Family Constitutions – The Rules

I have a saying that as soon as a parent passes away the children revert to how they felt when they were six years old. The rules as imposed by the parent often go out the window. Good communication between family members is vitally important when faced with business and investment decisions arising from an estate or for the longer term in a family company.

To create a formal document to govern the future decision making by the family group is optimal but often difficult to achieve. So how should you go about it and what level of documentation is required.

Firstly, if the entity that has the money and the assets is a company or a trust, the formal document governing management can be amended to accommodate the “rules” and it will be legally binding. A “family agreement” is a less formal way of achieving the goal but can be highly effective.

A  family business must make hard decisions each day to be successful and by adding a family dynamic it can be just that much harder to get a good outcome. The key to a family constitution is that the procedures are in place to enable good decision making to happen.

To have a successful business the business leaders need to adopt a strong Code of Conduct to build a brand and engage with the employees.This applies to all family members who want to be involved. On the same basis, a constitution can set out a method by which the shareholders plan to create capital and pay dividends according to sound policy. This might include retained earnings and limits on capital expenditure in any financial year, with a keen eye on the strategic growth plan for the business. These guidelines encompass communication between family members, confidentiality, dealing with employees and social media.

So how can you get there? By creating a platform for discussion and having independent advice on the process to build a skeleton of rules, great things can be achieved. Almost akin to a mediation a guiding hand can build on strengths and eliminate conflict by having a strong focus on shared benefits. To build harmony the shareholders need to accept that there must be a sensible way to resolve conflicts built into the rules. This might include regular meetings and agenda setting to identify areas of potential conflict, as well as acceptance of majority voting decisions on some matters, whilst reserving the right for a unanimous vote on others. A great start is to include an independent advisory board who can add professional skill to the culture of decision making.

The single driver is to ensure that the strategic plan as agreed from the outset is and remains the focus of the group. Profit is not always king but an important element of any measure of success. With profit comes choices and the ability to accommodate a wider set of goals. A sustainable business over the generations is a major milestone and having clear conflict resolution methods will generally enhance this position.

Life teaches us that there is always an end to things and planning for an exit by all or by one, is an essential part of the strategy. By getting agreement on a fair and sensible solution in times where an exit is unplanned or must happen for the good of the business, it is more likely all parties will benefit in maintaining capital value and profitability.

It is extremely challenging at times when family members want to or need t transition out of the business. A Family Constitution can set a framework for stepping through this succession process to ensure fair value for the leaver and for the continuing proprietors.Education, key performance indicators and philanthropic measures can all be built into a family Agreement to enable clear goals as well as being a dynamic process ope to change. The aim should always be for continual improvement. Ask us how we can create your Family Constitution today!

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