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Presenting Partner

Life Insurance Corporation of India

Moneycontrol

Budget 2022

Technology Partner

Dell Technologies

Associate Partners

Kotak Mutual Fund
Pharmeasy
Indiabulls
SBI
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Family governance: A conflict-free structure for passing on your wealth to heirs

Family governance is a set of rules put together by a family. This set of formal and informal rules structures the decision-making processes in family businesses

August 19, 2021 / 10:16 AM IST

Despite families devising plans for passing their wealth, we still hear about sibling rivalry, business partition and family conflicts over their respective shares. Have you pondered the reasons for such an outcome? Do we believe that disputes are inevitable when money enters the picture? Or, is there something we are missing while passing on wealth to our loved ones?

India as a country is known for its cohesive family ties. Earlier, traditional Indian families used to adopt the learnings from epics such as Mahabharata and Ramayana that teach us how to live, what to do and what not to do when confronted with issues such as family conflicts, ego-battles, and sibling rivalry over wealth. Unfortunately, the import of these timeless scriptures hasn’t been digested by present-day families. These epics demonstrate issues faced by every family today. Kauravas trying to grab the kingdom through unfair means from the Pandavas in the Mahabharata or the seed of envy planted in the heart of Kaikeyi to aspire for the entire kingdom for her own son in Ramayana sound familiar, don’t they?

The life of the Pandavas taught us a very important principle – unity in diversity. The brothers united for higher goals despite the challenges and differences in opinions. They understood the relevance of cooperation as a means to establishing good governance. In the modern world, this concept is popularly known as family governance.

What is Family governance?

Family governance is a set of rules put together by a family.

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This set of formal and informal rules structure the decision-making processes in family businesses. It is concerned with mutual interaction among family members aimed at making desirable choices for all stakeholders. It is a set of mechanisms that family members can utilize for collective decision-making and implementation that presents them with a forum to voice their opinions and fulfills their interests as well as resolves family conflicts constructively.

Why is family governance important?

Family business is an overlap of the two subsystems namely, family – representing the emotional aspect – and business – representing the aspect of rationality. This overlap tends to result in differing purposes and priorities that produce stress for the founder and other members.

Typical family businesses go through the following stages.

Controlling owner stage: The founder being the sole decision-making authority whereby the management of the business is quite simple.

Sibling partnership stage:  Marks the entry of the second generation when the children of the founder join the business. The control and ownership authority of the business are shared amongst the siblings and the founder. It becomes important to define rules that govern distribution of control amongst the siblings as well establish mechanisms to avoid sibling rivalry.

Cousin consortium stage: Represents the stage of diluted ownership control marked by the entry of the third generation. Processes need to be established to manage diverse interests, needs and perspectives of the extended cousin system, as the cousins may not necessarily share the same family values, cohesiveness and may have little in common, and hence effective governance structures need to be set-up to establish a shared vision.

The issue in family businesses is not just the number of members or their diverse opinions and aspirations, but the absence of a forum to manage these differences constructively, resulting in a unified approach towards family business goals. We need to realise that besides traditional inheritance plans, it is the spoken and, often the unspoken rules of conduct, wisdom, and family values passed on from one generation to the other that play a pivotal role in ensuring family togetherness transpiring into a unified approach towards family business and wealth.

Governance is considered relevant for family businesses due to the complexities of family dynamics in the business. While it has gained prominence in the ultra-high net worth individuals segment due to the estate value and cost involved, a closer look at such governance mechanisms makes one realize the importance of passing on family values, wisdom, and unified vision for the coming generations along with your wealth irrespective of the quantum of the estate.
Sneha Makhija is Head of Wealth Planning, Products & Solutions, Sanctum Wealth
first published: Aug 19, 2021 10:14 am
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