Some of the key “risk areas” for family businesses include family cohesion, business ownership and wealth management.
To try to mitigate these typical family risks, families need to resort to the principle of fair process, as anticipating and communicating in a timely and transparent manner, and more generally by installing good family and business governance systems.
Modern risks resulting from societal trends
In recent times, family businesses have had to face ‘new’ risks, linked to the current societal trends, such as the emergence of social media and the growing divorce rate. However, measures to mitigate these new types of risks remain similar and are based on the principles of clear rules, clear communication and good governance.
For instance, sensitive information may find its way into the press via the social media activities of younger family members – educating them to the risks of unwanted publicity is essential to avoid placing the family’s reputation or family members’ security at risk. Another contemporary risk is the increasing effect that divorce can have on family businesses. More than ever marriage contracts (or pre-nuptial agreements) should be designed with the aim of protecting business shares from leaving the family or having to pay high allocation for alimony.
Since many traditional and non-traditional risks can threaten the family business, deciding on a comprehensive risk management policy is indispensable to create and sustain financial success, maintain family cohesiveness, and try to provide for future generations.
Among the guidelines to include in a risk management policy are the expectations that family members should:
- Achieve financial literacy regarding their wealth and the wealth of the family business
- Have a prenuptial agreement with their spouse
- Understand how each individual’s behavior – both positive and negative – can impact the family’s reputation
A solid risk-management policy contains the purpose, principle and procedure for implementation. The purpose of a family risk management policy may be to reduce the risk for family members, both individually and as a whole. Adherence to the policy would go far to protect the family’s human and financial assets and minimize potential liability. The principle of the policy may be to make clear that the responsibility is to identify the areas of high risk and to do whatever possible to mitigate that risk.
Further, as important as it is to have a risk management strategy, it is equally as important to review and adjust that policy as the family, and the risks it faces, evolves and changes. Although risk is almost impossible to avoid completely, implementing clear governance practices and policies which evolve with the company can help identify, manage, and ultimately avoid many of the risks that can threaten the family business.
An ongoing, proactive risk management process is crucial for the family business if it wants to reach its goals and objectives.
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