A Family Business Constitution Provides a Valuable Road Map for Future Generations

Families own and manage the majority of businesses worldwide, according to new family entrepreneurship data Although family businesses are the dominant form of business all over the world, yet only a few of them are able to survive over generations; with only 30% surviving into the second generation, 12% into the third generation, and only 3% are still viable into the fourth generation. At the same time, family businesses contribute to around 70% to 90% of global annual GDP and can outperform publicly-listed non−family businesses. Most family businesses still have a far greater overlap between the family and the business, with no set of rules or policies governing such a relationship. As part of the family governance system, family businesses need to draft a Family Constitution to bring governance into the family aspects that intertwine with the business aspects, hence ensuring business sustainability and protecting the family relationships. A Family Constitution is a written and morally binding agreement among family members that articulates a set of principles and policies regarding how the family member will manage the business as an owner or employee or even both. It also serves as a key reference in ensuring a smooth intergenerational transition. The Chapters of a Family Constitution are more or less the same, however, the content is fully dependent on the family philosophy; usually flavored by the founder of the business, the nature of the business, and the different interests of the family members. Some successful families have adopted these principles and understood the need to establish a Family Constitution, but many still don’t see it as a priority.

How Can One Secure the Survival and Sustainability of The Family Business?

The first step is to understand what your goal is for the family business. What do you want it to look like in 10 years? You can create a mission statement that guides the company’s decisions and helps employees know what they are working towards. The next step is to review your current assets, liabilities, and needs. This will help you determine if there are any gaps in resources or if there are too many resources that could be cut back on. Once these gaps have been identified, you can start making changes in order to close them and make the company more sustainable.

There are many different ways in which one can go about the process of securing the survival and sustainability of the family business. we will go through them one by one

Work on An Employment Policy

Employment Policy will help you to confront and iron out uncomfortable, but potentially problematic issues. You need to ensure that employment decisions are based on structure and not on emotional or personal issues.

For example, Are family members required to gain experience from outside the family business first? or if they are required to present a job search period before working in the family business? Will employment be based on what the family wants or what the business needs? Are the Spouses of family members allowed to work in the business?

To guarantee a successful employment policy, you need to first answer these questions and establish a solid rule that can’t be broken.

Conflict of Interest Policy

Develop a conflict of interest policy to manage and prevent all potential situations that could have a negative impact on the business performance and possibly turbulence amongst family members who are working together in a family business, such as Investment in companies operating in related business or sector, and the employment of other family members in other active businesses related, directly or indirectly, to the family business.

Work on An Exit Policy

What will happen if a family member sought an exit? Who is going to purchase the shares of this departed family member? What if there are no funds to buy these shares, do family members have to accept an outsider? What if the departing family member owns the majority of voting rights? Will this require different exit procedures? Will the departing family member get his money as a lump sum or over installments?

Exiting a family business is a sensitive issue that should be dealt with appropriately. Mechanisms and procedures should be planned ahead to deal with circumventing such issues.

Work on a pre-defined policy to identify the right exit route for any family member and the right way forward.

Succession Policy

One way is to work on establishing a clear succession plan for the future. A succession plan establishes who will be in charge of the company when it’s time for it to be passed down from one generation to another. You need to work on developing, implementing, and communicating a well−structured ‘Succession Policy’, which includes clear succession criteria like: Will the next CEO be a family member or a non-family member? What are the criteria for choosing your successors? How are you going to communicate the succession plan to family managers, and employees? What is the timeline for the succession?

Conflict Resolution Policy

Unsettled conflicts can be a really difficult situation especially when family ties are involved. Divergent thoughts and opinions between family members in the business context may produce conflicts, Having a ‘Conflict Resolution Policy’ is essential to maintain harmony on both fronts; family and business. To develop such a policy, you just need to identify the potential areas of conflict and draft a policy to overcome them

Family Assembly Meeting

Despite the importance of Family Business Meetings, they are not intended to replace regular business meetings or board meetings, but rather complement them. Family Assembly Meetings are informal meetings intended to address the interactions between the family members and the business.

A key success factor for the implementation of a Family Constitution is having a periodical Family Assembly Meeting, that shall ensure a continuous communication process among the family members in relation to the family business. Of course, some guidelines are needed to make a family meeting successful, for example; Who should attend it? What is a good frequency of the Family Meetings? At which age should family members be allowed to vote on family policies etc…

Seek Help From Experts at LOGIC Consulting In Creating a Family Business Constitution

To hire an external expert to put a Family Constitution in place and define ‘the rules of the road’ while aligning the vision of the senior generation with the current and next generations is not an easy task, and you will need a third-party expert to do the job for you, We at LOGIC consulting will help you through the process at ease no matter what industry you are a part of.

Check out a full case study by our senior partner Maha Maalouf on “The Badawy’s” family business. from here