The rules which governs and guides the family members on the ownership, privileges, business management, business performance, rewards to owners and the management of family wealth; needs to be agreed upon, documented and adopted. This is captured in the Family Business Constitution. It provides guidance and define the manner to all family members on their different roles and the rules that they need to abide by as a member of family business. The process and escalations available for decision making, the code of conduct applicable to the members of family and professionals. It is important to develop a Family Business Constitution before you need one.
Clearly defined set of ground rules creates the foundation of any successful family business. These rules, which constitute the document called a Family Business Constitution, provides guidance and define the manner in which your family business functions. A Family Business Constitution is an invaluable formal agreement that creates a binding contract by which all family members must abide. It outlines the processes to be adhered by the family for managing critical decisions concerning the family and the business.
Make a Family Business Constitution Before You Need One
If you do not have a written Family Business Constitution, now is the time to create one, when there is harmony and relations are cordial relations among family members. Waiting until there is a dispute or an unresolvable challenge or when the business suffers from challenging situation due to divergent thinking of family members can destroy the existence of the business itself. All such situations are too late for discussing such an important document. The key is to formulate and adopt a Family Business Constitution, before it’s needed… not after.
“A family constitution is like a nation’s constitution and serves the same function. It contains the ground rules for interaction, setting goals and define the conditions for how things will be done. It specifies the methodology for resolution of differences and conflicts.
Factors to Include in Your Family Business Constitution:
- The mission of the business
- The short-term and long-term goals of the business
- Oral traditions followed which needs to be captured and put in writing
- A written agreement on how to differentiate between the tasks of the family and the tasks of the business
- A written commitment to operate the business in the most professional manner possible
- Process on how the business ownership will be transmitted or transferred
- Procedures for sale of business shares and valuation of business
- Principles for compensation for working family members and rewards for owning family members
- Criteria for joining the family business
- Induction of family members wishing to join the family business
- Performance management and mentoring of family members working in the business
- A commitment to handle disputes in a particular manner
- Job descriptions for each family employee
- Management of Family Wealth and rules for utilisation of the income from family wealth
A Family Constitution must be Formalized
A Family Business Constitution is a formal agreement that should be in writing, considering the future success of the family business in mind. Therefore, it is essential that all family members involved in the business as owner or manager have access to the constitution. The Family Business Constitution should be signed by each family member associated with the business in various capacity to verify that he/she has read and understood the contains of the same in the same spirit.
A commitment of family members to abide by the Family Business Constitution is important. It is essentially a document that clearly states that every member of the family has agreed and committed to adhere to the constitution, which is designed to help the family business succeed. Having a written Family Business Constitution ensures that family members are obligated to follow the guidelines set forth in the document.
Creating a Family Business Constitution is a process
Creating a family constitution is a process in itself. It is a unique document developed exclusively for each family based on its past, present and especially considering the future challenges that the family business may face.
The process starts with having one to one discussion with all major family members, to understand the individual perspective of the individual member on the current operations and also the future of the family business. Post which there is orientation workshop to orient the family members with the sections and topics of the family constitution; and prioritise the topics for the family will be decided. The family also narrows down on the decision making criteria on how they will be deciding the finalisation of each topic – will it be by consensus or majority voting?
In the subsequent sessions, discussion is evoked on each individual topic; the practices in force are recorded, various scenarios are placed and options are discussed and shortlisted. Post the meeting the draft is circulated for confirmation; once confirmed the final draft is prepared and signed off in the subsequent meeting. On completion of all the points the document is prepared and signed off by all family members affirming their commitment to abide by the constitution.
The above process is tricky and there is struggle to take up the same by the family on their own. It is advised for an intervention from external consultant, for creating a draft of a constitution. A consultant can also serve as an effective mediator when disagreements arise while developing business ground rules, goals and other conditions that will be included in the document as well as placing different scenarios and options that may happen in future.
Adopting a Family Constitution is an Effective Family Business Conflict Management Tool
A family constitution is a mechanism that sets up the playing field. It helps resolve conflicts before they get out of hand. It helps the family operate better in an agreed framework.
Some of the issues that can be addressed through a Family constitution are:
- What kind of control the family will have on the business in terms of ownership and management of the business?
- How ownership will be transferred? The agreements for transfer of ownership.
- Rules for separating the family business from regular family life.
- The rules for compensation of family members working in the business and How non-working family members will be compensated?
- Employment policy for family members desirous of joining the family business
- Who in the family is responsible for what specific job responsibilities?
- As business owners, what is the family’s expectation from the business in terms of return on capital?
- Guidelines for managing and distribution of family wealth
Ultimately, a Family Constitution is meant to be a binding agreement that holds power. When a conflict arises, family members can refer the Family Constitution for guidance on how the conflict should be resolved.
Keys to Success for a Successful Family Business
To survive over generations, family firms need to adopt formal policies about whom to employ, whom to promote, and how to balance family and business interests. If you desire your family business to succeed and create wealth and provide financial benefits to your family members for years to come, it’s important to know, that as owners of a successful family business, you must accept that there will be challenges along the way, and you will need to skill yourself for to handle conflict and able to devise options and create solutions that will help move the business forward.
- Develop a Common Vision so that there is clear understanding among all the members on what the Family business is trying to achieve. This can be best accomplished by creating a written vision statement.
- Create an Alignment to prevent conflict and create agreement among the family members involved on important issues.
- Prepare a Shareholder Agreement which will legally bind the business owners on various terms on ownership that will avoid conflict within a family business.
There are several other key factors that help eliminate the possibility that family business conflict will arise. By adopting a Family Constitution you can mitigate the many of the conflict risks.
Does Your Family Business Need Help?
With extensive hands on experience of assisting family businesses, we understand the wide variety of challenges that families face as they work together to build, grow and sustain a thriving family business generation after generation. Through orientation programs, one to one as well as common meetings, workshops, public talks, mentoring, coaching, Family retreats and private family business consulting services, we help family business owners chart their way through family business issues of all shapes and sizes.