Family dynamics can be complicated even in the simplest of family units. Throw a family business into the equation in which some (or all) of the family are involved, and there is the potential for disaster. Family Charters (otherwise known as Family Constitutions) are an increasingly popular way for family businesses to create a structure by which to enhance the future prosperity of the business and to minimise the risk of disharmony amongst the family members.
What are family charters?
Family Charters are written statements of intent or agreements entered into by the family members in relation to a family business.
Most family businesses will have unwritten agreements governing the day to day running of the business, their aims for the future and how they anticipate the next generation will become involved. Much of this may be defined by tradition, and may no longer be fit for purpose.
A Family Charter might typically deal with:
- how the business should be run
- goals and the long-term strategy for the business
- how the family relates with the business
- expectations for how the family members should behave towards each other within the business.
Why a Family Charter?
As families grow and new generations of the family enter the picture, there can be a significant increase in the number of individuals with either a direct or indirect relationship with the business. As children become adults this might include spouses and might then include children of children and so on. How does the family govern who enters the business, who owns shares, who is entitled to sit on the board and who will be employed within the business? How does the business relate to family members who are not involved in the business?
The process leading to the creation of the Family Charter allows decisions to be made and compromises reached at a time when parties would have a clear and objective viewpoint on what they would want in any number of given circumstances: all too often, decisions of the sort that would be covered by the Family Charter would otherwise need to be made at a time when tensions are running high and positions have become entrenched. The Family Charter provides an objective "level head" to refer to in difficult times.
Other examples of the sorts of things that might be included are:
- what if someone wants to sell their shares?
- should everyone in the family be entitled to own shares?
- who should not be entitled to own shares (e.g. the spouses of family shareholders)?
- how does the family's relationship with the board work?
- what happens if there is a dispute?
- what about family members who are not employed in the business and/or are not shareholders?
- what if there is disagreement about the direction of the business?
But we already have a shareholders' agreement
A shareholders' agreement, is an agreement between the shareholders of a company as to how the company should be run, and is usually legally binding. This may be just what is needed where all parties are focused solely on the needs and direction of the business, but families, by their nature, are more complex creatures and need to be handled differently.
A Family Charter is unlikely to be legally binding: you might view it as more of a mission statement for the business. It might include a statement of values and ethical guidelines that are insufficiently precise to be enforced. It might also deal in broad terms with any family policy on a matter which already forms part of a shareholders' agreement, for example who is entitled to own the shares of the business.
Can I do this myself?
It may be perfectly possible for the family to draw up their own Family Charter if it is confident in being able to identify all the relevant issues and the family unit and its relationship with the business is not a complex one.
However, there is often a patriarch or matriarch within any family business whose views may dominate the views of others. There may also be hidden agendas and unwritten rules that might prevent a Family Charter being prepared that genuinely reflects a consensus view of how things should be done.
Drawing up a Family Charter may be a difficult process and might allow issues to rise to the surface that have otherwise been buried away; however by engaging in the process of preparing the Family Charter, many of these issues will be resolved at a time when all parties are focused on the task in hand. This prevents the need to have to find a resolution at what might be time of great stress (e.g. the death of a family and business member).
Families and businesses are becoming more varied and complex every day. A Family Charter allows those involved in the business (and possibly even those family members who are not) to agree on various important matters that could otherwise result in discord within the family.
The intertwining of the family and the business might be viewed as the main weakness of the family business in many respects, but this relationship can create a level of stability and drive often missing from other businesses. By establishing a framework upon which the business is owned, runs on a day to day basis and passes from one generation to the next within a Family Charter, these perceived weaknesses can be overcome so that the family business can operate at peak efficiency.