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Family Constitutions - What are they? What's in them?

Families learn to build a shared vision by aligning individual and family values and goals, and that
The Business of Family
Family Constitutions - What are they? What's in them?
By Mike Boyd • Issue #4 • View online
Families learn to build a shared vision by aligning individual and family values and goals, and that vision becomes a guide for planning, decision-making and action.
A strong shared family vision statement links the past, present, and future, and invigorates family members by resonating with each person both emotionally and rationally.
A good starting point to consider a family’s vision is is to think about purpose. Once families agree on purpose, then normally everything else drops into place.
The simple question “What’s our business/family enterprise for?” often produces a range of answers from different family members: some may see the business as jobs for the kids, a charitable foundation, a pension fund, or even investing in a super yacht.

Values are what a family and its business stand for; vision is a shared sense of where each is heading. Together, vision and values provide a major source of strength and resilience for the family firm, and are central to long-term family business success. [Leach, P. Family Enterprises - The Essentials]

Family Constitution
The shared vision and values of a family are often documented in a written family constitution (sometimes called a protocol or creed) - a document which sets out the vision, values, rights, responsibilities and rules applying to stakeholders and beneficiaries in the family enterprise.
It states the intent of the enterprise and sets out plans and structures to achieve its goals. Another critical aspect is continuity planning to prevent or recover from complex and unexpected situations which, although unlikely, may arise in the fulness of time.
Rather than a cookie-cutter legal template, the best family constitutions often morph into a generational story-telling device, collecting and documenting the “family ways” and celebrating their uniqueness and “differentness”.
Like any organisation, a family organised around its vision and values develops a brand over time and begins to stand for something. The best constitutions reflect the essence of what it means to be a member of, and contributor to, the ongoing stewardship of the family enterprise.

What’s in a Family Constitution?
Philip Marcovici’s excellent book, The Destructive Power of Family Wealth lists a few of the many well-thought-out items that a family constitution might contain. I’ve paraphrased the following summary:
Background on the Family and Family Business
  • The family origins, history and the values of the founding generation
Mission and Vision
  • Drawing on the history of the family business, the objectives of the family and what it hopes to achieve for the benefit of the family, the business, employees and community.
Family Governance
How will the family govern itself? Typically a family council or similar group is formed, and procedures set out for who will populate it, how decisions are made and how members are appointed or replaced.
Who are Family Members?
Apart from spouses, upfront consideration of how the family views step-children, adopted children, and others is important, and ideally should be discussed before the specific questions arise. A potentially emotional and divisive issue.
Family Assets and Who Really Owns Them?
The extent to which younger generation are meant to be owners of assets or custodians of assets for further generations. Stewardship vs ownership.
Family Values
While family values are part of the upbringing of children, setting out the values of the family in writing is often a good way of cementing the approach to business and wealth that the family is committed to.
Family Education
Will the family support education costs? School and university or other specialised programs too? Is a certain level of education required to join the family council or the family business?
Employment Policies
Should every member of the family (spouses?) have a right to work in the family business? What are the employment policies for family members? Successful families utilise clear guidelines and expectations for members who want to work in the family business.
Expenses and Use of Family Assets
The extent to which some expenses of the family may be communalised and the extent to which those communally owned assets, such as a family holiday home, boat or ski chalet will be used and paid for? Can family members utilise these assets freely?
Social Responsibility and Philanthropy
The constitution is a good place to set out the family’s views on responsible investing and philanthropy.
Entrepreneurial Children, Competition and the Role of a Family “Bank”
How can the family’s assets be used to support entrepreneurial children and new ventures? Can those ventures compete with the existing family business (online vs traditional)? Will the family provided non-bank financing for speculative pursuits?
Compensating Family Members Involved in the Family Business
A thorny issue that business-owning families face and which the constitution should discuss, is how family members will be rewarded for the work they do in a family business. What if a daughter runs the family business full time but shares ownership 50/50 with her professional doctor brother? Is remuneration benchmarked to market rates?
Family Mentors
Formally appointing mentors outside of the family to support the younger generation can be useful whether a family business is involved or not. Having a formal approach to mentorships can be important and beneficial.
Expectations Regarding Pre-nuptial Agreements and Trust Arrangements
Divorces in the younger generation can have a dramatically negative impact on a family business and family assets generally. Well-structured discretionary trusts, pre-nuptial and post-nuptial agreements useful planning tools. Having the constitution lay out expectations regarding such arrangements and their being a condition to inheritance is important.
Pruning the Family Tree
Allowing for the likelihood that there will be family members who will not want to participate in or support the family enterprise, and having clear procedures to buy out their interests and at what price, has been a key way successful families have managed to keep their business in family hands for generations.
Harvesting the Family Business
The constitution should provide procedures for when the family business can be “harvested” - sold when it makes strategic sense to sell and reinvest the proceeds for the benefit of the family.
Family Retreats
Arrangements for regular, annual or more frequent, family meetings involving the wider “family assembly” to allow the family to review its business and wealth and stay connected. As families grow, more work is needed to keep families together, and the retreat becomes a key element of this.
The Family Legacy and Individual Legacies
It is often useful to consider, in the preparation of a family constitution and in discussions with family members, what “legacy” really means, and the need for all family members to have the ability to achieve their goals and aspirations.
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As you can see the list is comprehensive and though-provoking for all to consider, not just those with a family constitution. This is just one example of a document which a family may curate over time and update with additions or revisions from year to year.

This Week's Featured Book:
Interesting links:
Make Haste Slowly: The Kikkoman Creed (Video)
Kikkoman’s Mogi Family Creed
Kikkoman - Wikipedia
Post M.
Herman Miller is a 120-year old American business that produces iconic furniture and generates >$100M in cash/year. Worth $1.5B.

Wayfair acquires demand via SEO and sells ephemeral and non-descript furniture and burns ~$500M/year. Worth >$20B.

New owner could do the former well
Stay in touch
Mike Boyd is an Australian entrepreneur based in Singapore. He’s the CEO of Vroom.com.auProsura.com & an active YPO member.
Mike’s on a mission to build a small portfolio of cash-flowing companies and invest the proceeds for the next generation at Mudbrick Capital.
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