What is a family constitution?

A family business constitution - sometimes known as a family agreement - is partly a statement of general principles. It outlines your business' core values and vision, and your family's commitment to them. It is also an important way to successfully manage conflict in a family business. When well drawn-up, such a document can even prevent conflict occurring in the first place.

Importantly, it is also a practical guide for running the business and a framework you can use to deal with business issues that have the potential to cause disputes. Let’s cover the basics here.

A collaborative process

Just as every family business is unique, the constitution it develops should reflect the unique culture and complexities of both the family and the business. A family constitution may be as short as a one page statement of the family and the business’ values and mission, or a lengthy and legalistic document.

Regardless of the nature of the constitution, it is essential that the family goes through the process of identifying potential problems that may require resolution in the future and collectively make decisions as to how to address these issues as they arise.

The process of drawing up a family constitution therefore should be collaborative, involving everybody with a stake in the business. The document should also be regularly reviewed.

Ultimately the question arises as to which comes first – the Family or the Business. This is the critical first step we believe.

Structure your constitution

A typical family business constitution might include the following sections:

  • the vision, mission, objectives, strategies and ethos of the business
  • leadership
  • management structure
  • entry principles for family members
  • transition, succession and exit policies – departure, death, retirement and equity sale
  • rights, responsibilities and obligations of family appointments
  • rights, responsibilities and obligations of family members inactive in the business
  • appointment and rights of non-family board members, management and employees
  • training, remuneration and appraisal of employees - both family and non-family
  • involvement of non-executive directors and other outsiders – e.g. third party advisers
  • communication channels
  • dispute-resolution procedures

Therefore some of the key issues to consider in depth could include:

  • The advantages of family businesses
  • Key things to consider when setting up a family business
  • Communication and family businesses
  • Managing conflict in family businesses
  • Pay and benefits for family members
  • Setting up the Family Council
  • Drawing up a family business agreement
  • Transition Management & Succession/Exit Planning including knowledge capture & transfer
  • Celebrating with pride and passion having family members working together in the business

It is the process that matters most!

(Read The Family Constitution: It's the process that counts, not the content by John L. Ward from the Kellogg School of Management)

So let’s summarise more formally the purpose and specific policies and procedures that should be addressed on this most profoundly critical subject.

Promote the continual development of the business

  • Assess the skills and frameworks required at Board and Management level to ensure that the best resources are available to facilitate the development of the business
  • Agree on ground rules for planning for the transition to & succession of the business's leadership – including knowledge capture & transfer
  • Establish a clear process for delineating family and business governance issues
  • Create ground rules for selecting and assessing non-family members to join the business

Facilitate the continual family ownership of the business

Define: 

  • Policies for the transfer or sale of shares
  • Dividend policies
  • Policies in relation to the timing, participation and size of liquidity/equity events
  • Policies governing the communication of information to shareholders
  • Policies in relation to the representation of shareholders at Board and Shareholder meetings
  • Polices in relation to the nomination and assessment of Directors
  • Policies governing the behaviour and relationships between shareholders
  • Procedures for resolving conflicts

Bolster the strength of the family

Define: 

  • Processes to establish and revisit unifying family values and vision for the business
  • Mechanisms for the family to get together and provide and receive information in relation to the business
  • Policies in relation to making resources and/or services available to the broader family
  • Ground rules for selecting and assessing family members to join the business
  • Rules delineating family and business issues