Family business planning

Creating the Right Family Constitution for Your Business

When my parents first proposed creating corporate governance and a family constitution for our family business, we all thought it was a great idea. Everyone was enthusiastic—until we began the process. It was time consuming, tedious, and at times, quite frustrating. However, with the wise, calm, and steady leadership of our parents, we were able to achieve a suitably defined structure.

According to the International Finance Corporation, “Because most families run their businesses themselves (at least during the first and second generations), there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.”

The necessity for a sound structure that is both firm in its foundation and fluid enough to conform to changing times and family dynamics, is paramount. The failure to establish any kind of family governance can have resounding negative consequences, particularly in ensuring the succession policy for multiple generations.

Drafting Your Constitution

Creating a family constitution is neither easy nor quick, but it is necessary. You are working together to create a living document with roots in the unshakable core values of your family, but with branches and leaves that will grow and change as each generation becomes more involved. The following are suggestions on how to approach creating your own family constitution:

1. Start with a mission statement

The mission statement of any constitution is not written just for the present family business, but for the many generations to come. It is a statement of your family’s values, your goals, and your expectations for those who will come after you. The mission statement defines your intentions, but it doesn’t tell future generations how you expect to get there. That is where the Articles come in.

2. Establish governing articles

Just as the U.S. Constitution defines the country’s governance and how the three branches—executive, legislative, and judicial—should keep each other in balance, so your constitution should clearly establish the responsibilities of each governing body—be it a single-family council or a combination of council and board of directors—and the basic operational structure of each, including how leaders are selected and defining a standard code of conduct.

3. Include a Bill of Rights

Just like the U.S. Constitution, your Bill of Rights can clarify the rights of family members and shareholders, as well as define their basic obligations and responsibilities. When these are clearly established, your bill of rights can go far in helping to resolve family conflicts.

The welfare of family, whether you’re cultivating them to take over the family business one day or not, is the primary focus of the majority of family businesses. Just like wills, deeds, and other documents critical to one’s individual life, your business must establish guidance and direction to help it, and the family members who operate it, to thrive. Find out how equipped you are to experience greater success as a family business by taking my quiz: