A Primer on Family Constitutions
Creating and maintaining a successful family-owned business involves balancing the demands of business with the complexities of family dynamics. One of the best ways for families to manage these complexities and ensure business longevity is by creating a family constitution—a set of rules and principles guiding how family members interact with each other and the business. This guide on family constitutions discusses the importance of such documents, what they typically contain, and how to develop and implement them in a way that benefits both the business and the family.
Understanding Family Constitutions
A family constitution, also known as a family protocol or family charter, is a document that establishes a framework for governance and decision-making within a family-owned business. While there’s no rigid structure or required content for these documents, they typically include key aspects like the family’s mission and values, governance mechanisms, succession planning, employment policies, and guidelines for conflict resolution.
The Need for a Family Constitution
Running a business requires focus and discipline, while maintaining family harmony involves patience and flexibility. In family-owned businesses, these two aspects are often intertwined, leading to complex decisions. Families might need to choose between prioritizing business demands or family harmony, which can create conflicts. A family constitution helps manage these situations by providing clear guidelines for decision-making and creating standardized policies for all so that decisions are not seen as personal.
Key Components of a Family Constitution
Although each family constitution is unique, common elements include:
- Background: A history of the family and business origins.
- Family Mission and Values: A statement of the family’s core beliefs and guiding principles, setting the tone for the rest of the document.
- Governance Structure: A description of the family councils, boards, or committees that will manage family and business matters. It also describes the voting procedures and rules for decision-making.
- Defining Family: Who is considered family – spouses, adopted children, stepchildren?
- Succession Planning: A plan for how leadership roles and ownership will transition from one generation to the next.
- Employment Policies: Rules governing family members’ employment within the business, including compensation, roles, and management policies.
- Conflict Resolution: Procedures for resolving disagreements among family members.
- Asset Management: Policies on wealth generation, wealth protection, and joint asset ownership policies.
- Social Responsibility and Philanthropy: Codification of the family’s views on giving and impact.
- Inheritance Policies: Expectations regarding pre-nuptial agreements and trust arrangements.
- Exits: Exit policies for individual business shareholders and procedures for a potential sale of the business.
Developing a Family Constitution
The process of creating a family constitution requires open communication and discipline. Families should establish a leadership group that includes members from multiple generations and with varying degrees of ownership interest. External advisors, such as legal experts or advisors specialized in family enterprises, may be helpful, especially for larger families.
The structure and length of a family constitution can vary. Some families prefer concise documents with key bullet points, while others opt for detailed constitutions that cover a wider range of topics. As the leadership group drafts the constitution, they should regularly meet to discuss progress, gather feedback from the broader family, and make revisions as needed.
Implementing and Reviewing the Constitution
Once the constitution is drafted, it’s crucial to involve the entire family in reviewing and revising it. Anonymous voting can be helpful to ensure honest feedback. After the final version is adopted, the family should focus on implementation, which might involve workshops or meetings to explain new policies and procedures.
A family constitution is a living document that should evolve as the family and business change. Regular reviews, ideally annually, can keep the constitution relevant and effective by allowing families to adapt to new challenges and maintain a cohesive approach to governance.
Conclusion
A well-crafted family constitution is a valuable tool for family-owned businesses that helps families align their values and business goals to ensure a stable foundation for future generations. While the process of creating and implementing a family constitution can be challenging, it can also be a rewarding journey that strengthens family bonds and supports the business’ long-term success.
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Additional Resources
For more resources and examples of family constitution frameworks, click the links below:
- Family Constitution and Family By-Laws from Morgan Stanley
- Family Constitution example by ClearDocs
- Family Constitution (Template) from the Credit Suisse White Paper on Family Governance
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Madeline Tolsdorf collaborated in the writing of this article.
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