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Bringing the family business community together

Another Way To Write A Constitution

3rd April 2016 Barbara R Hauser, J.D., TEP

Barbara Hauser takes a fresh look at governance and the role of constitutions with some practical suggestions to help families move forward.

Some families admit they are intimidated by the terms “family governance” and “family constitution.” So they avoid talking about them. This means they will not be taking advantage of some of the best tools around, for family harmony.

I’ve been taking a fresh look at “governance” and “constitutions” and have come up with some ideas for families, and their advisors. 

First, my own definition of “family governance” is a simple one: “making decisions together.”

Every family, everywhere, already does this. Whatever they might, or might not, call it—they have a way of making decisions as a family. The trick is to evaluate how well the current system is working. In my book, International Family Governance, I compare families to countries. How do countries make decisions? Do some systems work better than others? Do some lead to rebellions and revolutions?

Second, for a definition of “constitution” I’ve been thinking that families already have formed all kinds of different “rules” in the family. Why not peg the various existing rules into the framework of a constitution? I gave a presentation recently in New York with a senior family advisor from the Pitcairn Company. She gave an example of a family who said they did not want to work on a family constitution, but who had already had meetings for several years, to discuss a number of family issues, which they did resolve and did put in writing. I suggested to her that the family could gather together all their different decisions and put them into the framework of a family constitution. She is going to suggest that to the family.

It might be that all they have to add, to begin with, would be a Preamble and a method for making changes—the two elements I urge all families to include. In the Preamble the family has a chance to tell some of its history and values and wishes for the future. Including a method to make changes sends the important message to the next generations that this is their document too, and they can change it.

In addition to providing a home for the key decisions that a family has already made, the process of working on a family constitution can help the family uncover other topics that they have not addressed, for whatever reason. For example, many families have a special family vacation home, or compound, and the shared use often causes conflicts. The rules about use can be included in the constitution.

When there is a family business, a constitution can be even more helpful to the family, in my opinion. For example, if there is a holding company as the top level legal structure, then the board of the holding company acts in fact as the governance system for the family businesses. There are likely to be other assets: family trusts, individual investments, private equity investments in other firms, etc. Why not use one over-arching governance document to be responsible for all of the holdings? A family constitution fills this role easily.

In other cases, there may be a variety of investments and businesses but without a holding company at the top level. It should be possible to create a Family Board to govern and oversee all the assets. The scope of the Family Board could be expanded to cover family activities, such as annual gatherings, education, philanthropy, and entrepreneurial ventures. The variety is as rich as the families’ interests.

So, there’s no reason for families to be intimidated—a family constitution can include whatever rules the family wants to include. And the families are likely to already have some of the parts, just without the label.


About the Author - Barbara Hauser is a leading family business consultant who has written many articles on the challenges faced by family firms and has extensive knowledge of working with family firms.  Visit her website here to find out more.  She is thankful to Susan Schoenfeld, of Wealth Legacy Advisors, and Rebecca Meyer, of Pitcairn, for their helpful comments in writing this piece.

 

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