FB News

Dennis T Jaffe on how to write your family constitution

By Dennis T Jaffe

Writing the constitution begins with the existing legal documents. They are read and explained so that they are clear to the family. This is more difficult than it seems, and often there are several drafts before the meaning and mechanics of each agreement is understood, consistent, and clear.

Then, the drafters look at the informal policies and activities that have been created by the family council and other operating entities, like the foundation or family office. There are several parts to a constitution that refer, for example, to the family values, the activities of the council, business governance, trust agreements, and philanthropic activities and entities such as foundations.

The constitution is an amalgam and expansion of several individual agreements—created by the council, the owners' council, the trust, and the board of directors. The constitution is a unifying document used by the whole family. Family leaders may start to draft a constitution but soon discover many reasons to include other family members. They need to know what is on their minds, what their expectations and concerns are.

Families that develop the most useful and accepted constitutions report that the process of creating them was inclusive, proceeding through several drafts over a period of a year or more. The constitution draws from many documents—legal and shareholder agreements, for example—and expands upon how they work in practice. By searching out and carefully reading these documents, the drafters are able to explain them to the family, which often leads to the need for clarification and even change.

Which comes first: the constitution or the institutions it defines—the council and the assembly?

The families in this study report that these elements evolve together in parallel. Sometimes the family members begin to meet and write a statement about who they are and what they are doing. So the constitution is drafted by this self-created group. Other times, family leaders begin to write a constitution and soon discover that they need to include others to consider what they want for the future.

This cannot be done by a lawyer or consultant. When family members read and reflect upon existing agreements, questions occur, gaps are located, new conditions are recognized, and contradictions surface. Different family members see the agreements differently and raise different questions, especially members of the rising generation. To make a constitution that all can live with, everyone must have input and questions must be responded to.

Constitutions do not last forever. Enterprising families face major changes each generation as a new group of family leaders emerges. The constitution often starts as a short document, a few pages of values and polices, and then over each generation further sections are added. After a new generation, a constitution adds policies as well as family history and traditions; it can grow to become a small family monograph.

A constitution evolves as the family faces new challenges and as old rules and policies are re-evaluated. Here is one evolutionary story:

The first version was for the second generation only. It was a three-page paper where they wrote things that they could or could not do as brothers and shareholders. It was very simple, but they put that into practice. That's what amazes me: they have very strong personalities, so they got together for almost three years to build this family constitution. In the beginning, it was a lot about separating family, business, and ownership, so they had simple things. For example, a shareholder's wife cannot bring her car to get fixed in the company; she cannot use the gardener to work in her house. They each could have a company car.

Last year, we signed the second family constitution, created by the second and third generation together. It covered all five of our major family holding companies. A working group from each holding would nominate one person to represent that holding in the constitution task force. The new constitution grew from three to more than forty pages.

I think the rules also grow. It's amazing because our constitution has a lot of policies that we may not use, that we hope to never use. For example, if someone wants to leave the family business, to sell their shares, how are we going to do that, how are we going to pay for that? Now we have all the little rules that the third and the fourth generation understand and can live with. For example, right now the business can no longer give a car to all shareholders, so we understood that benefit was only for the second generation.

This is an edited extract from Borrowed from Your Grandchildren: The Evolution of 100-Year Family Enterprises by Dennis T Jaffe (published by Wiley, 2020).

Top Stories