The need for a family constitution

In my last column, I wrote about the concept of family councils which are designed to help a family business minimize internal conflicts and hostilities. However, I also added that a family council needs to have an explicit written document containing the framework for governing the organization.  Although few families see the need for a written framework, I strongly recommend that if you make the effort to organize a family council, then you should also take the time to prepare a written and comprehensive family constitution. This is a critical requirement for family councils to succeed.

Several books on family business management contain recommendations for the components of a family constitution. Although there are variations, the different proposals are substantially the same.

Here is a list of the usual components of a family constitution.

· A mission statement defining the family’s fundamental desire to be in business together. This is a necessary declaration because without that desire, there is obviously no need for a family constitution.

· A statement of the family’s fundamental values and beliefs. This should express the family’s commonly accepted values which they would like to ensure are preserved in the business arena. An example is: “Our family name is our most important asset.”

· Family code of the conduct. This specifies the family’s expectation with regard to how the members should treat one another. For example: “Family members should not argue in public or file legal cases against each other.”

· Policies for regulating the relationship between the family and the business. This should include critical issues such as employment of family members in the business. For example: “A member of the family who hopes to work for the family business must have a college degree and at least have worked for another company for at least five years.”

· There should be rules governing the performance evaluation of family members. For example, “If after the first two years of work, they are not in the top 25 percent performers of the company’s executives, they will be asked to leave.”

· A retirement policy. There can be a rule such as: “All family members should automatically retire at age 70 and can serve on the Board of Directors only until the age of 80.”

· Dismissal policy. This is a sensitive issue that should be addressed directly. For example: “The authority to fire a family member rests solely with his or her direct supervisor. However, prior to dismissing a family member, the general manager should inform the family council so that the ramifications of the dismissal can be anticipated and properly managed.”

· Stock redemption policies. The family constitution can specify the process under which the family members can sell their stocks with a minimum of family disruption. The rules for a family member selling shares in a family business may be established such that all transactions should continue to maintain the balance of power among the family branches.

· A non-competition agreement. There should be restrictions on competition among family members who decide to leave and set up their own businesses. This can include restrictions on commercial uses of the family name.

· Job descriptions for the key positions in the governance structures. This should spell out the duties, terms, responsibilities and privileges of the chairman of the family council, chairman of the Board of Directors and other positions occupied by other family members.

· Succession policies. The family constitution should spell out the specific process by which the leaders of the company and the business will be chosen. The process should also specify how family members on the Board of Directors will be chosen.

The writing of a family constitution is a powerful way to motivate family members to work together.  In the book “Consulting to Family Businesses” by Jane Hilburt-Davis, the author listed down some conditions of an unhealthy family enterprise. These are when the family has poor communication skills and is unable to manage conflicts. There is a low level of trust among family members. The goals and values of the family are unclear. Family members’ roles and obligations are unclear. The business lacks a sense of direction and thus, no strategic planning. The business lacks sufficient expertise and the family tries to do it all. There is little thought to succession planning. Family issues spill over into business issues and vice versa. Boundaries between work and family are unclear.

Over time, conflict is inevitable within a family business. Conflict is not inherently bad but it can be healthy or unhealthy. How conflict is managed is a determinant of the degree to which a family business remains healthy and strong. There are several conflict management strategies and no single one is a panacea.

In the last column and this column, I have discussed two conflict management strategies: the family council and the family constitution. The goal should be to arrive at the best decision that will attain the family business’ mission, goals and objectives.