A Family Constitution? “Why bother?”

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This is the usual response I get when trying to convince a family to put together a written constitution for a family business.  Informality works great in the early stages; it’s the heart and soul of most entrepreneurs.   “I make the rules – why put things in writing?” goes the thinking. But as the family grows and the business gains more complexity a written family constitution becomes essential.

In my practice as an advisor to the family-owned firm, I have seen my share of family feuds over money ending up holding the business hostage. In the long run, significant damage can be done to family relationships. Far too often I am brought in toward the end of the process, which makes getting to a positive outcome much more difficult, if not impossible.

Some of the issues that trip up the family firm include:

  • Whose children get jobs in the company?
  • Who will have ownership in the future?
  • Who will benefit from the family assets, and how much?
  • If I don’t work in the business but I own shares, what am I entitled to?

Conflicts surrounding these kinds of issues in a family business can almost be predicted. It’s not a matter of “if” but “when” such issues will arise.  But if families can learn to anticipate these problems in advance and create policies and guidelines that everyone supports, the odds of avoiding trouble improves drastically.

Herein lies the value of a family constitution: It serves as a protective structure, a buffer if you will, between the family and the business. In that sense, it almost acts like an insurance policy.  As an instrument of governance, a family constitution expresses the vision and purpose of the family for generations to come. It helps clarify everyone’s expectations. It helps family members understand and accept what they can feel entitled to as well as what’s to be expected of them. By eliminating uncertainty a Family Constitution is a must for the family owned enterprise intent on generational continuity.

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