July 8th 2014
Unlike a Family Counsel, whose objective is to provide a sounding board for family members and to assist in conflict resolution and/or arbitration, the Family Business Constitution is a written document that serves as a roadmap for business continuity and family harmony.
The difference between the family business constitution and a shareholders’ agreement are the signatories. All family members are party to the family business constitution, not just owners.
The Family Business Constitution should provide guidance on:
It should attempt to outline how to integrate the family business into family life, i.e. how to balance commercial interests against:
- Family preferences;
- Paternal attitudes towards employees (family and non-family employees), retired or retiring family business members, tenants of family owned building, local residents vs family members living out of town.
Communication structure between family on business matters, non-business matters and family issues:
- Conflict resolution mechanisms, both an informal process and a formal process that would include the Family Counsel;
- Family employment/personnel policies;
- Compensation;
- Frequently encountered and predictable problems;
- Family governance;
- Family policy and guidelines for acceptable behaviour;
- Emergency planning.
The Family Business Constitution should provide guidance on:
It should attempt to outline how to integrate the family business into family life, i.e. how to balance commercial interests against:
- Family preferences;
- Paternal attitudes towards employees (family and non-family employees), retired or retiring family business members, tenants of family owned building, local residents vs family members living out of town.
Communication structure between family on business matters, non-business matters and family issues:
- Conflict resolution mechanisms, both an informal process and a formal process that would include the Family Counsel;
- Family employment/personnel policies;
- Compensation;
- Frequently encountered and predictable problems;
- Family governance;
- Family policy and guidelines for acceptable behaviour;
- Emergency planning.
What to include in your Family Business Constitution
- The long-term goals of the family business, including what the family defines as success. These measures will impact other principles (maintain the business in the family, sell to a 3rd party, etc… ) that would affect succession
- Business succession:
- How should the successor be determined and based on what criteria
- What should be done to ensure business practices, ethics, contacts, policies and procedures are passed smoothly to the next generation
- How to care for retired family members – are their needs being met, and under what circumstances?
- Governance:
- The communication of family values, mission and long-term vision to all family members (whether working in the business or not)
- Keeping family members (especially non-management) informed about business accomplishments, challenges, etc…
- The communication of the rules and decisions that might affect family members’ employment, dividends, tax planning, and other benefits that come from business ownership
- Establishing formal communication channels that allow family members to share their ideas, aspirations and issues
- Allowing family members to come together and make necessary decisions
- Family Involvement:
- What rules should determine how particular family members are admitted to, promoted in and ejected from the business?
- How closely do family members need to be involved in ownership or the management of the business?
- Commercial (non-family) management of the family business – is this allowed, acceptable or a must?
- Training – new leaders (particularly from within the family) should be appropriately trained and educated, not only in business matters, but within the roles they will be taking on.
- Do potential successors spend time at a non-family business to gain insight, knowledge experience and credibility before taking over the family business
- Rectification of errors – what is the mechanism for rectifying incorrect decisions/choices? How are these errors identified?
Please note that the information provided in this bulletin consists of general guidelines and that there are many exceptions and special cases that could apply.
If you want to know more about family businesses, how to manage tangible such as tax and estate planning
and the not so tangible family dynamics, please contact us or subscribe to our Newsletter.
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