The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business
100
The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business
100Paperback(2011)
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Overview
Product Details
| ISBN-13: | 9780230111165 |
|---|---|
| Publisher: | Palgrave Macmillan US |
| Publication date: | 01/11/2011 |
| Series: | A Family Business Publication |
| Edition description: | 2011 |
| Pages: | 100 |
| Product dimensions: | 5.40(w) x 8.20(h) x 0.40(d) |
About the Author
JOHN L. WARD Co-founder of the Family Business Consulting Group Inc. He is Clinical Professor at the Kellogg School of Management, USA, and teaches strategic management, business leadership and family enterprise continuity.
Read an Excerpt
The Family Constition
Agreements to Secure and Perpetuate Your Family and Your Business
By Daniela Montemerlo, John L. Ward
Palgrave Macmillan
Copyright © 2011 Family Business Consulting GroupAll rights reserved.
ISBN: 978-0-230-11116-5
CHAPTER 1
The Fundamental Components of a Family Agreement
The second generation of the Cordetto family in Argentina was considering the future for the eight cousins of the third generation. Several questions were making demands on people's time and energy:
* What are the rules for next-generation family members to work in the business?
* Is the family committed to next-generation business involvement and ownership, and if so, why?
* How does the family make decisions?
* How can the family educate themselves to address these subjects?
* Who should participate in the educational process and decision making?
* Is it more important to rely on the family's values and past experiences? Or is it better to set clear rules?
* If family members are expected to pursue higher education and outside work experience, can we still expect them to start at the bottom of the company as past generations have done?
* Will we need different compensation systems than in the past?
* How do we keep family shareholders who are not working in the business involved?
* What if a family member wants to sell his/her shares? Our corporate bylaws have not been reviewed since the business began. How do we proceed?
A family agreement addresses these questions and many more.
PURPOSE
More and more business-owning families are working to adopt family agreements for several reasons:
* To keep family ownership united and to forge a broad and strong owning family's commitment to the future of the family's business
* To give the family business a strong foundation and to build the confidence of non-family managers and business partners
* To shape next-generation expectations for their roles in the business and as future owners
* To keep the family together, preventing conflicts over unnecessary misunderstandings
CONTENT
Family agreements can be as short as a one-page description of the family's values and mission or as long as fifty pages of policies and contractual stipulations. The intention of any family agreement is, explicitly or implicitly, to guide the family through important, possibly even contentious, decisions into the future. To do so, some families rely more on philosophy, others lean on principles and many believe they benefit greatly from precise policies. It is also valuable to consider who the parties to the family agreement are. Is the agreement for all family members or only for those who are shareholders?
In other words, a family agreement should address the following issues:
* How to resolve specific family firm issues
* What to consider as key elements when making present and future decisions
* Why the family wishes to address future issues
* Who is included in decision making and whom the decisions affect
* When to review and revise the agreements
Presented in a different way, a family agreement might include the following components:
* Preamble or introduction for the parties involved (Who?)
* Statement of family values and beliefs (Why?)
* Outline of family business principles (What?)
* Chapters on policies that govern family and business relations (How?)
* Conclusion on the method to make amendments (When?)
Consider the common but complex subject of business leadership succession. In the family agreement Introduction, there might be an exchange of letters between two generations of family acknowledging and respecting each other. Moreover, the family agreement might articulate values that will shape succession, such as trust in outsiders as possible non-family candidates and belief in the inherent capacity of family members to grow and to develop as leaders.
Translating those values regarding the topic of succession might provide the following family business principles:
* "Only the best person for the business can be CEO."
* "A business must have one leader (not co-CEOs)."
* "The roles of CEO and chairman should be separate."
* "Family should be groomed, if at all possible, for the chairman of the board position."
Going further, the family may specify the process and criteria for selecting the successor. For example, "The Family Council will nominate the chairman candidate(s) to the business's board of directors' nominating committee," or "The search for the successor CEO will involve only the board's independent directors and will include consideration of external and non-family management candidates by a search firm and organizational psychologist."
Family agreements can be very different in form, content, and even names (they may be referred to as family charters, contracts, protocols, codes of conduct, statements, etc.). Given this variety, we find it useful to think of "types" of family agreements. Each has a distinctive focus and perspective.
* Owners' contract (shareholders' agreement)—specifies the legal understandings among shareholders (i.e., buy–sell agreement, redemption process, dividend rights, etc.)
* Family business protocol—defines the formal policies of family interaction with the business (i.e., employment rules, clear direction as to who can speak to the news media, evaluation process of family members for promotion and professional development, etc.)
* Family statement—offers a philosophical set of views of what is important to the family (i.e., values statement, family mission statement, etc.)
The family statement has as a primary focus: the welfare of the family as a family. The family business protocol considers the interests of the business as an institution. The owners' contract (shareholders' agreement) protects the rights of owners. (See Exhibit 1.)
Inherently, therefore, each type of family agreement takes a particular perspective—that of the family, the business, or the ownership.
In fact, many successful long-lasting business-owning families consider each perspective in a balanced way. They attempt to articulate all elements of a family agreement in an integrated way—the who (preamble), the why (values and mission), the what (principles), the how (policies and contracts) and the when (periodic review and revision). A family agreement that answers all the questions—who, why, what, how, and when—is defined as a family constitution, the title of this book.
PROCESS
The style and substance of family agreements varies, as it should, from culture to culture, country to country, and family to family. Each family should adopt its own process for developing its family agreement and should address its issues with its own rules, depending on the nature of the business, the laws of the land and the culture of the family. This book will provide general approaches based on our experience and research. Our fundamental belief is that the process of forging a family agreement can be just as or more important than the content of the agreement itself. In fact, it is not difficult to develop abstract rules. It is far more difficult to make these rules fit within a family's particular situation.
The process of developing the family agreement builds family decision-making and problem-solving skills. The process educates family members about their own histories and their business as it functions today. The process motivates family members to consider the collective good and an overarching sense of purpose for business ownership and for family as family.
A successful family agreement is much more than a piece of paper; it is, instead, "paper in action ." The process, which led to signing the agreement, strengthens trust and unity. The process becomes a means by which the family business may be elevated for change—providing new structures, new behaviors, and new roles. The process, most importantly, fosters family commitment to personal and collective growth.
CONCLUSION
Family agreements address the interest of the business with a clarity that invigorates the commitment of management and stakeholders. The agreement provides the vision that strengthens the resolve and devotion of ownership. The process of developing a family agreement builds family confidence and comfort.
The type of family agreement a business-owning family favors will affect not only the content of the agreement but also the process. We will discuss this further in Chapters 4 and 5. Which type of family agreement a family has also reflects certain fundamental assumptions about business and family, as will be discussed in Chapter 6. Over time, there is a natural gravity for all families—regardless of the agreement they start with—toward a full, formal family constitution.
From whatever perspective—family, business, or ownership—as the family commences the process of developing its agreement, education and confidence grow over time. Many families are motivated to ongoing efforts to develop more balanced and comprehensive family agreements—ultimately creating a family constitution. Enthusiasm and energy often grow along with the experience.
The family constitution, a comprehensive articulation of philosophy, principles, and policies for the future that balances and synthesizes the welfare of family, owners, and the business, is among the most important steps a business-owning family can take to secure and strengthen its business and, most preciously, its family.
CHAPTER 2What Shapes the Family Agreement?
Every family agreement is—or should be—unique, reflecting the distinct character and culture of the particular business-owning family, the nature of its business, and applicable laws. This chapter explores those factors, focusing especially on the influence of the family's culture.
National laws and customs influence the content of family agreements. Owners' contracts, of course, must conform to applicable law. Some countries' laws permit different classes of equity shares, restrict company share redemptions, or allow a company's shares to be controlled through tax-advantaged foundations or trusts.
In addition, legal custom in different countries may encourage writing much of the family agreement as a contract or as a formal amendment to the corporate charter. If so, the agreement would likely become more specific and less flexible.
The company's strategic context also matters. In some countries, corporate debt is cheap, and in others, debt may be unavailable. Industry differences influence the family agreement. If the industry is rapidly growing and capital intensive, the dividend policy likely will be affected. If the family business is a highly skilled professional service firm, it is likely to have more rigorous employment policies for family members. Such a firm will also be more likely to restrict ownership to employed family members and possibly be more likely to offer ownership to non-family executives. When ownership includes nonfamily, governance rules may be quite different. A diversified business may have more and different roles for the family in the company's governance. It may also allow for different kinds of family goals or educational policies. (For more on how the business environment influences the family's policies, goals, and roles, see Strategic Planning for the Family Business.) Certainly, the size of the firm and the liquidity it might provide are basic to the family's relationship to the firm.
Because the legal and strategic contexts are important, families typically include professional advisors and company executives or directors in the process of developing their family agreements. Lawyers and accountants explain the options and constraints. Board members constructively enter into the early stages of the development process to foster a dialogue on how family choices may affect the strength or direction of the business and vice versa.
FAMILY INFLUENCES
The size of the family, mixed with the size of the business, fundamentally affects the content of the family agreement. Large families will likely have more family members not employed by the business than in the business. In such situations, the meaning, mission, and values of the company have critical importance. The larger the family, the more likely the family agreement will stress the family purpose and philosophy. Generally speaking, the larger the business, the more flexible the rules of the family agreement will be. In fact, if the business has ample resources, it can absorb family evolution and change more readily.
Exhibit 2 identifies two of several ways in which family agreements may differ: flexible versus rigid rules and family or business focused. There are several other common dimensions of difference in family agreements:
* Some family agreements are brief; others are very detailed.
* Some family agreements are enforced through moral authority; others through legal authority.
* Some family agreements embrace ongoing family interactive processes (i.e., education, values affirmation, dialogue with the board of directors) to sustain family commitment and cohesiveness; others depend on their written document to constrain conflict.
All these variations seem to come from a specific cultural mentality of the owning family. Does the family feel it is business first in its care and consideration? Alternatively, is it more family first?
This difference in a family's orientation—business first or family first—shapes the content of the family agreement, ultimately the type of family agreement and even the process by which it is drafted, as you will note in the following exhibit.
A family-first family will likely develop its family agreement more slowly, with more meetings, and include a family business consultant for facilitation. A business-first family will likely develop its family agreement more quickly, as a formal project, and likely depend more on its lawyer or accountant for advice.
The family-first or business-first orientation of the family strongly influences the very type of family agreement developed:
Accordingly, it is valuable to explore how and why different families are different in terms of their priorities.
FAMILY FIRST VERSUS BUSINESS FIRST
Families, especially as they develop their family agreements, have various assumptions underlying the type and content and style of their family agreements. They have basic assumptions as to what it takes to be a successful, long-lasting business. One such assumption relates to the desirability for innovation and entrepreneurship versus the appreciation of stability and consistency. Another assumption is the belief as to whether ownership and management need to be one, or whether separation is possible. Yet another assumption concerns the development of business leadership: must it come from within the family, or is it best if it does not? Finally, does an organization need one clear leader, or is it acceptable to have a leadership team, with sibling or cousin coleaders?
Families also have basic assumptions about how families behave. Some feel conflict or at least separation is inevitable. Others feel owning a business brings family closer together. Some believe family closeness suffocates individuality. Others believe family closeness facilitates individual creativity and personal risk taking.
Families have basic assumptions about human nature as well. Some design their Family Agreements around the belief that wealth destroys human motivation and happiness. Others believe non-paid work (i.e., philanthropy and personal growth and achievement) can be as rewarding and of as much value as paid work.
The assumptions about family, business, and human nature are reflected in two overarching perspectives:
1. The business is good for the family; or the business will risk the family's harmony. Those who believe the business is good for the family argue that were it not for the business, the family would not be close, perhaps eventually fragmenting and ceasing to be a family that even sees each other. The business creates shared interests and provides a reason to bring the family together in creating an environment where all can work hard at strengthening family relationships.
Those who feel the business is a severe risk to the family argue that the requirements and resources of the business inevitably cause family conflict, bringing out the worst in family members—greed, selfishness, and rivalry. If it weren't for the demands of the business, they reason, the family would be happier and closer.
2. The family is good for the business; or the family will harm the business's success. Those who believe the family is good for the business cite the benefits of stable, caring ownership. They talk of the family's interest and commitment to the long term and to "doing the right thing." They see the family's values bringing special strengths to the business's culture.
Others fear family management competence is inevitably diluted, that family size and demands for money will sap the business and that family conflict will distract or divide the business. The long-held dreams of building a business that becomes a permanent memorial to the founder and a protected institution serving the community and employees are seen as threatened by family involvement.
Families, who feel conflicted on this score, believing that both the family and the business threaten each other, become concerned about protecting and preserving ownership security or personal financial security. These families are most likely on the path to selling the business.
Families, who see a positive, mutual, interdependent benefit, with the family enhancing the business and the business enhancing the family, seek to balance both perspectives—searching for the synergies between family and business. In fact, ownership concerns may be minimized. If ownership concerns are low, then the family agreement can be more flexible and adaptive.
These contrasting and various perspectives are summarized below. For each combination of perspectives, the fundamental goal of the family agreement is noted, plus the orientation to address family first, ownership first, or business first.
(Continues...)
Excerpted from The Family Constition by Daniela Montemerlo, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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