How Can A Family Charter Help?
20th September 2016 Paul Andrews
Family Business Charters can help to bind the family together but how can they be used to unify the family in its approach to the business.
There is a growing trend for family businesses (particularly those which are multi-generational) to draw up a family charter, sometimes called a constitution or protocol.
What is a family charter?
Broadly a statement of agreed family values and relationships concerning the business. This is particularly useful where the business involves a large number of family members (some working in the business and some not) and non-family members are involved in the management. Family members who are not themselves shareholders may still be parties to the charter.
For example, family members whose only interest is via a family trust. In this sense a charter differs from a Shareholders' Agreement. It is also different in that there may be some shareholders who are not parties to the charter (for example, non-family executives).
What will the Charter contain?
The content will be different for each family but charters will typically address issues such as:
- The long-term goals and strategy for the business.
- business decisions which should be referred by the Board to the family for their views.
- Rules and procedures relating to the establishment and running of the Family Council and how the Council communicates the family's wishes to the Board.
- The family's policy on who can own shares, together with rules relating to the sale of shares by family members.
- The employment, remuneration and appraisal of family members.
- The policy relating to the payment of dividends.
- Educating and mentoring the next generation.
- Corporate social responsibility and philanthropy.
- Procedures for resolving disputes between family members.
Given the very nature of families and therefore family businesses no two charters are likely to be the same. Some will address issues in much more detail than others - so differences manifest themselves not just in style but also in length!
As the family grows, the business develops and the economy fluctuates, family attitudes may change. While the Charter stands as a reminder of the family's guiding principles it should not be viewed as cast in stone. It is important to keep the Charter under review.
Its legal status?
Many family charters are not legally binding (or are only legally binding in part). They are designed to be more of a record of the consensus which has been reached by the family as to how the business is going to be run. Where there is a substantial number of family members it is, of course, quite possible that not all those members will agree to every provision in the charter but will nevertheless be prepared to put their name to the charter.
Some provisions in the charter may in any event be set out in more detail, and in a legally binding form, in the Articles of Association or in a Shareholders' Agreement - a good example being the procedure to be followed on any sale of shares by a family member.
Why establish a charter?
Formulating a charter can be time-consuming and is best done with the assistance of an external family business consultant who understands family business dynamics. The process may force family members to confront difficult issues which have until then been avoided.
However, many families have described the process of drawing up a charter as invaluable particularly if it can result in:
- the family being unified in its approach to the business
- management knowing what the family expects of it in terms of the way the business is run.
A charter can also perform an important role in valuing and including those family members who are neither shareholders in their own right nor employees of the business - by involving them in establishing the tenets that make up the charter.
Family Charters sit right on the interface of family and business – and the success of that relationship so often determines the prosperity of the business and of the family. Particularly as the business and family grow it is worth looking at that relationship, and crystallising, resolving and establishing the core values at the heart of it all. The very process of preparing a family charter will do that, and reviewing it will keep it alive.