“I wish I could have helped earlier,” I often think as I work with clients to navigate challenges in my practice as a dispute resolution lawyer. Reverse-engineering disputes and seeing where things went wrong can reveal many preventative steps that family enterprises can take in the governance of their businesses, foundations and relationships.
These steps can help address the causes of conflicts before it is too late and they erupt into formal court or other legal proceedings.
Corporate governance is how an organization makes decisions. In the case of a corporation, that means decisions made in and about the boardroom. This includes how and why the board of directors makes decisions, how directors and management work together, how individual directors discharge their duties, how conflicts of interest are handled, how shareholders decide who is a director and how shareholders work together.
Good governance is good business, as it helps everyone work cooperatively and efficiently in their respective roles.
On the other hand, corporate governance conflicts can be incredibly damaging to family enterprises. This damage can take many forms. Conflicts can destroy value in a family enterprise by draining internal resources and causing gridlock in the decision-making process.
This was visible in a recent court decision, Libfeld v. Libfeld, involving disputes between four brothers who co-owned a property company founded by their father in Ontario. The dispute between the brothers meant that the company had not entered into any transactions since 2017 despite sitting on more than $250 million in cash.
Disputes can also cause reputational damage as news of bad behavior or the mere existence of a conflict spills out into the community, bringing down the standing of the business and the family with employees, business partners, customers and clients. This reputational damage can even cause recruitment and retention issues. No one wants to work at a dumpster fire.
Causes of conflict
- Succession: The transfer of wealth and control from one generation to another can be a difficult task if not undertaken with clarity and deliberateness. This can cause all manner of difficulties after the passing of a family member. Succession issues arose in the recent Rogers v. Rogers Communications Inc. decision involving the Rogers family. Before his death, Ted Rogers had drafted a “Memorandum of Wishes,” and one issue in the dispute was the legal effect of this document. Sometimes in family enterprises, the enterprise and the family can become confusingly intertwined.
- Decision-making: Family enterprises can lack some of the formality of other types of organizations. An enterprise can grow organically from a single founder but then fail to develop the kind of professional structures that help guide business decisions. This absence can set up conflicts as family members disagree over the fundamental direction of an enterprise and have no established ways of making decisions.
- Vague and overlapping roles and responsibilities: Often in family enterprises individuals can play several roles – owners, directors and employees. Some family members may play some roles but not others. These roles can overlap so it is not clear who is responsible for what, creating the potential for disputes.
Ways to start the conversation
How can these conflicts be prevented in the first place? Here are a few ways to begin a conversation about governance.
- Seek out governance education, whether a one-off session or a longer course, to establish a baseline common understanding and prompt discussions about important topics such as succession or roles. Bringing in a third-party outsider to prompt these discussions is sometimes easier than having one family member appear to dictate terms.
- Schedule regular check-ins among family members in their various capacities (owners, directors, management). Family members need to understand the different roles they play.
- Prepare clear, written governance documents such as by-laws and board policies that reflect shared understandings and common purposes
- Bring in independent advisors at any point. This can be a lawyer, accountant or financial advisor through such forms as an on-call consulting retainer, an advisory board or as a director. Don’t wait for a crisis to prompt action.
- Develop pre-dispute resolution agreements. For example, consider mandatory mediation and arbitration provisions in governance documents so that any disputes are resolved efficiently and confidentially.
Take an ‘exit ramp’
It is never too late to act to improve a situation, even if a dispute has already arisen. Exit ramps can help you avoid entering the formal dispute-resolution process of the court and other legal proceedings.
Mediation is a non-binding form of dispute resolution where a neutral third party is hired to help facilitate a negotiation between the parties. The mediator does not make decisions. Everyone involved needs to agree to participate, and the solution that comes out of the process will also be consensual. This means everyone should feel some degree of control and acceptance at the end.
That solution can also be very creative. A good mediator can both help the parties move forward and also help them air their grievances to hopefully give some kind of detoxifying closure to the dispute. Independent counsel in the form of external lawyers or other types of advisors can be brought in to assist, advise and investigate certain matters.
Eric Morgan is a partner at Kushneryk Morgan LLP, a law firm specializing in corporate governance and dispute resolution (www.kmcounsel.ca).
Get the latest stories from Canadian Family Offices in our weekly newsletter. Sign up here.
Please visit here to see information about our standards of journalistic excellence.