Keeping the peace: Why your family business needs a family constitution

Of all the pieces of advice I give to family businesses, the need for a family constitution is one of the most important. You’ll find plenty of information on what goes into a family constitution here on the website, but let’s take a look at the why. We dive into why your family business should have a family constitution – and what happens if you don’t.

As the name suggests, family business brings together two complex entities – family and business. On their own, either can be fraught but put them together, and the potential for disaster is colossal! However, there are many upsides to families going into business together. In my long career in family business advisory, I have seen many families do great things together in business and create far more opportunities than calamities.

When you enter the family business, it’s likely that one of your key goals is to maintain a great relationship with your family. But it is often when trying to keep everyone happy and keep the peace that the exact opposite occurs. Avoiding those conversations or topics that cause tension is a guaranteed way to create bigger problems down the track.

So, how do you deal with the big issues, the tough issues, the complicated issues – and still be able to sit down for Christmas lunch together? The answer is a family constitution, also known as a family charter.

What is a family constitution?

A family constitution provides a set of guidelines and rules agreed upon by everyone in the family. Also known as a family charter, it is a document that provides clear expectations for every member of the family business. It covers what happens when someone wants to become involved in the business, their behaviour in the business and how the family manages money matters like pay rates and dividends. A family constitution covers how the family supports one another in starting new businesses, in times of strife, or when special education or health requirements are needed.

Anyone in a family business may be familiar with the frustration of those never-ending discussions. You know the one where you have the same conversation repeatedly without moving forward on an issue or finding a resolution. It’s a frustrating place to be, but one that is easily avoided when a family constitution is in place.

Why you need a family constitution

We’ve talked a lot about the what, but it’s good to understand why a family business should have a family constitution.

When everyone agrees, nobody can disagree

A family charter is only constituted when all family members reach an agreement. First, the important issues are identified and an agreement is reached on how the family will handle each one. The result is a clear set of guidelines that everyone has okayed and can refer back to at any time. Getting the details down in black and white avoids misunderstandings when big decisions or big changes arise.

Tackles the tough stuff

Unlike other types of business, a family business involves big emotions. When a family comes together in business, they bring all of those powerful dynamics with them – love, respect, jealousy, envy, anger, and it goes on. It is important to give these dynamics an outlet, but also to ensure there is a clear process for dealing with emotive issues.

For many, the elephant in the room is what will happen when a parent dies. A family constitution provides an opportunity to cover this delicate issue so that no one is left wondering what will happen, and most importantly, everybody has said what they need to say before it’s too late. The succession process is a particularly difficult task for many family businesses and working with a family business advisor during this process makes things easier.

A secure tomorrow means a stress-free today

There is so much rolled up into a family business. It is not only your career and income but also your identity, your future and your security. If you are unsure of what your future holds because it involves asking difficult questions of family members, you are putting yourself on a pathway to anxiety and stress. And we all know that no one is at their best when they are under pressure. Stressed-out family members can create conflict where it is completely avoidable. With a family constitution in place, everything is set out clearly, paving the way for harmony rather than heartbreak.

How to write a family constitution

A family constitution is not a five-minute job. It is important to give the issues that arise the time they deserve. Without question, a family charter tackles some tricky issues. But as much as you may be dreading the conversations you need to have, it is worth it in the end. Working with a family business expert provides a structured format to navigate important conversations in a surprisingly painless way.

We recommend setting aside three to four days to write a family constitution. In that time, you create a list of the issues and objectives that need to be covered; this may cover topics that have been avoided for years. With the help of an expert, each issue is discussed thoughtfully and respectfully until a decision is made and entered into the charter.

Constitutions for family businesses in transition

For family businesses in transition, a constitution is critical. For example, a family business transitioning from a sibling-run group into a structure involving more family members (such as a cousin-run group) will need to consider more than just shareholder agreements. The family constitution holds the whole process together, making it easy for everyone in the family to benefit both now and in the future.

In this scenario or any others like it, a family charter provides security. When family members feel secure, they can relax. Family members and non-family members, such as executives or board members have overarching clarity, and the potential risk to both the family and the business is reduced.

A few key considerations for family constitutions. A family charter should:

Meet core values of honesty, fairness and transparency. We never do side deals with family members. Everyone in the room is involved in decision-making, and everyone agrees before it’s finalised.

Takes as long as needed. We give your whole family time to digest and think about their decisions. No one is rushed, and no one is pressured.

Long-term thinking. We aim for a timeframe of at least 40 years. Ideally, your family will know what your great-granddaughter will be getting from the business.

Provides a level of certainty. We are aiming for legacy-building. When everyone knows the rules, everyone can relax and get on with building their dream.

How can a consultant help write a family constitution?

If your family business is serious about building a legacy, the family constitution is a critical step in the journey. Working with a consultant allows you to benefit from an external party who doesn’t have any emotional investment. A family business consultant helps facilitate the conversation, guides the process, and helps you bring up issues that you may be worried about or find difficult to address.

While it is an investment in time and money, we see families transformed by this process. We see conflict significantly reduced, relationships saved, and family members energised because they are clear to work on potential opportunities.

If you’re in need of a family business constitution, or would like to speak to one of our family business advisers, feel free to get in touch.

Contact Family Business Central