What is a Family Constitution?

Family businesses can get somewhat difficult to manage due to various aspects of family dynamics, such as expansion or generational change. History has shown that the majority of family businesses fail before the third generation has ever had a chance to enjoy the success. Most of them fall apart due to internal conflicts rather than external problems.

Did you know that having a Family Constitution can strengthen your company’s chances of continuous success?

A Family Constitution: What is it?

A Family Constitution is a formal document that sets out the rights, rules, and responsibilities of all stakeholders in the family. It provides firm plans and structures to rely on when dealing with unforeseen situations that might arise in the family.

As family businesses develop and grow, relationships between family members start to change. It’s not only personal relationships we’re talking about; it’s also the complicated relationships between various family members and the wealth structure. Sometimes, misunderstandings may occur between the family office and the family trustees – literally, anyone who is intended to have a role in the preservation of the company.

The key to preservation and growth is establishing and fostering a mutual understanding of the rights and responsibilities of everyone involved in the family business.

A Family Constitution defines goals and values, supports the family’s relationships and recognizes differences. Its core role is to set boundaries and a foundation for a successful family structure.

Many families need guidance in creating a Family Constitution and turning to family enterprise consulting for advice is a great idea.

Core Components Of the Family Constitution

An effective Family Constitution should contain three core ingredients: your family mission statement, personalized policies and procedures and the creation of a family council.

  1. Family Mission Statement

Each Family Constitution needs to begin with a personalized mission statement. The family needs to think about everyone’s skills and values, as well as their dreams and abilities. Do you know what your family’s purpose is? Does your family have a clear mission? There is most certainly a need for one in every family.

All of these need to be taken into consideration when writing down a family mission statement. The statement doesn’t necessarily need to be lengthy. In fact, a Family Constitution doesn’t have to be a long list of rules. Write down your mission. Make it simple, but clear.

  1. Tailor the Constitution to Your Family and Stick to It

Each family is unique, so a Family Constitution should be unique too. Forget about one-size-fits-all Family Constitution solutions. Your family has its values and what works for another family might not work for yours. You should never try to fit your family’s story into existing molds. Create a strategy around your family instead.

The most important part is putting your Constitution to action. It’s not enough for everyone to gather and agree upon it. You have to live it out every day.

  1. Family Council

A Family Constitution needs to define what roles should different family members have in all important family matters. Usually, two core areas need to be separated, especially when it comes to families that run a family business: 1) The control functions; 2) the distribution of benefits across the family. The Family Constitution should define an executive board of family members who would be entitled to oversee all family matters. This board usually is described as Family Council.

 

Elaine King, CFP is an expert on wealth planning, family governance, and financial education programs.

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