Why you should think about developing a family constitution
7th August 2018
Anyone who owns a family business knows that sometimes the family might not agree on how the business is run, or the role of individual family members. Having a written set of rules and guidelines can help the family navigate disagreements, as well as harness the benefits family ownership can bring.
For many families, this written set of rules take the form of a 'family constitution'.
Family constitutions are formal documents setting out a family’s values, strategic goals and governance structures. Thinking about these areas is important, because in a family business planning for the family is just as important as planning for the business.
Why family governance?
Family businesses have a unique structure, with the family, the owners and the business all playing a role. Because these elements are equally important, being aware of how they are connected is important for the future success of your business.
You may be an owner and a member of the family, but not work in the business. How do you interact with the business, now and in the future? Or you might manage the business but not be a family member. How do you talk to the family and vice versa?
Addressing these questions becomes crucial as the firm develops and the family grows because, inevitably, some people will be left disappointed if there is no clear plan. And disappointment can lead to unnecessary conflict, which is what you would like to avoid in a family.
But there can be other unexpected events that can pose a serious threat to the family business, without a proper plan. If there is a sudden death or a key leader decides to leave, is the family business prepared?
Here’s where the family constitution comes in handy. It is a framework which will help to smooth the governance of the family affairs and interests. It outlines how a family will govern itself so, effectively, it adds formal structures or codifies the structures that exist already.
Start with what is already there
Luckily, if you own a multi-generational family business it means you must be already doing something right when it comes to family governance. For instance, you might have a set of unwritten rules, or you may have a number of articles and agreements in place. This are a great place to start to develop your family constitution, and set out more clearly and comprehensively what ownership and family involvement in the business will look like.
It’s a process
The first thing to know about family constitutions is that they are a process, not a one-off document.
Drafting a family constitution means allowing time to discuss issues including who is family, who owns the business, succession, how decisions are made, and reach agreement amongst the family.
And while a constitution is often suitable when put in place, both the family business and the world around it are always changing, so the rules need to change with it. It is therefore necessary to review and update the family constitution regularly for it to remain relevant.
In fact we often say that the process of writing a family constitution is just as important, if not more important, as the document itself.
Involve the family
When developing your family constitution, it is important to engage the whole family. The more inclusive the process, the more effective your constitution is likely to be. By taking into account different perspectives and achieving an aligned vision, you will prevent unnecessary conflict later on.
Moreover, the process of writing a constitution is often a good exercise for the family to get closer and more interested and involved in the business.
A unique document for a unique business
Family constitutions are not generic templates. They should always be tailored to the unique characteristics and needs of your family business. Whilst it may be helpful to look at examples of constitutions others have written to better understand what could be included in the document, these should not be adopted blindly.
Drafting a family constitution is a complex process, but it can be an interesting and exciting exercise for your family business. To find out more about family constitutions, join us on 25 September.