Dr Peter May explains how a constitution can help ease the struggles that family businesses face in times of succession or destabilisation, and gives advice on how best a constitution can be developed
The ties that family owners have to their company are stronger than those of typical shareholders because emotional issues accompany the strictly economic aspects. Their connection is stable and based on family ties with the consequence that, in addition to economic aspects, the entire range of family dynamics has an impact on interactions and decision-making processes.
As if this were not enough, relationships are subject to constant change due to succession, which results in ongoing destabilisation. In a nutshell, these are the ingredients that are often responsible for the demise of a family business.
A family constitution can prevent this. Those who start developing a family constitution aim to stabilise the element most indispensable for the long-term success of a family business – namely the family itself. They seek to bundle diverging owner interests and establish the family as a source of strength as opposed to an interference factor for the company.
They want to ensure that the family maintains agreement on the common project of the family business in the long term and that all requirements for this are met. They want to make sure that the family feels a sense of community and unity with regards to the common project despite diverging lives and interests.
In essence, those who start developing a family constitution want to transform family members into responsible owners of the family's company knowing that only professional ownership can guarantee the long-term survival of the family business.
Developing a family constitution
Developing a family constitution refers to a process in which families in business define themselves in order to create, modify or confirm their identity, their corporate governance and their family governance. Adherence to certain rules, outlined below, is recommended to ensure the success of this process.
Rule 1 The development of a family strategy should be accompanied by an external facilitator, who should ideally have the ability to manage the process as well as specific professional skills pertaining to good governance in family businesses. Even if family members have such skills, they are not suitable as facilitators because they have their own interests from the point of view of the other members and thus cannot remain impartial.
Rule 2 The process has to be managed in an open-minded manner. Strong patriarchs tend to want to determine the results. I have been asked more than once by my clients whether we could simply adopt the "German Governance Code for Family Businesses" – which I helped to create in 2004 to aid business families to achieve good governance – to save time and money or to avoid unpleasant surprises. Those who think in this way will at best receive a nice piece of paper, the use of which is not greater than that of many high-gloss brochures that public corporations print their personnel management principles on.
With regards to contents, this piece of paper has absolutely no value. The required enthusiasm for the common project of the family business does not result from pressure from above, but from integration in a process of understanding and communication. As the saying goes, consensus trumps leverage. Neither should there be any taboos. Topics that are swept under the rug do not simply
disappear. Unresolved issues are like time bombs that can undermine the entire process.
Therefore, even if it is difficult, all issues should be out in the open. This type of approach requires a significant leap of faith on the part of those in power. But I have to say that this leap has been justified in all of the processes I have accompanied thus far. Family members have more understanding of what is required in family businesses than most patriarchs imagine. And, what's more, they are willing to act on this understanding.
Rule 3 The process should not be limited to a specified duration. It takes as long as necessary to achieve excellent results together. Each family has its own pace. I have made an interesting observation in this regard. Families that enter a process thinking it will be "short and sweet" usually require more time than those who have planned for a longer process. Developing awareness of problems is a necessary part of the process. Those who take this step on their own save time.
Rule 4 A family strategy is developed most effectively in a series of workshops ideally each lasting one or two days every four to eight weeks in a calm place outside the company.
Rule 5 Not only the company owners, but all family members with a direct or indirect impact on decisions in the company and/or family should participate in these workshops if possible. This especially includes in-laws, whose status requires urgent attention and the support of whom is to be gained for the project's success. Even children should participate in the process as soon as they are old enough to make substantial contributions to discussions and decision-making processes.
Sometimes it could be sensible to carry out the process in several sequential or simultaneous parts. This especially applies to large families, in which a draft can be created by a small workgroup. The draft can then be processed by a shareholders' committee and finally by the whole family.
This type of multi-level procedure could also make sense in exceptional cases when integrating in-laws or before one generation succeeds another. It can be helpful in such cases to have the younger generation develop its ideas for a new inter-generation contract and then query the older generation as to its opinion of the stance taken.
Rule 6 At the end of this process, the results should be recorded in writing to document their binding nature and simplify forwarding to new family members, external managers or business partners. This should only be carried out by the family without external guidance. This ensures that the result reflects the family's individuality in its order, emphasis and language. Only then will it be accepted by all participants as what it should be: a constitution that is binding – not legally but morally – in a distinctive, highly professional business family.
Rule 7 However, the family strategy is only complete once the specifications made in the family constitution have been implemented. This implementation is carried out in part by designing or redesigning existing contracts and in some cases actual measures are to be performed such as establishing a training programme for company owners and/or the their successors or setting up a shared family office. In order to ensure all of this happens, it is recommended that responsibilities (eg, specifying a "family manager") be clearly delegated and that a simple but effective system of checks and balances be set up.
Improve survival chances
In the end it's up to you to guarantee that all the agreements are actually carried out. Remember, if you don't do it, it's not going to happen. But if you do it, you can implement a family management to achieve good governance in a relatively short amount of time, which will significantly improve your family business's ability to survive.