The Why, When And How Of Family Constitutions

A lot of multi-generational family businesses struggle to get buy-in from everyone. A family constitution can help secure, and maintain, commitment towards a unified goal.

I often speak about family businesses needing to bring everybody together to proactively plan for the future. At FINH, we openly endorse the development of a Family Council or even a “Family Constitution,” the latter of which serves as an emotionally-binding contract, creating a vision for how the family and the business can grow together.

Rather than the default arrangement — jamming business talk into discussions around the dinner table –family businesses can leverage their own unique, formal family constitution. The idea is to build around a sustainable model that promotes generations of pro-growth decisions.

Creating a Family Constitution

A family constitution can be as simple or nuanced as the family wants, but keep in mind it’s easier to get buy-in by starting with the lowest common denominators. In other words: everyone wants to succeed individually, as a family, and as a business. Start with the basic premise and go from there.

Just like putting up a house, crafting a family constitution starts with the foundation and framework. The foundation is the people. This means members of the family get together, often with an experienced professional, to speak openly and create commitment. Every family business has its own dynamics and personalities, so the path to consensus is always different.

The framework is made from procedural rules that are drafted directly into the formal constitution. This is when family meetings are scheduled, when the relationship between family issues and business issues is defined, and roles/responsibilities are established.

What to Include

Family constitutions are sort of like shareholders agreements. There’s a lot of flexibility in the standard shareholders agreement, but each one has to cover the basics like ownership, finances, assets, transfers, and restrictions. Family constitutions will vary from family to family, but each one should cover ownership, business interests, conflict resolution processes, wealth and title transfers, communication channels, and the role of the family council.

Emotion is a real dynamic in family business, and it won’t go away just because a family constitution established a formal process. In no way should the family constitution be designed to squash emotions, either; make sure there’s sufficient room in the structure to accommodate intensity and passion when it pops up. Remember that the family constitution doesn’t force agreement. It codifies agreements once reached.

Constitutions included family values, family goals, and the process through which those values and goals are synthesized. When used properly, a family constitution both creates a path and sets up guard rails to keep everyone on track. It’s a document everyone can refer to, read, and understand.

Relationship Between Family Constitution and the Family Business

Family constitutions are not the same thing as business constitutions. The business needs its own rules and processes, particularly if it includes non-family workers or management. Instead, the family constitution is the physical, documented result of strong family governance – it acknowledges that the business needs and the family needs aren’t always the same, but they aren’t completely separate, either.

A family constitution helps bring the family together in cooperation. This inevitably helps the family business out, especially in families prone to infighting. It also serves as an example for times of future conflict.

Each family constitution gives direction in a way that benefits the business, even if indirectly. Sometimes this takes the form of a “mission statement” or a “purpose statement.” The values and principles laid out here will underpin the conduct of the family business moving forward.

Why Family Constitutions are Important?

Creating a family constitution is not a guarantee of business success. It won’t make conflict go away in the family. Instead, a family constitution is a living, documented mechanism to reduce the ill effects of conflict and uncertainty. It should force the members of the family to consider what is most important to them and, more importantly, how to live out those values in their personal and professional lives.

Most family businesses fail to make it to a third generation. There are major hurdles around succession, taxation, regulation, accountability, and infighting.

As a family business advisor, I know first-hand how important it is to have a strategy and a vision. A family constitution won’t give you these things, but it can be a powerful ally in support of them over the long haul.