Corporate governance in family businesses has become increasingly important in the Brazilian business world, where around 90% of companies are family-controlled. The lack of adequate planning for business succession and the difficulty of maintaining harmony in family relationships often culminate in the failure of the company after the third generation. In this context, the creation of effective governance mechanisms and the implementation of formal structures are fundamental for the continuity and sustainability of these organizations.
Family businesses face the challenge of reconciling professional business management with family values and traditions. Family governance, structured through the creation of councils, aims to offer this reconciliation. The Family Council, for example, is a (non-corporate) body that enables communication between family members and helps resolve conflicts, preserve family values and plan succession. The Board of Directors, on the other hand, is a deliberative body provided for in the Corporations Law, which provides a strategic and impartial view of business management and is often made up of external members who bring a more technical and professional approach.
In addition to these structures, the use of specific legal instruments is essential to ensure family governance. In this sense, the Partners’ Agreement – also called the Shareholders’ Agreement or Shareholders’ Agreement, depending on the legal nature of the company – regulates corporate aspects such as the purchase and sale of shares and voting rights, ensuring predictability in future business decisions. The Family Protocol, also known as the Family Statute, establishes rules for coexistence and responsibilities among family members directly or indirectly involved in the business, creating a structure that minimizes internal conflicts and favours the continuity of values to be passed down through the generations.
To implement these governance structures, companies in the form of holding companies (known as family holding companies) can be used. Conceptually, a holding company can be defined as a legal entity that centralizes the organizational and/or patrimonial control of the family group, either through (i) a pure holding company, focused exclusively on managing stakes in other companies; (ii) a mixed holding company, which also includes other business activities; or (iii) a patrimonial holding company, which only manages the family assets. These structures facilitate succession planning and the administration of assets, contributing to the perpetuation and preservation of the business, and can also lead to a reduction in the tax burden.
Analyzing the challenges faced by family businesses, one of the main points of wear and tear in the family relationship is the lack of interest from future generations in participating in the management of the business. Recent research shows that more than 50% of heirs do not want to be directly involved in the management of the company[1]. In this scenario, it is crucial that business families create governance mechanisms that allow the business to continue, even if direct management is carried out by external professionals.
At the same time, it is important that the family members in control and managing the business create structures that encourage the younger generations to participate and understand the family premises, giving them the opportunity to bring in points of view and changes in the contemporary world that can have a direct impact on the perpetuity of the business, especially those of a technological nature.
Thus, by combining all these elements, family corporate governance can be effectively implemented in various structures.
Finally, it should be noted that family businesses often find it difficult to separate the business context from the family relationship, mixing up the problems of both relationships. For these reasons, it is recommended that implementation is also carried out with the help of a consultant or lawyer, i.e. an agent outside the family relationship.
[1] Source: KPMG. Available for download in PDF, p. 8). Accessed on: 25 Aug. 2024.