Corporate governance in family businesses has become increasingly relevant in the Brazilian business landscape, where approximately 90% of companies are under family control. The lack of adequate succession planning and the difficulty of maintaining harmony in family relationships often lead to business failure after the third generation. In this context, creating effective governance mechanisms and implementing formal structures are essential for the continuity and sustainability of these organizations.

Family businesses face the challenge of balancing professional management with family values and traditions. Family governance, structured through the creation of councils, aims to achieve this balance. The Family Council, for example, is a non-corporate body that facilitates communication among family members and assists in conflict resolution, preservation of family values, and succession planning. The Board of Directors, on the other hand, is a deliberative body provided for in the Corporations Law that offers a strategic and impartial view of business management. It is often composed 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 regard, the Shareholders' Agreement—also called a Quotaholders' or Stockholders' 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 Charter, establishes norms of coexistence and responsibilities among family members involved directly or indirectly in the business, creating a structure that minimizes internal conflicts and promotes the continuity of values to be passed down through generations.

For the implementation of these governance structures, companies in the form of holdings (known as family holdings) can be used. Conceptually, a holding can be defined as a legal entity that centralizes the organizational and/or asset control of the family group, either through (i) a pure holding, focused exclusively on managing equity in other companies; (ii) a mixed holding, which also incorporates other business activities; or (iii) an asset holding, which solely manages the family’s assets. These structures facilitate succession planning and asset management, contributing to the perpetuation and preservation of the business, and can even lead to tax burden reduction.

Analyzing the challenges faced by family businesses, one of the main sources of strain in family relationships is the lack of interest from future generations in participating in business management. Recent research indicates that more than 50% of heirs do not wish to be directly involved in the company's administration^[1]. In this scenario, it is crucial for family businesses to establish governance mechanisms that allow for the continuity of the business, even if direct management is eventually carried out by external professionals.

At the same time, it is important for family members who are in control and managing the business to create structures that encourage younger generations to participate and understand the family's principles, allowing them to bring perspectives and changes from the contemporary world that can directly impact the longevity of the business, especially those of a technological nature.

In this way, by combining all these elements, family corporate governance can be effectively implemented in various structures.

Finally, it should be noted that family businesses often struggle to separate the business context from family relationships, mixing issues from both areas. For these reasons, it is advisable that the implementation also be carried out with the assistance of a consultant or lawyer—an external agent to the family relationship.

^[1] Source: KPMG. Available for download in PDF, p. 8. Accessed on: Aug. 25, 2024.

By: Liège Fernandes Vargas

Corporate Law | CPDMA Team