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The word governance invokes an image of political regimes or corporate institutions enforcing laws and rules through complex bureaucratic systems. It's not a term most families associate with their own system of decision making and yet, in its simplest form, that is all it is.
For most families, the system they experience is informal and relies on mom or dad, or both, making the key decisions for the rest of the family members. This hierarchy is both biological and economic in nature. Most children are dependent upon their parents for their basic needs until they reach an age where they can become independent.
Children will often allow a certain level of parental oversight to continue beyond their independence due to tradition, values, and respect. Sometimes the roles can reverse where older parents rely on their children but most children from non-business-owning families tend to leave the nest and become independent of both their parents and their siblings. This allows relationships to remain neutral and, to some extent, optional.
In business-owning families, however, the influence of family members on each other’s economic and social situation may extend beyond normal cultural practices. Children of business-owning families might remain economically dependent on both their parents, their siblings, and even their cousins throughout their lifetime. This creates a level of inter-dependence that ties them together regardless of choice, relationships, or activity in the business.
It is this enforced inter-dependence that increases stress within the family and creates a need for more formality in the decision-making system. But many family members might not fully understand what that means or what a functional system might look like.
The terms “family assembly” and “family council” are often used to describe a formal system of governance in the family circle. These structures are usually created when families reach a size and level of complexity that creates enough tension to require action. This is typically when the business operation is so large that relatives, such as cousins, are involved, although the sibling ownership phase will have its challenges.
Long before that phase is reached, however, there is a recognized leading practice that you can use to head off major issues: introduce regular family meetings to the family group in order to promote strong family relationships and a stronger family business. The value of family meetings cannot be overstated and have been shown to form one of the top three correlating factors in family business success. Once implemented, these meetings can take on their own momentum, although this often relies on one or two key family members becoming champions of the process.
For those who aren’t sure what a family governance system might be responsible for, Craig E. Aronoff and John L. Ward have the answers. In their book “Family Meetings”, they list ten goals and benefits that might help clarify what we can expect to achieve. These are:
Under each heading there will be a raft of work and outcomes that all serve to strengthen the glue that holds the family together.
By starting with regular family meetings that begin to address the issues listed above, there is a logical progression towards formalisation both in the documents produced and in the structures created. Thus, the logical progression is towards a family assembly, a family council, and a family constitution. This can happen over time and should not be feared, as the family controls the pace of development. It might take some time to achieve but the results are worth it.
Once family meetings begin, most families start developing a better understanding of the business and of their contribution to it as individuals. They begin to learn how to communicate and to appreciate the legacy of wealth that they control. This then leads to long term sustainability allowing the family business to move beyond the third-generation failure that plagues so many.
To learn more about family governance models and how it can work for your family, contact Tina Di Vito, CPA, CA, CFP, TEP, FEA, Partner, Family Office Services, at 416.515.5071 or [email protected]
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