As we mentioned in our previous blog post, creating a family constitution would make a great resolution this year for families who own businesses. In this post, we explain what a family constitution is, who benefits from them and why this should be a priority for your family.
What is a family constitution?
A family constitution is a non-binding document that serves as a record of the commitment to family heritage, principles, values and goals. It defines the governance structure and aims to ensure smooth administration of the family’s relationships to one another, the family’s wealth and any businesses critical to the family and its legacy.
A constitution will provide a framework to unite the family members and guide the next generation of the family. Among the topics it could address are:
- How the family will work together and resolve conflicts
- How the family will make decisions crucial to the family
- How the next generation’s trusts will be administered and by whom
- How family businesses, the family office and family assets will be managed
A family constitution also offers an opportunity to articulate the family’s views on other topics, such as:
- The family’s core values, mission or vision
- What the family’s wealth or business represents to the family
- The family's philosophy about business ownership and wealth and its transfer to future generations
- The family's approach to participation in family-controlled enterprises
- How the family will balance the desire to enjoy the business’ economic success with the need to invest in the business to secure its future
Who would benefit from a family constitution?
- Any family who expects business ownership and wealth to be shared among multiple generations
- Families facing significant transitions, such as the transition from the wealth creator to children or grandchildren
- “Cousin Consortiums” and larger, extended families where better connections could be made between family members who:
- Are geographically separated
- Are widely separated by age
- Have diverse career interests
- Come from different economic circumstances
- Have more tenuous connections to the business
In these cases, the family constitution can be a vehicle to promote family harmony and unity by setting expectations, connecting members to each other and to the wealth or business, and by providing a framework for these relationships.
Why should this be a priority this year?
The ideal time to create a family constitution is when the family is functioning well and not in transition. This allows the constitution to serve as protection for the family and wealth against future conflict, difficult transitions or unexpected events.
More importantly, creating a family constitution takes the family through an impactful process, which can promote communication and create an opportunity to resolve matters that people might otherwise prefer to ignore. In fact, most experts believe that the process of creating the constitution is at least as important to the family as the finished product.
Why is the constitution creation process so beneficial to families?
Creating a document meant to address such a broad range of family behaviors, generations, roles and issues takes considerable time but yields many benefits to the family, including:
Benefit #1: By the time the family has discussed and arrived at a consensus on the topics that are important to them, they may have built cohesiveness and trust in one another.
Benefit #2: This process provides the family with practice for building group communication, decision-making and problem-solving skills.
Benefit #3: The process engages family members from multiple generations and provides members with reasons to care about the continued success of the family and the business.
Create the foundation for your family’s future.
Creating a family constitution helps a business-owning family prepare for the unexpected, build family unity and establish guidance for a growing family and business. Focusing on a few key questions, a family can start building the foundation of a constitution. If you need assistance starting the process, please contact Laura Jeltema or Mark Harder, Chair of the Private Client and Family Office Practice Group.
