Developing a structure that will enhance communication between family members and ensure the family's goals improves the trust between family members, but establishing procedures to administer these matters requires time and financial investment. One of the important means of creating and applying family decisions is the family constitution.
The family constitution expresses the values, philosophy, rules and expectations of family members, as employees or employers, in matters that involve them. This constitution is a living document. Its contents must be flexible and revised regularly in order to meet the changing needs of the family.
In principle, this constitution is a compendium of policies arranging the manner in which the family and the business interact with each other. Generally, it includes the family's mission statement as well as the family's philosophy or vision and values.
The family affects the business and the business affects the family. The family-based business plan is different from the plans of other business sectors. Family factors affecting the business include matters such as the number of children, their capacities, and the family's history. In turn, business factors that affect the family are issues such as size, geography, growth, and cash positions. When establishing a family constitution, it is important that the goals and business strategies of the family are aligned.
A family constitution is sometimes called a family creed, family charter or family agreement. Forget the terminology - they're essentially the same things that do the same job.That job is threefold.
• It documents the values and principles that will underpin the conduct of the family business.
• It defines the strategic objectives of the business.
• It sets out the way in which the family will make decisions affecting the ownership and management of the business.
Depending on the circumstances of the family and the business, the constitution can be either short and concise, or long and complicated.
Some people imagine that the creation of a family constitution will avoid family conflict over a family business. If only it were so. In truth, a family constitution won't circumvent or avoid conflict. What it should do is provide a mechanism by which conflict can be successfully managed and resolved. The act of creating a constitution also forces the family to consider important issues about the future of the family business that might otherwise be put aside.
Many family businesses appear quite able to get by without concerning themselves with a family constitution. This doesn't necessarily mean these businesses and families wouldn't benefit from a family constitution. Family to business mechanisms, such as a constitution or family council, provide a formal link between business matters and family affairs. The value of formal governance mechanisms is that it facilitates communication between the family, the owners and business managers.
As the family business evolves and successive generations enter the business, several changes occur.
• The number of individuals with an ownership interest in the business increases.
• The expectations of the business held by these individuals begin to diverge.
• As the business expands, it makes increasing financial and management demands on its owners.
A family constitution helps the family deal with these changes constructively. It requires the family to think about important decisions before they have to be made and to find agreement on important family and business goals.
