A family constitution to assure peace in family and business

A family constitution to assure peace in family...

Several siblings or cousins, different interests, owners spread all over the world. A growing firm with the difficulty of controlling different subsidiaries. Furthermore the question of how to finance the next investment. In addition to those family business issues, family members frequently ask themselves the following questions: Do I want to work in the firm? Am I capable of working in the company? Am I allowed to work in the business?


Senior Manager

KPMG AG Wirtschaftsprüfungsgesellschaft


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Business people discussing

I regularly discuss these topics with family members when developing a family constitution. The constitution is an entrepreneurial family document that combines all strategies, structures and rules that the family members want to follow. It also allows the business and its managers to act within a stable ownership framework. In addition, the process of developing a family charter leads to rules that are accepted because they have been developed by all participants and thanks to the process, family members are able to get to know each other better (especially their cousins).

Two family businesses with constitutions

Due to the dynastic intention of one German entrepreneurial family, the members developed a family constitution. The goal of the five brothers and sisters is to hand over a successful and independent firm to the next generation. The family constitution is an important instrument to reach this goal. The family was enthusiastic about the process and the result of the family constitution. Because they see that all conflicting issues are transparent nowadays and each family member knows his rights and duties. Besides, the family constitution would give stability and security to the company and its employees.

The result of the family charter drafted by another German family firm is similar. The aim for creating a family constitution was to protect the company against family conflicts and ensure the transition of the firm to the third generation. In the constitution, the family members agreed that if differences of opinion arose, they would talk as soon as possible about these issues and try to solve them. They do not want the lack of communication to become a cause for conflict.

Advantages and limitations of a family constitution

These are just two examples of entrepreneurial families, who have created a family constitution. Many other families agree, that the development of a family constitution is a worthwhile process. According to them, advantages include:

  • Transparency is created
  • Fair play in leadership succession is ensured
  • Verifiability is increased
  • Accountability is ensured
  • Trust is created
  • Solidarity and commitment are achieved

I often recognize that family constitutions are not a solution to all problems. If there are severe conflicts in the family it is important to solve them before creating a family charter. A family in conflict will find it difficult to reach a common solution to specific topics like succession. Moreover, family constitutions are not useful if family members are not completely open and transparent.

Content of a family constitution

Family constitutions are as varied as the world of family businesses. In my view there does not exist "the one and only structure" for a family constitution. However, there are several basic elements. Whether families want to define a rule for a certain topic depends on their individual situation. It is necessary to analyze which topics should be part of the development of their family constitution. I always recommend that aspects that might lead to conflicts are discussed when developing a family constitution.

Besides a clear vision and mission, common values and goals for the family and the business, the following questions could be answered when developing a family constitution:

  • How do you want to structure your wealth: focused or diversified?
  • What is your business model for your family firm? How do you handle risks?
  • How do you want to structure your company (several independent entities, holding, foundation)?
  • How do you want to handle the balance between tax optimization and controlling the companies?
  • Who is able to become an owner and which rights and duties does it imply?
  • How do you organize management and leadership succession? Do you need an advisory board?
  • Which topics apply in case an owner that wants to sell his shares?

Beside the questions above, it is also important to answer questions that deal with the family sphere such as:

  • Which ambitions do you have for your family wealth?
  • Do you want to organize your family in branches or as one family?
  • Who belongs to the internal family circle and which rights and duties are associated with that position?
  • Do you need a family manager or a family advisory board?
  • How do you prepare the next generation for a leading position in the business?
  • What can be done when a conflict appears?

Box: Aspects of a family constitution:

Who: The whole family

How: Development of a family constitution in individual conversations and joint workshops

Why: The aim is to maintain the existence of the family business over generations, to enable family cohesion and to avoid conflicts

What: Common visions, values and goals, a better understanding for the business model, common rules for the directors of the company, shareholder meetings, advisory board, succession, dividends, salary, family activities and family education as well as rules for conflict resolution

If you want to know more about how to develop a family constitution, please contact your local KPMG member firm professionals. If you want to read more about family business governance and family constitutions, please see: Governance in Family Enterprises – Maximizing Economic and Emotional Success, by Alexander Koeberle-Schmid, Denise Kenyon-Rouvinez and Ernesto J. Poza, Palgrave Macmillan, ISBN 978-1-137-29389-3, entitled to a 20 % discount with the promotional code WORLDPALGRAVE20 if ordered through http://www.palgrave.com.

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