“The family constitution, a comprehensive articulation of philosophy, principles, and policies for the future that balances and synthesizes the welfare of family, owners, and the business, is among the most important steps a business-owning family can take to secure and strengthen its business and, most preciously, its family.”
– Prof. John Ward
According to Prof. Ward, the two most effective practices implemented to protect and preserve the family business are a.) to create an independent board to strengthen the business and b.) to draft a family agreement to strengthen the family. This column is the last of a three-part series related to the latter.
In some countries, a family constitution is referred to as a family agreement. For some, it is a family creed or a charter. But regardless of the name, there is absolutely no doubt that a family agreement, when done correctly, can be the most important document that will perpetuate the family business for generations to come.
What I meant when I said “when done correctly” refers to the need to customize and tailor-fit rules and protocols based on the uniqueness of each family and business. Just as each family business is unique, so each family constitution will need to reflect the unique characteristics of both the business and the family to which it relates.
A constitution is a living document
A family constitution is a living document. It specifies the relationship between the business and the family. It sets out the roles, compositions and powers of the key governance bodies of the company. These bodies are family members, the shareholders, the management and the board of directors.
The constitution also contains regulatory protocols and formal policies that effectively curtail privileges or entitlements of family members and in laws for the greater good.
In my constitution building sessions with second-generation family businesses in Singapore and Vietnam last month, we touched on several sensitive questions related to governance, ownership, control and succession. Below are some questions that were solicited from the next generation members:
a.) How do the senior generation leaders in the family make decisions?
b.) When will our parents empower us to make decisions? We have been in the business for more than 10 years!
c.) What are the rules for next-generation family members to work in the business?
d.) Can we seek your help in pushing for our vision and values? We really do not know where this company is heading.
e.) Can we review the current compensation policy? The next generation family members have growing needs and we do not know if they are aware.
f.) What if a family member wants to sell his/her shares? We actually have no written agreement. How do we proceed?
g.) Is there a mechanism to gauge the performance of siblings? I sometimes feel it is unfair. I work more than my other siblings and yet we receive the same pay.
h.) Can we regulate the entry of in-laws?
i.) If and when I decide to pursue my MBA, will the family business pay for my tuition? Will it be the entire amount?
j.) Our dad was diagnosed with mild dementia last year and our MD has warned us it will continue to deteriorate. The problem with our father is he keeps on delaying the appointment of his successor. There are four of us. What should we do?
Clearly, these are troubling questions bordering on the uncertainty of their respective family businesses and a family constitution addresses these questions and many more.
It’s the journey that matters
The important thing in formulating a family constitution is the journey and it goes through many phases. A significant number of Constitutions that failed were attributed to several areas:
a.) The initiation, formulation and approval phases were all done in haste
b.) There was no proper orientation or buy in of family members from the different generations
c.) The contents were not real contributions from family members but extracted from a handful of senior generation leaders
d.) The information in the Constitution were open ended and created more questions and confusion than solutions
e.) The formulation process was limited to a few days and upon signing, the family members were left on their own to implement the rules
f.) The contents were limited to the present generation
g.) After the signing, the family members started violating what was agreed upon in the constitution and there was no proper monitoring
To conclude, a well-crafted family constitution that goes beyond two to three generations towards the future can perpetuate a family business for a long time. It is therefore my wish that family business members should start the process now in order to ensure the legacy of the founders and the everlasting prosperity of the family and its businesses.