Preventing Family Business Disputes: The Governance Checklist

Most family business disputes are preventable. Specifically, the triggers are well known, the patterns repeat, and the structures that prevent disputes are well understood. As a result, families that invest in proper governance early enjoy a substantial reduction in the risk of serious disputes later. Importantly, the families that handle their governance best do so when the family is functioning well, not when a dispute has already emerged. Crucially, preventing family business disputes is one of the highest-return investments any family business can make. As a result, this page sets out a practical governance checklist that family businesses can use to put the right structures in place.

This page explains what good family business governance looks like, what each element does, and how families should approach putting governance in place. Specifically, it covers the documents, the structures, the processes and the disciplines that distinguish well-governed family businesses from those that are exposed to dispute.

Why governance prevents disputes

In short, good family business governance prevents disputes by doing four things. First, it makes expectations explicit. Specifically, many family business disputes arise because expectations were never articulated. As a result, family members formed different assumptions about what would happen, and when those assumptions collided the dispute emerged. Importantly, good governance forces those assumptions to be discussed and recorded.

Second, it provides a structured way to handle disagreements. Specifically, good governance creates forums and procedures for difficult conversations. As a result, the family does not have to invent a way of handling each new issue under pressure. Third, it anticipates change. Importantly, every family business goes through transitions: generations change, family members marry and divorce, founders retire and die. Crucially, good governance plans for these transitions in advance. Fourth, it creates transparency. Specifically, transparency is the single most effective protection against the most common pattern of dispute, where one branch of the family suspects another of taking value out of the business unfairly.

For the wider context, see the common causes of family business disputes.

The governance checklist

Importantly, the checklist below sets out the main elements of family business governance. Specifically, not every family business needs every element. By contrast, every family business benefits from considering each one and putting in place the elements that match its circumstances.

1. A shareholders’ agreement

First, every family business with more than one shareholder should have a current shareholders’ agreement. Specifically, the agreement should set out how decisions are taken, how shares are transferred, what happens on a range of events, and how disputes are resolved. Importantly, the agreement should be reviewed every five years and at every generational transition. For more on this, see shareholders’ agreements for family businesses.

2. Up-to-date articles of association

Second, the articles of association should be current. Specifically, many family companies are still operating on the standard model articles, which provide very little protection for minority shareholders. As a result, the articles should be reviewed and updated to reflect the family’s actual arrangements. Crucially, the articles and the shareholders’ agreement should be consistent with each other.

3. A documented succession plan

Third, the family should have a documented succession plan. Specifically, the plan should set out who will take over which roles, on what timetable, and on what terms. Importantly, the plan does not need to lock everything in immutably. By contrast, it needs to be specific enough to remove the ambiguity that allows succession disputes to develop. For more on this, see succession planning for the family business.

4. A family constitution

Fourth, the family should consider a family constitution. Specifically, the constitution sets out the family’s values, the rules for participating in the business, and the structures for family decision-making. Importantly, the constitution is most valuable in larger families and in businesses approaching a generational transition. For more on this, see family constitutions and family forums.

5. A family forum or family council

Fifth, the family should have a regular forum at which the affairs of the business and the family’s relationship with the business are discussed. Specifically, the forum should meet two to four times a year, with an agenda and minutes. Importantly, the forum is separate from the board of directors. As a result, family matters are discussed in the forum and business matters at the board.

6. A properly constituted board of directors

Sixth, the family business should have a properly constituted board. Specifically, this means regular board meetings, minutes, and an agenda that addresses both routine business and strategic questions. Importantly, in larger family businesses, the board should include at least one independent non-executive director. For more on this, see the role of the non-executive director.

7. A clear remuneration policy for working family members

Seventh, the family business should have a clear remuneration policy. Specifically, the policy should commit the family to paying working family members at market rate for the role they perform. Importantly, the policy should provide for independent benchmarking. As a result, the question of whether working family members are paid fairly becomes a matter of objective measurement rather than family dispute. For more on the dispute pattern this addresses, see the have and have-not pattern.

8. A clear dividend policy

Eighth, the family business should have a clear dividend policy. Specifically, the policy should set out the proportion of profits to be paid as dividends, the timetable, and the basis on which the policy may change. Importantly, the dividend policy should be agreed with the non-working shareholders. As a result, the suspicion that the working family members are starving the non-workers of returns is addressed directly.

9. Regular financial reporting to shareholders

Ninth, the family business should provide regular financial reporting to shareholders. Specifically, this should include quarterly management accounts, annual budgets, and disclosure of director remuneration. Importantly, the reporting should go to all shareholders, not just those who work in the business. As a result, transparency becomes the norm rather than something the non-workers have to request.

10. A policy on related-party transactions

Tenth, the family business should have a policy on related-party transactions. Specifically, this means transactions between the company and entities owned by family members, such as property rentals or service contracts. Importantly, the policy should require all such transactions to be at arm’s length, properly documented and disclosed to the shareholders. As a result, the suspicion that family members are diverting value through related-party transactions is addressed directly.

11. A clear policy on family employment

Eleventh, the family business should have a clear policy on family employment. Specifically, the policy should set out the qualifications required for family members to join the business, the performance standards they will be held to, and the consequences if they do not meet those standards. Importantly, the policy should be applied consistently across all family members. As a result, the perception that some family members are being given an easier ride than others is addressed.

12. A clear policy on in-laws

Twelfth, the family business should have a clear policy on in-laws. Specifically, the policy should set out whether in-laws can be employed in the business, whether they can hold shares, and what happens to family member shares on divorce. Importantly, these are some of the most sensitive questions in any family business. As a result, addressing them in advance is far easier than addressing them under pressure.

13. A clear policy on disengaged family members

Thirteenth, the family business should have a clear policy on disengaged family members. Specifically, the policy should set out what rights family members have if they no longer participate in the business, and on what terms they can exit. Importantly, the disengaged family member is one of the most common triggers for a dispute. For more on this, see the passive shareholder.

14. A dispute resolution clause

Fourteenth, the governance documents should include a dispute resolution clause. Specifically, the clause should require the parties to attempt mediation before issuing proceedings. Importantly, this is consistent with the direction of travel confirmed in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416. As a result, the family has a structured route through any disagreement.

15. Regular governance review

Finally, the family should review its governance regularly. Specifically, the review should happen every five years and at every generational transition. Importantly, the review should be holistic, looking at the entire governance package together rather than just updating individual documents. As a result, the governance remains current rather than gradually losing relevance.

The cost and the return

Crucially, the cost of putting good governance in place is a small fraction of the cost of a single family business dispute. Specifically, the typical investment for a mid-sized family business is between £25,000 and £100,000 over the first year, depending on the complexity. By contrast, a single contested unfair prejudice petition can cost each side £150,000 to £750,000 in legal fees alone. As a result, the return on investment in prevention is extraordinary.

Importantly, families that have invested in good governance and have not had a dispute often regard the investment as overhead. Specifically, they cannot see the disputes that have not happened. By contrast, families that have been through a dispute usually regard preventive investment as the most valuable money they have ever spent. Crucially, the calculation needs to take into account not just the legal fees but the wider impact on the business, the family relationships, and the personal cost. For more on this, see the cost of family business litigation.

When to invest in governance

Importantly, the best time to invest in governance is when the family is functioning well. Specifically, when everyone is on speaking terms, there is no active dispute, and the family has the bandwidth to engage with the work. By contrast, the worst time is when a dispute has already developed. Crucially, the families that wait until the dispute has emerged often find that the governance work becomes part of the dispute itself.

In practice, the most common triggers for putting governance in place are these. First, the founder’s retirement is approaching. Second, the next generation is joining the business. Third, a significant family event such as a wedding, divorce or death has prompted reflection. Fourth, the family has just experienced a near-miss with a dispute. Fifth, the family is engaged in a significant transaction such as a sale or a major refinancing. Importantly, the best families anticipate the triggers rather than wait for them. As a result, they review their governance every five years regardless of what is happening.

The disciplines of good governance

By contrast, good governance is more than just having the right documents. Specifically, it is also about the disciplines the family observes day to day. Importantly, the disciplines that distinguish well-governed family businesses include the following.

• First, regular and structured meetings. Crucially, board meetings, family forums and shareholder meetings should be regular fixtures with clear agendas, minutes and follow-up.
• Second, separation of forums. Specifically, family issues are discussed in the family forum, business issues at the board, and ownership issues at shareholder meetings. Importantly, taking issues to the wrong forum is one of the most common causes of family business dispute.
• Third, transparency by default. Specifically, the financial position of the business and the remuneration of working family members should be openly shared with all shareholders. Crucially, transparency in advance prevents the suspicion that drives most family business disputes.
• Fourth, documented decisions. Importantly, decisions taken at the board and the family forum should be documented and circulated. As a result, the family is clear about what has been agreed.
• Fifth, professional standards. Specifically, the family business should be run to the same professional standards as a non-family business of similar size, regardless of the informality that the family relationship might allow.
• Sixth, regular review. Crucially, the family should review its own governance regularly and adjust where necessary. As a result, the governance evolves with the family and the business.
• Finally, willingness to take outside advice. Importantly, families that take outside advice from non-family advisers, including independent non-executive directors, family business consultants and specialist lawyers, generally fare better than families that try to run everything internally.

The role of outside advisers

Crucially, outside advisers play an important role in family business governance. Specifically, they bring perspective that family members cannot bring, raise issues that family members may avoid, and provide independent challenge to the working family members. Importantly, the most useful outside advisers in family business governance include the following.

First, an independent non-executive chair or director. Specifically, this person sits on the board and brings non-family judgment to decisions. Importantly, the right non-executive chair can transform the governance of a family business. For more on this, see the role of the non-executive director.

Second, a family business consultant. Specifically, this person works with the family on the family dynamics, the family constitution and the family forum. Importantly, they are usually not lawyers or accountants but specialists in family business work.

Third, specialist legal counsel. Specifically, this means lawyers who understand family business work, not just general commercial lawyers. Importantly, instructing a direct access barrister with family business experience can produce a sharper strategic picture than relying on general advisers alone.

Fourth, specialist tax advisers. Specifically, the tax position of a family business is usually complex and benefits from specialist advice. Importantly, this is particularly important during generational transitions, when significant tax decisions are being taken.

Finally, where appropriate, a family office or trust adviser. Specifically, larger family businesses often hold shares through trusts or family offices, and these structures need their own specialist advice. Importantly, the trust and family office advisers should work alongside the company advisers rather than separately.

What good governance does not do

Importantly, even the best governance cannot prevent every family business dispute. Specifically, where the family relationship has fundamentally broken down, or where there is genuine misconduct, governance is unlikely to prevent the dispute. By contrast, good governance reduces the risk of disputes arising from misunderstanding, ambiguity or accumulated grievance. As a result, the families that benefit most from good governance are those that have engaged with it in good faith.

Likewise, governance does not replace the underlying family relationship. Specifically, the family forum cannot substitute for the relationships of love, respect and trust that hold a family together. Importantly, governance supports those relationships rather than replacing them. Crucially, the best-governed family businesses are those where the governance and the relationships work together.

Where to start

Importantly, families that have realised they need to invest in governance often ask where to start. Specifically, the answer depends on the current state of the family business. In practice, the most useful first steps are these.

• First, audit the current position. Specifically, does the business have a current shareholders’ agreement? Are the articles of association up to date? Is there a succession plan? Importantly, the audit identifies the gaps that need to be addressed.
• Second, prioritise. Specifically, where there are several gaps, the family should address the most pressing first. Typically, this is either the shareholders’ agreement or the succession plan, depending on the situation.
• Third, take advice. Importantly, family business owners should engage specialist advisers rather than try to do the work themselves. Crucially, the cost of doing the work properly is a fraction of the cost of doing it badly and having to redo it later.
• Fourth, involve all relevant family members. Specifically, governance documents are only effective if everyone has had a fair voice in shaping them. As a result, the process needs to be inclusive even if it is slower as a consequence.
• Finally, build in regular review. Crucially, the governance should be reviewed every five years and at every generational transition.

Frequently asked questions

What is family business governance?

In short, family business governance is the set of structures, documents and disciplines that determine how a family business is run and how the family makes decisions about the business. Specifically, it includes the shareholders’ agreement, the articles of association, the family constitution, the family forum, the board of directors, and the policies on remuneration, dividends, family employment and exits. Importantly, good governance prevents most family business disputes by making expectations explicit, providing structures for difficult conversations, anticipating change and creating transparency.

How much does it cost to put good governance in place?

Generally, the typical investment for a mid-sized family business is between £25,000 and £100,000 over the first year, depending on the complexity. Specifically, this includes the shareholders’ agreement, the updated articles, the succession plan, the family constitution and the initial work on the family forum. By contrast, a single contested unfair prejudice petition can cost each side £150,000 to £750,000 in legal fees alone. As a result, the return on investment in prevention is extraordinary.

When should a family business put governance in place?

The best time is when the family is functioning well and no dispute is active. Specifically, the most common triggers are an approaching generational transition, the next generation joining the business, a significant family event, or a near-miss with a dispute. Importantly, the best families anticipate the triggers and review their governance regularly rather than waiting for a crisis.

Can a family business put governance in place after a dispute has started?

Yes, but it is harder. Specifically, where the dispute is active, the governance work can itself become part of the dispute. By contrast, where the dispute has been resolved and the family is starting again, governance work is often part of the settlement. Importantly, the post-settlement governance work is one of the most valuable parts of the settlement because it reduces the risk of a future dispute.

Do small family businesses need this level of governance?

Generally, yes. Specifically, the elements may be simpler for a small family business than for a large one, but the principles are the same. Importantly, small family businesses are not less vulnerable to disputes than large ones. By contrast, they often have less ability to absorb the cost of a dispute. As a result, small family businesses arguably need governance more, not less, than larger ones.

Further reading on this site

• Family Business Disputes (main page)
• The Three Circles Model
• The Common Causes of Family Business Disputes
• Early Warning Signs of a Family Business Dispute
• Shareholders’ Agreements
• Family Constitutions and Family Forums
• Succession Planning
• The Role of the Non-Executive Director
• The Have and Have-Not Pattern
• The Cost of Family Business Litigation
• Why Mediation Is Usually the Right Starting Point
• Direct Access Barrister

Get advice on your situation

Good family business governance is one of the highest-return investments any family business can make. Specifically, the cost of prevention is a small fraction of the cost of a single dispute. As a result, early specialist advice on governance is one of the most valuable investments you can make. I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers prevention and governance in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.