Why You Should Have A Family Constitution

Over time a Family Constitution can gain such moral weight that contradiction becomes unthinkable. Bryony Cove and Sonal Shah of Farrer & Co explain more.

Family businesses are as old as civilisation itself. But family and business are not necessarily natural bedfellows. They operate under different cultural systems; family is safe and protective and business can be hostile and competitive which can create tensions between the two, particularly as a business expands.

Wealthy families with businesses are beginning to recognise this tension and are fighting back, often through the use of a Family Constitution. Just as the constitution of a country tries to balance the different needs and visions of its people, so too does a Family Constitution in the family context. It can be named many things – family contracts, family charters, codes of conduct, mission statement, etc. Essentially they are all trying to achieve the same aims:

• To set out the family’s shared vision and ethos which underpins the conduct of the family business:

• To articulate the relationship between the family and the business including setting out how decisions affecting both will be made;

• To set out the mechanisms for the succession of the business and shared expectations of how family members should behave towards each other in the context of both the business and the family.

Family Constitutions can be long or short, simple or complex and drafted either by family members themselves or professionals. They are personal documents and as such are not normally legally binding. However, over time a Family Constitution can gain such moral weight that contradiction becomes unthinkable.

We find that families who run large businesses are often too busy to deal with what are often seen as “softer” issues such as communication and management of the family as part of the business. The idea of a Family Constitution is often dismissed as far less important than the everyday running of the business itself. However, the impact of having a Family Constitution can be significant. The process of creating one in itself addresses questions which may not have been considered before:

• Who should be involved in preparing the document?

• What issues should it cover?

• Should non-family members (such as key employees or managers) be involved?

These questions can then lead to a dialogue which many families simply do not get around to having, often until it is simply too late. Without the pretext of a Family Constitution, important questions can go unanswered, for example:

• How important is the continuation of the business? Should it be sold in the future or retained for future generations?

• •How should the business be managed, both now and in the future?

• •Should there be regular family meetings?

• •Who is expected to do what, both within the business and within the family?

Often, by the time families consider a Constitution, it can be too late. The catalyst can be the retirement or death of the founder of the business (usually the head of the family) or when serious disagreements occur such as over a child’s divorce or even prospective marriage.

Passions can often run high and factions may have already appeared. The best time to embark on a Family Constitution is precisely when the need for one is not obvious – during a period of stability and harmony and when there is little or no conflict. That way decisions can be taken objectively and calmly and ensure that the procedures are in place and ready to be used before the unexpected event or disagreement occurs.

Just as each family has its own individual dynamic, challenges and taboos, so each Family Constitution will be unique. Often the finished result is not the most important thing; it is the thought and effort that goes into creating it and the discussion this requires. However, Family Constitutions should be treated as living documents and families should be ready and willing to update and adapt it as circumstances change.

Family Constitutions cannot prevent conflict; however the successful development of one often results in better communication and greater harmony within the family. Commercially, a Family Constitution can help ensure the success of the business and ensure its survival for future generations.