What is the biggest challenge faced by family businesses and what is the simplest solution to all such challenges? The answer to all these problems lies in a Family Constitution.
So, what exactly is a family constitution?
A family constitution is a document that is drafted by family members, taking their family values and belief system and reflecting it in the working and processes of their family business. Why is it so important to have such a document? Well, although a family constitution is not legally binding, there are several reasons such as building a structure for future generations, internal cohesion and so on that warrant having a family constitution extremely worthwhile. Having worked with several family businesses across middle east and Europe and based on my experience, I am listing a few herein below:
1) A simple document minus the legal jargon
When it comes to a business, there are several documents that are advised and drafted over time such as shareholders’ agreements, memorandum, articles, by-laws and so on. But, in all honesty, all these documents are complex legal drafts bursting with legal jargon and often times, family members may find themselves struggling to understand several aspects of such documents. Moreover, these documents do not underline and annotate family values and beliefs that the family business is based on in the first place.
Therefore, a simple document underlining the family values, philosophy, family’s history and mission for the present and the upcoming generations may hold much more meaning to the family members and also present a much more enduring picture for how the family business should be managed and what values should be followed by future generations.
2) Creating a framework and guidelines to avoid possible conflicts
A family constitution helps create guidelines surrounding roles and responsibilities, allowances and withdrawals by the family members, budgeting of the expenses, benefits of each family member including those actively involved in the management and those who are passive members. Such guidelines can help avoid to an extent probable conflict within the family and help streamline each member’s roles and responsibilities so as to ensure the entire burden is not on the shoulders of a handful of active family members.
3) Internal cohesion
By providing a stable framework and guidelines for working together, a family constitution certainly brings more understanding, compatibility and builds internal cohesion among family members. This in turn results in a more efficiently managed and in most cases more profitable family business.
4) Paving the way for thefuture
A family business aspiring to become more professional and looking to gain visibility on a commercial level must have a family constitution devising a professional structure with a board made up of both family and some external professional advisors, a family council, a clearly defined employment and governance policy and a well-structured succession plan among others. A family business with such a structure is more likely to have a much better economic success than their peers. Also, a well-structured family business also increases chances of a possible merger, buy-out and even IPOs and future listing.
5) Building a framework for future generations
A family business will always have people entering and leaving the governing body. In such cases, a family constitution is extremely helpful as it can help provide guidelines for such transitioning members. Those who are leaving will know what benefits and powers they will still retain and those who are entering will get familiarized with the family values, ethics and beliefs as well as the governing policies and structure of the business.
In short, a family constitution can bring a lot of cohesion, harmony and streamline the management of a family business. Having said that, just drafting a constitution may not be enough, it is important to properly implement and bring into practice the guidelines and processes outlined under the document.
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