What next after the family constitution?

MUNICH, Germany — A Merry Christmas to Sun.Star Cebu readers! It is extremely freezing here and I wish I was in sun-baked Philippines. But work beckons and I am in Germany for meetings with fellow family business consultants to collaborate on complex European family enterprises.

After these series of engagements, I will finally shut down and enjoy my vacation with family and celebrate Christmas in Vienna, Austria.

Articulating this article’s title

If you are finally convinced that having a Constitution on the Top Shelf or COTS that I highlighted in my article last week is not in the best interest of the family and the business, then implementation is the only way to go.

It is either the family swims together in one direction or sinks together, carrying with it a dysfunctional enterprise and a legacy lost after being built through sheer hard work by the founding generation.

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict in family businesses can be greater than for other businesses, typically due to a clash between business and emotional concerns.

Purpose of the family constitution

In a nutshell, a written, comprehensive and process-driven family constitution is a critical requirement for it to succeed. Doing it in haste is a recipe for failure even if family members signed it.

The agreements highlighted in the constitution seek to nurture and promote the company’s successful development and to prepare the family members for succession.

Basically, the family constitution defines the family’s vision of the future and its core values and beliefs. It likewise spells out the purpose and responsibilities of the family council, the ownership council, the family assembly and the board of directors/business council.

More importantly, it also guarantees the enterprise a workable governance system as the family transitions from a single-owner phase to sibling ownership all the way to the cousin consortium, where the sheer number of owners and family members working in the business can be overwhelming and unwieldy.

Finally, on top of the business, it regulates family relationships by integrating what was agreed upon, and these are conflict resolution mechanisms, family business protocols, decision-making criteria, participation policy for those interested to join, corporate direction of the business and setting up rules of family members to own shares and to whom to sell shares. This legally enforceable document is also exhaustively covered in a binding shareholders’ agreement.

When all of these elements are harmonized and agreed upon in writing, the next step now becomes very crucial as the family coach seeks to provide an impartial and objective balancing act, reiterating to everyone what was agreed upon and asserting compliance in all aspects of the family agreement.

There is, however, a downside if implementation is done wrong.

All talk and no action

How conflict is managed determines the degree to which a family and its business remains healthy and strong and how it can address head-on the issues that might affect the relationships of the family members/branches.

Failure to manage conflict after the signing of the constitution leads to the splintering of the family business. One of the telltale signs is when family members talk endlessly about the issues yet fail to act on them. We call that procrastination.

Penny-wise and pound-foolish mindset

Here’s the Cambridge Dictionary definition of this phrase: to be extremely careful about small amounts of money and not careful enough about larger amounts of money. In our context, that refers to family members looks at the cost and never at the investment on family relationships, growth and legacy.

Facilitating governance is extremely challenging, especially when rules agreed upon are documented and are set in motion. Investing on an objective and experienced family business advisor to facilitate family meetings can unburden the family business and its members of the stress and senseless conflict that can escalate to irreparable damage to family relationships.

Managing the day-to-day business

Family members are so focused on wealth generation and set aside the constitution. Obviously, under stress and confronted with a heavy load every single day, which management activity loses out? Hands down, the clear priority will always be the business and never the governance part.

How unfortunate.

To be continued in Tuesday’s issue: Setting up the family council.

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