A family constitution: why? or why not? | KPMG | CY

A family constitution: why? or why not?

A family constitution: why? or why not?

Extract from the book “Governance in Family Enterprises – Maximizing Economic and Emotional Success”, 2014 , reproduced with autorisation, Palgrave Macmillan ©

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A family constitution (or family charter) is a written document that lists the family mission, vision, and values as well as a number of rules and policies that describes the nature of the relationship between a family and the business it owns. A family constitution can be an important instrument for ensuring cohesion, commitment, and internal harmony, as well as economic and emotional success, in family enterprises.

The constitution is bound by moral force, rather than legal, although the rules may also be included in the articles of incorporation. The constitution is normally developed with the help of the family business governance principles of “responsible ownership” and “fair process”.

Typically, owners develop the family constitution through a series of joint workshops. It is important for all parties jointly to produce a document themselves and approve it through consensus. Through the development process, the owners get to know each other better and learn the strengths and weaknesses of the others. They learn together. They are more likely to understand, respect, and accept the rights and obligations of each role – owner, board, management – through this participative process. Thus, the payoff of a family constitution is twofold: the process and the document itself.

It is important to note that, while not all content of a family constitution has to be legally binding and included in the articles of incorporation, in many cases this is advisable. The principle is: the greater the potential for conflict concerning the issue at hand, the stronger the case for it to be included. For instance, there are often conflicts about succession and dividends. Therefore, those issues should be clearly defined in the articles of incorporation.

It is important to note that family constitutions are not a cure for all problems. If a family has a deep-rooted conflict, for instance, the family will need to work on the conflict before they sit down and work on the constitution. Failing to do so will only increase disagreement as soon as an item of the constitution raises a divergence of opinions.

In addition, family constitutions have little value when family members don’t voice their opinion during the process of discussing and formulating the policies or other elements of a constitution. This is unfortunately often seen in families or cultures where respect for the elders is paramount. Family members will usually agree to whatever the elder generation or the patriarch says.

Family constitutions have a positive effect on business and family. In Germany, only about a quarter of business-owning families have a family constitution. However, about 70% of owner families currently without a constitution plan to create one. The owners have recognized that setting out the strategy and structure of the business-owning family and the family enterprises in a formal document can increase long-term success.

Family constitutions especially lead to peace and stability, cohesion and identification with the business as well as an improved management and control structure. This is an indication, that a family constitutions leads to a higher emotional value. In addition, those with a family constitution have a higher profit margin than those without one.

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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