Do we really need a family constitution?

THE following is the confession by a worried 62-year-old business owner:

“Three of my children have proven themselves to be competent and reliable.

I know they are hardworking and I believe they are capable of leading the family business into the future. They have been egging me to look in into the possibility of hiring non-family members to occupy middle management positions in the family business. Perhaps, it’s about time as the business has become so complex. Honestly, I didn’t expect this family business to grow this big.”

“Separately, through the help of a consultant/friend, we are also in the process of discussing the transfer of some control from me to the three of them. This will give me more time to look at opportunities in Vietnam and Indonesia due to the Asean integration.”

“Apart from empowering my children, we are also talking about an ownership plan where we start the gradual transfer of ownership to my children.

That way, we resolve many ownership issues when I am gone and more importantly in the interim, work out a very good tax minimization plan.

Personally, I should have done this much earlier (before the marriage of my daughter) but after a few meetings with the consultant, he assured me there is still time. We both agreed that it is better to start the process.”

“So why am I still worried? What makes me awake on some nights? It is really about my other son. He is not involved in the family business and decided years ago that he wanted to pursue his own career. He is an IT engineer working in the US.”

“I cannot stop worrying about whether I am treating my other child fairly. Is he feeling bad that he is not included in the future of the family business? Does he feel that I am giving something to the others and nothing to him? I didn’t know the ownership issue is very sensitive especially to my children active in the family business. It didn’t help any that it became even more pronounced when they got married. I guess as their needs change, you can expect issues like higher pay and ownership to surface quite often. “

“Anyway going back to my son in the US, should I give him a piece of the ownership?

Dividend sharing? Or an allowance maybe? After all, he is my son and I want to treat them all equally. Should I talk to him when he takes his vacation again? He was here over the holidays but I was not prepared to talk to him. And if I ask him, would he really share to me what he feels?””

This business owner’s fears and discomfort were eventually put to rest when the family completed its family constitution. It was really a process that covered 12 three-hour sessions spread over 12 months. The process of crafting agreements included dialogues with all members of the family and the development of a set of agreed upon roles for the future employment, leadership and ownership of the family business. Even Skype was used during the session just so family members where in the loop. The once a month session was a process that gave family members the chance to work together and made decisions together and talked in a structured logical way about the future of the family business.

After the signing of the constitution, the business owner knew he had no further need to worry when his son (who was not active in the business) told him that one of the best investments the family ever made was the family constitution for which he was in full support of and, as he further indicated, “who knows, just maybe one of my kids will help continue your legacy.”

Research confirms the truth of this old saying. Fewer than half of all family businesses survive the transition from each generation to the next. Do the math — only about 10 percent will make it to the fourth generation. It’s a sad commentary on the reality that faces family business.

The reasons for possible failure are complex; however, it’s increasingly recognized that family issues more so than business issues determine the outcome of generational change in family businesses. The actual case provides an important perspective in managing this change—the adoption of a family constitution.

Most business owners would always ask: Do we really need one?

Many family businesses appear quite able to get by without concerning themselves with a family constitution. Of course, for as long as the patriarch or matriarch is alive!

But what if he or she suddenly goes? Therefore, it pays to be well prepared and this doesn’t necessarily mean these businesses and families wouldn’t benefit from a family constitution.

From my experience working with family business across Asia, there are generally nine common issues for a family business and these are all important subjects that are addressed in family constitutions:

a. Balancing family concerns and business interests;
b. Entry policies of the next generation family members;
c. The role of the in laws in the family business;
d. Roles of active and non-active family members;
e. Compensating family members involved in the business;
f. Working out a smooth transition;
g. Maintaining family control of the business;
h. Preparing and mentoring a successor; and
i. Appointing a successor.

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