By Shiue-Chuan Wang & Yu-Wei Lin, Senior Partner & Associate of Formosan Brothers, Attorneys-at-Law

Many people often have a misunderstanding about family businesses. They think family/small businesses are low in operational efficiency or even poorly managed. Yet, in fact, the world is filled with all types of family businesses big and small. Some family businesses even have better operational performances and survive longer than non-family businesses. But as the size of a family business grows, the distribution of responsibilities and the organization of family members often become more and more complicated.

At the same time, there might be conflicts among members of this family business. These conflicts might originate from different views on the choice of the company's heirs, competition among families, or disputes over compensation and dividend policies. A family business may also make wrong business decisions because of conflicts among family members, or get caught in an endless power struggle between family members, which may eventually lead to the closure of the family business or the destruction of the family. In order to solve this problem, the concept of family governance arose. This concept comes from separating the “family” from the “business”: In the “business” aspect, company development is implemented through corporate governance; in the “family” aspect, the purpose of intergenerational inheritance and family development can be achieved through family governance.

In terms of family governance, many century-old family businesses would formulate a “family constitution” and set up a “family council” as ways for resolving disputes and creating cohesion and communication.

Therefore, to successfully govern a family business, it is best for the family in question to establish a set of rules that provide unique and clear visions for the family, expressly specifying the family members participating in the operations of the  family business, the arrangement for intergenerational inheritance, the ways to handle expectations of both participating and non-participating members of the family business, and how family members are to interact with the business and the managers of the business.

Family Constitution
When a family and its family business go through one or two generations of inheritance, the number of people participating in the operations of the family business will naturally increase, and there will be more divergence in the expectations of the family business among family members, leading to conflicts. To handle such conflicts, some families would formulate a “family constitution” as a document specifying the relationships between family members and the family business and defining the operational strategies of the family business. A family constitution often contains provisions on "family purpose, philosophy and mission", "family governance structure", "family equity", "family business inheritance and talent cultivation", and "handling of violations of the family constitution" as the rules among family members during transitional periods or emergencies.

However, it should be noted that a family constitution is not legally binding on the family members in principle. Whether it is enforceable depends on the self-discipline and mutual trust of family members. Hence, in family inheritance practices, a family constitution may be combined with the set-up of a close company or a family trust to strengthen the binding force of the family constitution on family members.

Family Council
A very important purpose of family governance is to provide a communication channel for family members between family and business, so that they can understand each other and form a consensus. As such, many families would set up a family council. Through regular family gatherings to discuss issues arising from the family and the business, the family council serves as the center for family strategy and planning. It implements the family’s values established by the family constitution and serves as a communication channel among family members to provide the directions for family policies.

In conclusion, in order to achieve sustainability of the family business and pass down the heritage of the elders, it is preferable for family businesses to carefully plan out the structure and operational mechanisms of family governance as soon as possible.
(This article was published in the Expert’s Commentary Column of the Commercial Times：https://view.ctee.com.tw/business/33701.html）

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