Why would our business benefit from a family constitution?

Find out more about family constitutions by The Family Business Community:

Before you think “this doesn’t sound like it would apply to us”, let us explain a bit more about what family constitutions are and how you could gain from having one in place.

Whilst ‘family constitutions’ admittedly sound like a complicated document for large, corporate companies, when broken down they’re actually just a recorded version of how your family thinks and acts.

Many family businesses we meet operate very successfully on a shared understanding of certain guiding principles, processes and behaviours. These often work okay in an unofficial capacity until there is a disagreement, a challenging issue or a difficult life event such as a retirement, bereavement or divorce.

What a family constitution offers, is a formally recorded (usually a written document) version of these principles, processes and behaviours, as agreed by all family members. Think of it as your own family business rulebook.

Having some form of a family constitution can be of huge benefit to any size of family business, but they become particularly useful when the business grows and there are multiple generations involved or lots of shareholders.

Family constitutions will inevitably vary in content and length according to the business in question, but the objective is simply to set out the consensus views of the family.

The contents of a family constitution are usually considered and developed through a planning process – a series of family meetings and discussions, sometimes with the help of a specialist advisor.  Depending on the size and geographical location of all the family members, this may take the form of ‘round the kitchen table’ chats or through a family governance body such as a family assembly or a family council.

Either way will help to facilitate the communication of family matters, needs and interests, with fairness, inclusiveness, transparency, accountability and clarity being key to achieving a collective buy-in from all family members. The agreed conclusions drawn from these meetings can then be formally recorded into your family constitution.

What do family constitutions contain?

Family constitutions will set out information on the governance of the family in regard to the running of the family business.

A comprehensive list of considerations would include the following:

  • Purpose – what is the family business for?
  • Vision & values – your vision for the future, core values & philosophy
  • Long term goals
  • Management philosophy
  • Relationships within the family – responsibilities, how to handle conflict etc
  • Education
  • Family members in the business – what are your processes/ criteria for entry, roles, performance evaluation, training, retirement?
  • Management succession
  • Share ownership – share rights, voting control, dividend policy etc
  • Crisis arrangements

Whilst we know that not all of the above will be relevant to every family business, particularly smaller companies or husband and wife partnerships, they may provide food for thought.

Family constitutions are not typically legally binding, although they often refer to other relevant legal agreements.

They are also generally regarded as living documents, to be reviewed periodically to ensure that they are kept up to date.

Benefits of family constitutions

In our experience, family constitutions often help to increase clarity, unity and transparency between family members in business together. No more assumptions, things left unsaid, grudges that pass-through generations or different rules for different people. In addition, when disagreements or crisis happen, there will be clear processes and guidance in place to steer the family. They might even prevent the disagreements from happening in the first place!

Many business owners choose to create their constitution with the help of a trained consultant. This process typically takes a few months to allow time for the defining of goals, vision, values, decision-making processes and/ or any legally binding documents to be formed.

Here at The Family Business Community, we work with family businesses across all sectors who need support or guidance with forming and implementing family constitutions. For further advice on any of the above, please get in touch with a member of our team via team@fambizcommunity.com

 

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