The Formal Policies That Protect Family Businesses from Interpersonal Chaos

Family businesses operate in a space where trust is assumed, roles are inherited, and emotions run deep. That intimacy can be a strength, but without structure, it’s also a vulnerability. When family dynamics become the guiding factor when a business faces a big decision, it’s only a matter of time before misaligned expectations, unequal treatment, or legal ambiguity threaten the very thing everyone is working to protect.

In my teaching on and advisory work with family-controlled companies, I use a simple mantra to get people to focus on this vital message. The mantra is: Make policies before it’s personal.

This is more than just a governance ideal—it’s a survival strategy. It ensures that rules, not relationships, drive decisions. When formal policies exist, families can focus on growing the business rather than untangling disputes or nursing resentments.

Let’s explore what this looks like in practice through the story of a real (but anonymized) family business that got it wrong before learning to get it right.

A Family at a Crossroads

The Rossis were a third-generation European family in the hospitality business. With 15 luxury boutique hotels across multiple continents and a growing brand, the business had expanded significantly under the stewardship of the founder’s children. But success bred complexity.

When a member of the third generation, John, married and brought his spouse into the company as an employee, questions about fairness, accountability, and ownership surfaced. Other family members quietly wondered: Was John’s wife qualified? Who made that decision? Should other spouses be allowed to join the business, too?

At the same time, roles among the siblings and cousins began to blur. Though a second-generation family member still held the CEO title, decision-making increasingly shifted to third-generation relatives without formal acknowledgment of the change. One third-generation cousin began running operations. The CFO from the second generation increasingly found themselves sidelined. Other members of the third generation started stepping in as well, some without clear responsibilities, others uncertain if they were expected to join the business or if simply expressing interest would be enough to secure a role.

When John later filed for divorce, and his now-estranged spouse claimed a share of business ownership, everything that had gone unspoken came to a head.

The Rossis faced a messy legal challenge because they hadn’t put in place rules or policies that set out how they’d handle a family member’s divorce. At stake was more than a slice of equity: As the family disagreed over the path forward, they faced the very real risk of tearing apart the business and the family behind it.

A Lack of Basic Governance Structures

The Rossis had grown rapidly, but their governance had not kept pace. Specifically:

• There were no shareholder agreements defining who could own shares, no dispute-resolution process, and no clarity on what would happen in the event of divorce.
• There was no buy-sell mechanism setting out a process for family members who wanted to liquidate their holdings.
• There was no requirement that any family member who holds equity and plans to marry needed their partner to sign a prenup and create an estate plan that limited non-family ownership in the event of divorce or death.
• There was no formal governance structure for decision-making and conflict resolution.
• There was no board of advisors that included independent members to guide strategy, succession, and sensitive decisions.

Although all of these deficiencies created problems, the lack of an effective board structure for a company of this size and complexity created special challenges. Decisions were made informally among family members, often based on emotion rather than objectivity.

Had the Rossis established a board of advisors, and included independent, non-family members, they would have benefited from external perspective, professional accountability, and a buffer between personal dynamics and business governance. Independent board members don’t just lend credibility; they offer objectivity when the family is too close to see clearly.

Standardizing a process around documents such as a prenup is also important. It’s not enough to decree that every family member who owns a share of the company must have a prenup; it’s also vital that the terms set out in these agreements be relatively uniform, so there are no surprises if an equity-owning couple does divorce. To further level the playing field, couples that married before this policy was put in place can be encouraged to create post-nuptial agreements that set out terms for how business equity would remain with the spouse who was born into the family if the marriage ends.

Formal, legally binding policies like these aren’t about distrusting family members. They’re about protecting everyone equally from unnecessary risk. They also reduce the risk of unilateral decisions by clarifying who has authority and under what conditions. More importantly, they help ensure that the business can survive generational transitions.

Although the documents and structures are the end result of this process, the discussions that are required to put them in place are valuable, too. The way families decide how to handle situations in which someone wants to sell their share, or what happens if someone divorces, tend to surface differences in the way people view the kind of relationship, commitment, and duty that family members have to the business—and to each other. The open dialogue it takes to put these policies in place can be beneficial to get issues and different perspectives into the open.

Setting Hiring Rules

John’s spouse had been hired without a formal interview or job description. Other family members had come through opportunity; others through obligation. Performance expectations were vague. Titles were handed out based on family hierarchy, not qualifications. Compensation for family members was all over the map: Some family members were paid significantly more than non-family members who held the same role, and others appeared undercompensated because their salary had been set with an eye toward how much they stood to gain from their equity in the business.

This left non-family employees demoralized and created tension among cousins. When John’s marriage ended, the debate over whether John’s spouse should stay employed became personal, emotional, and divisive. It didn’t need to be this way.

This company, like all family-controlled firms, needed a set of employment practices for family members. These policies should:

• Create a formal hiring process for all roles, family and non-family.
• Write down clear expectations around which family members are eligible for employment, and what qualifications they need to be considered for roles.
• Ensure everyone hired has a clear job descriptions and performance metrics tied to accountability.
• Set in place a code of conduct and grievance procedures applicable to everyone.
• Agree on a fair and standard way to set compensation for family and non-family members.

Clearly defined hiring and employment criteria help dispel perceptions of favoritism. Transparent processes promote fairness, ensuring no one feels that a family connection outweighs performance. A formal grievance process empowers all employees to raise issues safely and constructively before they spill into the family dynamic.

The Turning Point

The Rossi family’s crisis was painful, but it was also clarifying. The family hired a family business advisor and began putting the necessary policies in place. They created a family charter, drafted employment and ownership policies, and agreed that all future marriages involving family shareholders would be accompanied by a prenup.

Today, the business is stronger and so is the family. Roles are clearer. Expectations are aligned. And when disagreements arise, they’re handled through process, not personality.

. . .

My message on these issues should be clear: Don’t wait for a crisis to get clarity. Too many family enterprises treat formal policies as something optional, or worse, as something cold and untrusting. Proactive policies are the most powerful tools for preserving what makes family businesses special: unity, purpose, and continuity.

Putting policies into place doesn’t mean turning your back on trust. It means creating a structure that honors it and allows families to focus on building their legacy instead of putting out fires.

If your family business doesn’t yet have a clear policy on ownership, employment, and marital agreements, now is the time to act. Not because conflict is inevitable, but because peace is worth protecting.