A family constitution is a confidential family document outlining their vision and agreement on ownership and management of the business. So how do you create one?
Why create a family constitution?
Every family is different and the individuals within a family will each have a different role, expectation and attitude towards the family business so a family constitution can help to:
- Clarify and guide the relationship between the family and the business;
- Clearly separate ‘management’ and ‘ownership’ related issues;
- Create a clearly aligned vision;
- Create forums for communication;
- Identify opportunities for education and development;
- Manage the expectations of family members;
- Ensure everyone understands their role and responsibilities towards the family business;
- Provide a point of reference for future generations.
Who could benefit?
All family business owners can benefit form creating a family constitution and they are particularly useful for family businesses that have:
- Some of the shareholders working in the family business but others who do not;
- Been considering the transition of the business to the next generation;
- Started to professionalise the way their business is run;
- Multi-generations involved in the family business;
- Geographical challenges with individuals located all over the country/world;
- Diluted shareholdings across a wide shareholding base.
How do you create a family constitution?
In essence the process of creating a family constitution would typically involve six stages.
Stage 1 – Family Seminar
It is important that this first meeting educates and informs everyone present as to the sorts of issues faced by family businesses around the world and the models that there are to help deal with these.
This greatly assists everyone to understand what is possible and how other families have dealt with similar situations. The other key objective at this stage is the give the family the opportunity to decide, as a group, if they are happy to commit to the process. If the whole family agrees to go forward, there is a greater likelihood of a successful outcome.
Stage 2 – Individual Meetings
In order to understand the viewpoints and perspective of all family and key non-family members, individual meetings are essential. These meetings afford the individuals a confidential opportunity for them to give their views in an open manner.
Having undertaken the individual meetings, the underlying circumstances and issues can be ascertained to help drive the next stage of the process.
Stage 3 – Review Meeting
A review meeting enables open discussion on the areas of difference to begin to educate the family on the areas that they need to give more consideration.
Stage 4 – Drafting the Constitution
At this stage, the first draft of the constitution would be prepared which would contain many different options and discussion notes within it. This draft would be distributed to the family in advance of the family retreat to ensure that everyone was given sufficient time to consider the content.
Stage 5 – Family Retreat
Having had time to consider the draft, a family meeting would be convened to discuss the content. The key aim at this stage is to involve the family in reaching a consensus on the issues identified to ensure that this can be incorporated into the final document.
Stage 6 – Finalisation of the Constitution
The final document will be drafted and distributed to the family members. It is important that the document is reviewed on a regular basis and updated accordingly.
The journey that each family goes on in drafting a family constitution is powerful in its’ own right and gaining consensus on key issues helps to drive the business forward with agreement on areas that could otherwise cause debate and unnecessary angst.
As such, successful family businesses that have succeeded in passing the business through a number of generations embrace the need for professional governance structures to be in place, and the family constitution can be an integral part of this structure.