The Overlooked Document That Every Family Business Must Have
Perpetuity is a central objective of every family business. In today’s ever-changing world, it is critical for owner families to proactively mitigate risks to achieve that longevity. In our experience, virtually every successful multigenerational family business does so through two practices. The first, which we’ll discuss here, is a family charter or constitution that keeps the family together in the face of changes and challenges. (The second, which we will cover in a subsequent post, is to establish an effective governance framework that holds the business together through a range of events.) A well-constituted family charter helps avoid disputes that can divide families and divert significant time and energy from managing the business. It also sends a strong signal to current and potential non-family leaders that the business is run with a best-practice orientation.
The family charter usually augments the shareholders’ agreement and establishes a set of guidelines that typically encompass the family’s relationship with the business. These guidelines include:
- Governance mechanisms
- Succession planning, decision making and the respective roles of family members, non-family members and professionals
- Dispute resolution and communication forums such as a family council
- The family’s business mission, vision, values and goals
- Determining the business roles of next-generation and non-blood line family members, and establishing mechanisms for managing their exits
- Investments, incentives and wealth distribution
- Sustainability, philanthropy and other social responsibility issues
Once you realize you need one, it’s often too late
The strong presence of many founders often provides a false sense of security, leading many family members to think that they do not have to prepare for disagreements or unpleasant scenarios. But family dynamics change over time: children grow and have families of their own; the relationships between family members evolve; each member’s professional profile and ambitions becomes more distinct. Having a leader who can definitively rule on or build consensus around issues as they arise is very different from having a comprehensive framework that has been thought out, debated and agreed upon. Establishing a family charter early on helps preserve common ground before vested interests and conflicting priorities diverge and harden. Like insurance, a family charter only is useful if it is in place before it is needed.