It’s impossible to think about the transition of any business — and perhaps more so the family farm — without talking about the governance structure that is going to allow that farm business to operate, thrive and be sustainable for generations to follow.
It’s easy to find. Just look for the fireworks.
“The flashpoints usually start when the next generation is beginning to flex its muscles,” says John Tucker, a family business consultant with the Family Business Consultancy, a U.K.-based company that helps family businesses deal with transition issues (see their website at www.thebfc.co.uk).
Tucker is a big name in the world of family business. He founded the International Centre for Families in Business, and also started the U.K.’s first MBA for Family Business.
“Generational transition issues are the driving force, but it gets wrapped up in governance,” says Tucker, who then lists all the challenges. “What rules, disciplines and processes do we apply, how do we talk to each other, what’s fair, what’s equal, how do we look after Mom and Dad?”
And they’re hard to ignore. Farms are different from most other family businesses, he point out. “Other families in business go home at night.”
Who would vote for this?
Tucker has spent 30 years helping family businesses including farms through the transition process, and while he sees the development of a governance structure as crucial to the process, he finds there is often initial resistance to the whole notion of governance.
Many entrepreneurs, particularly men, see the governance discussion as an attempt to erode their authority, says Tucker. “They see it as somebody from the outside — the banker, the lawyer, the accountant or the farm consultant — trying to impose a set of rules and way of doing things on them.”
They see it, too, as something that’s contrary to everything that helped them build the farm, which they were able to do because they’re good at knowing their own minds and making their own decisions.
“Anything that smacks of control from somewhere else is seen as a negative,” Tucker says. “It’s one of the first things we have to get over because it’s all very well having this wonderful theory about governance, but if they believe that governance isn’t a positive process for them, they just don’t buy into it.”
Tucker spent five years in New Zealand working with Massey University and Lincoln University to develop two educational modules for farm governance and transition. What he learned through that experience talking with professionals who serve the farming community in New Zealand has formed the basis of the Family Business Governance System model that he has developed to help family businesses with transition and governance.
The right advisers
Do your advisers really understand your family?
One of the biggest issues that Tucker has seen over the years is that the professionals, including lawyers, bankers and accountants who are the first people that a family business turn to for advice, and who purport to understand the family and its business, actually don’t.
“They don’t have an understanding of the emotional systems and the psychological forces at work when a family is in business together, so they almost try and impose some sort of structure from day one,” says Tucker, who comes from a psychology background.
But trust is crucial to a family farm succession, and it doesn’t happen overnight.
“To build trust with a family takes a long time,” Tucker says, crucially adding “You can’t build trust without being able to talk about the real issues that a family is facing in terms of their relationships, which often get in the way of any governance system.”
He finds lawyers and accountants in particular find it difficult to even start conversations about relationships, so it doesn’t get talked about. “You can usually sort out the property stuff, and the pensions, and the salaries,” Tucker says. “But when it comes down to power, control, envy, and jealousy and all that emotional stuff, it’s difficult to deal with. But it’s got to be on the agenda.”
Yes, you need a family charter
For Tucker’s clients, the process of developing a family business governance system begins with the family charter. “A family charter is a gentle way of working with the family and leading them through a process of working together to explore the things that really matter to them,” he says.
The charter process can take a long time. Tucker has worked with families that have been able to agree on a family charter in six months, while others have taken three years because it has meant dealing with emotional and ethical issues that are important to the family.
The family charter deals with questions like, what is the family’s ownership philosophy? Should someone own shares in the business only if they work in the business? Or is the family business there for every member of the family to support them whether they work in it or not? What is the family’s attitude to philanthropy and to educating the next generation? What is the family’s attitude towards family members, outside people or spouses being given roles and jobs in the family business?
Once the charter is in place, a family council and family assembly are set up. The family council, which meets twice a year, includes family members and is the voice of the whole farm family. It is separate from the board of directors, which has the authority for day-to-day operations of the business and for being responsible to the owners or shareholders.
The family council is an advisory group that makes sure the values, vision, goals and policies of the whole family — as set out in the family charter — are heard.
“If a family business is moving towards separation of ownership and management, the family charter and the family council become very powerful because they inform the management of the business what the family wishes are,” says Tucker.
The family assembly is a vehicle for creating an environment where all of the family who are involved in the family business — whether actively or not on a daily basis — can come together maybe once or twice a year to understand what is going on with the farm.
“These are powerful tools and although these family documents are not legally binding, they are about the family’s ethics, and values, what the family holds dear and how they want to see their farm run,” says Tucker.
Shareholders need an agreement
The family charter is an important guiding document for the family which reinforces its wishes, but it should exist alongside legal documents such as a shareholders’ agreement. Because the shareholders’ agreement deals with the responsibilities and roles of the owners and governs their behaviour, it can save a lot of headaches down the road. Unfortunately, all too often, farm families don’t think they need one.
“Too often I have seen people say, we’re family, why do we need to have an agreement about what we do with shares?” says Tucker.
That’s a path toward trouble, he warns. “If you look at the attrition rates of families that fail between the first and second, and the second and third generation, they’re huge. It’s because they haven’t addressed the issues like their attitude to ownership. Is this family business here forever? Do you want to see it passing from one generation to the next? What does it mean to own shares in the business? What’s fair, what’s equal? What does that mean to people? Where can a shareholder sell his or her shares and are they allowed to? A shareholders’ agreement is about what the owners want from the business and how they want to work together.”
All too often, admits Tucker, these conversations aren’t even on the radar until something happens to cause discord or to fracture the family, and that’s when he usually gets a phone call for help. It’s hard to persuade families to start planning before they reach a crisis point.
“I have yet to come across a family in business that doesn’t have some of these issues at some point, it’s almost built into their DNA, and particularly when you get spouses involved,” says Tucker. “Normally, I find the bloodline family can sort things out, but when you start to get outsiders and spouses involved all sorts of things start happening, like envy and jealousy. If I’m an oldest son and I get married and I’ve worked in the family business since I was 16, where does my loyalty lie? With Mom and Dad and my bloodline family, or with my new wife and kids? This stuff is incredibly hard.”
Not enough advisers to go around
There are groups in the U.K. — such as the Family Farm Institute and the Family Business Network — that are working to try and educate families about transition and governance. But part of the problem is that there simply aren’t enough family business advisers to go around, and especially ones who have an understanding of farm family business.
It doesn’t help either that dealing with what Tucker calls “emotional capital” is not an easy thing to do and few people in the traditional business service professions are trained to do it.
“We’re doing our best, but it’s a minefield of a sector to work in, and I think a lot of professionals are put off working with family businesses because it’s hard work,” says Tucker. “You can’t leverage it like legal and accountancy work. I can’t go into a family business and start working with them and say, ‘I won’t be here next week but my 27-year-old assistant will be coming to work with you.’ It doesn’t work like that because you have to build quality relationships and trust over time. You have to be able to deal with anger, frustration, tears and all of the human emotions that are inherent in being in a family and if you can’t deal with that it makes it very difficult.”
Kids are business people
In many sectors, first-generation business owners don’t start a business with the intention of it becoming a generational family business. They get into business for other reasons, such as wanting the freedom of being self-employed.
Farmers are different because they dream from day one that the kids and grandkids will want to continue farming. But whether that’s the dream of the next generation or not, in any family business the next generation starts to get involved at a very young age, whether the parents realize it or not.
“Most parents’ eyes would go to the top of their head if I said; You know what, your kids were involved in your family business when they were three because they sit around the dinner table, listen to all the talk, and take it in. It seeps into their brains, and they begin to become part of that business long before the parents ever realize that the kids are part of the business,” says Tucker. “That’s even truer with a farm. So, I believe the outgoing generation has to take the responsibility, not the kids. If the relationships break down, the transfer of wealth breaks down as well. The transition from the second to the third and subsequent generations is trickier because as the farm grows there’s more at stake.”
Tucker has seen plenty of sadness over the past 30 years when a family breaks up because it hasn’t sought help to plan through transition before the process becomes a bitter fight.
“When families fall out, I’ve seen suicides, drug addiction, alcoholism, parents who don’t get to see their grandchildren, and I think there are many more families who break up as a result of being in business together than we know about,” he says. “You need to start to plan this stuff and start to talk about this openly. It’s all about transparency and understanding expectations. Parents need to understand the expectations the children have of them and the kids need to understand the expectations that the parents have got.”