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An iron constitution

Dennis Jaffe is a founding member of the Aspen Family Business Group. www.aspenfamilybusiness.com

Family businesses come with huge behavioural and strategic legacies. An effective way of protecting them and allowing them to change and develop is to enshrine certain details in a constitution. Dennis Jaffe looks at the useful outcomes of such a document

Every time you cross a generational barrier, the link between family owners and a strong and growing business becomes problematic. From a single owner, a business can evolve to include many family and even non-family owners. For the family, only some of their values relate to the business; others are more connected to the family and its history of being identified with the business.
 
Many of the conflicts that arise in families that own and control businesses have their roots in different expectations and understandings among family members and generations. What one parent or family will say to his offspring differs from what their sibling, or cousin, might say to hers. Many wise families with large businesses have decided that they want to create a master document setting out the rules and operating assumptions for the family in relation to their business and their wealth. As a family grows more distant from the founder, the opportunity for confused messages becomes greater.
 
A business is based in formal legal agreements that set forth rules of ownership and business operation. But a family also has informal agreements, which might not have legal but have personal and moral force for family members. The EU had a long-running constitutional convention to create a charter for their union, that was drafted and then rejected by two key members of the alliance. While the EU exists regardless of whether or not it has a formal constitution, many believe that a guiding set of principles and agreements would be a step forward, if they can get ratification from their many constituencies. Like the EU, a family is a network of connected people striving for a common purpose. A constitution would help the alliance span generations, created by one generation but binding on future ones, with enough flexibility to allow for new realities and directions.
 
A family with many members and a large business – or many enterprises such as diverse investments, real estate holdings, and a family foundation – may decide the time has come to link all these entities and create a master agreement to help guide the family for generations. Because each generation will have different interests and desires for this association, families usually decide to draft a constitution when two or more generations are pondering their role and connection to the family's enterprises. The purpose of creating a constitution is to get agreement in areas where there are differences, so that every adult family member can understand what they can expect, what the rules are for being involved, and how to derive benefit from the many sources of family capital.
 
Constitutions begin with constitutional conventions, where key stakeholders gather together to define what they want. Traditionally, they are large and rowdy groups, that begin with conflicts until several leaders emerge who help the group forge consensus on key issues. The family constitutional conventions my colleagues at the Aspen Family Business Group and I have seen are large and emotionally intense affairs.
 
Who convenes them and who attends them? Like the family itself, the convention is not a pure democracy. The elders, who often have created the wealth, and who have greater control over it, are its key members. They form the upper house – the House of Lords – and hold the family's legacy and long-term memory. However, they are legislating for future generations, so the more that others are part of the discussions at the start, the greater the chance that they will agree and be comfortable living with the outcomes. A good group for a ­family convention is a reverse pyramid, key elders at the top, joined by several members of the second and/or third generation who represent and are in touch with their generational groups.
 
Like those of their governmental counterparts, family constitutions begin with statements of principles and values. Much has been made of the need for a family and business mission. We see that long-term success begins with a simple statement of who they are, as a family and as a business. For a family who has prospered and may even share a name with a business, the effects of the business rub off. Its good works may be attributed to the family's values, or its failings may tar the family. As controlling owners, a family can set forth some key values that the business should embody, that should be known and adhered to by the leaders of the company.
 
While the company's mission is clear, what is the family's mission? A family has a legacy and common history, but that does not dictate whether the family should remain together as an entity for another generation. What if they find that they no longer have the talent or interest in owning or running the business? When do they sell, and how do they go about doing this? Since ownership is more than a question of return on investment, but concerns the family's role in the community, and employment of future generations, the whole family must be part of this.
 
Faced with a large stake in a company that may offers no role for influence to some family members and not much income, these inactive shareholders may decide that being a member of the family should not include owning part of the family's legacy business. Or family members may not be satisfied with their return from the business, or the need for more capital to develop the business, and may want the family to consider a sale. The constitution may not answer these questions but it provides a framework for resolving them, by specifying how minority family members are treated, or how they can sell some of their ownership to outsiders or other family members. In defining the rights and obligations of citizenship in the family, a family constitution specifies the limits and degree by which family members are tied together by their legacy, and how much they can pursue as individual citizens.

Governance is thus the central feature of a good constitution. It specifies how decisions are made, and how laws or rules can be created that bind the whole group. For a family, since different members and generations have different degrees of ownership, the democratic solution of one person one vote will not usually suffice. The constitution may also set out how the family supports or encourages new ventures. Some families, like governments, create a family bank that offers loans and invests in new ventures, some of them founded by family members.
 
It is a great achievement for a family to have a constitution that is understood and respected by all members of the family. Having such a document signals that the family has taken the time to define who they are, and to set rules that will help each generation grow up and take on higher levels of responsibility and leadership for the family. At some point, it moves the family forward to get together and consolidate all of their agreements, and iron out differences, to create a master operating agreement for all of the family's ventures and activities.

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