart and lost 30% of revenue over 3 years. Fortunately, key business members determined that “We need a salesperson” and explored the power of expansion. Revenue increased from 35% to 95% in 6 months, and their growth compounded by 12% for the next 4 years during The Recession.
By creating an effective governance structure, they saved the business.
About the Author:
For more than 40 years, Charlie Leichtweis been helping family businesses establish best in class governance as an executive, advisor, and board member. He’s the author of two books, The Power of Respect, and The Power of Legacy. Also, he hosts the Power of Respect in Business podcast, which explores various topics about the dynamics and challenges of family businesses.
If your family is struggling with how to remain in control through generational changes, please contact us at charlie@expertsinhow.com to set up a free consultation.