In a recent article in Business Spectator, The constitution solution to governance clutter, Leon Gettler makes the case that every family business needs a constitution, especially when we consider the number of family-run organisations that don’t last beyond the third generation. According to Gettler:
“As a family business grows, there will be tensions as more stakeholders and more family members with an interest in the enterprise move into the picture. The business, as it grows, will be demanding more financial and management commitments from its owners. Family issues rather than business issues determine generational change in every family business.”
A family constitution is a roadmap setting out the family’s vision and values. Constitutions are not enforceable by law, but they create a moral obligation among family members as it relates to the business, helping to plan ahead and ensure divisive matters or issues are discussed before they happen.
Binding family members together morally ensures a greater commitment to preserving the family legacy. In addition, family constitutions create a mechanism to resolve and manage conflicts and focus everyone on the key issues that are being ignored.
Gettler argues that family constitutions can circumvent some of the most common mistakes of family businesses:
According to KPMG Australia’s Family Business survey, four out of five family firms don’t have a constitution. And as Gettler points out:
“If family constitutions are ever put in place, it usually happens when there is a changing of the guard, when the founder passes it on to their children, comprising other branches of the family.As this can be unplanned if, for example, the founder dies or becomes ill, it is better to have the document in place earlier on.”
Unlike a shareholders agreement, a family constitution covers more than just the people who have shares in the business – all family members, or their representatives, should participate in the process.
In the article, Gettler discusses what a family constitution should include. At the very least, the family constitution needs to document the mission, values, and principles of the business, and outline the key strategic objectives including the long and short term goals.
A family constitution also needs to set out the process for resolving conflicts about the business between family members and spell out their rights: