Designing a Family Business Constitution

Families without formal governance lack structured decision making. The founder operates the business based on experience. Such a system is often an impediment to growth. If the business is to scale, the dependence on one founder has to change and decision making process must adopt a systems based approach.

For growth and perpetuity, the family business must create decision making systems on how they plan to work now and in the future. One governance tool that has proven to help family businesses grow and perpetuate, is the family business constitution. The family business constitution (FBC) is a tool for alignment. It is important that conversations on the constitution are initiated in a high trust environment. It does not work when family is already facing a feud or in a low trust environment. Also a FBC is only successful when there is a strong value system in place. Although it is not legally binding, creating it helps to avoid misunderstandings, mistaken assumptions, and unrealistic expectations. It is a living document that can be amended with the consensus of stakeholders.

While family businesses agree to the need for creating the constitution, very few take practical steps to drafting one. Quoting from experience in family business advisory, it is generally one or two members of the family who are sensitized to the necessity of a constitution. These members typically rally around the family but are mostly successful in generating only little interest in the constitution.

Irrespective of age the person who leads the process (constitution lead) may face opposition for their initiative. The constitution lead must be patient and willing to steer the process over an extended period. Conversations on the constitution are challenging, as they involve scenario building and families are comfortable living in status quo. Onboarding of family members takes time and is a painstaking process well worth the effort. The journey to governance structures including constitution are seldom arrived at without the assistance of an outside advisor.

In practice it is the advisor that allays the fears of reluctant members by allowing for their concerns and questions to be voiced and answered. Often this is in the form of a workshop primer on family business governance. The advisor introduces distinguishing features of the family business such as the three circle model, family business lifecycle etc., to help members appreciate complexity and dimensions of the task at hand. Depending on the skill of the advisor most families emerge with the resolve to create the FBC. By consensus, one lead from the family is selected to help with the logistics of the process.

The starting point of FC is shared purpose or why does the family want to do business together? Family cohesion does not automatically mean clarity. Many families are cohesive but confused on how they want to work together in the future. The constitution helps build clarity on individual understanding as well as an aggregate understanding.

Initiating the FC from family history and values, helps build rapport amongst members. It is not uncommon for next generation to not know of the journey of the founder. The iteration of values helps develop engagement and ultimately cohesion. From experience, a team building exercise prior to conversations on policies helps stimulate lateral thinking

It is important to begin drafting the constitution by choosing a decision making rule. Achieving agreement on the decision making rule helps ease out the process. Drafting a FC is a slow process which requires patience and magnanimity. For a family to enter into a FBC conversation, the starting point is clarity on individual desires. All content put forward is open for scrutiny from members. Content is vet with scenario building and thoroughly assessed for benefit to the family and to the business.

A skilled advisor helps create rapport among members by building on the group’s camaraderie. Family is encouraged to keep an open mind with an emphasis that no one family member is wrong in their approach. Also different personalities have differing approaches to polices, based on their intrinsic motivation. For example, one member may create a policy to mitigate conflict of interest which may be perceived as a barrier to freedoms by another.

Many families are tempted to use the FBCs drafted by others. Although it is not a bad idea to look at the policies of other families, a copy paste approach does not work. Primarily for the reason that the process of drafting the constitution is as important as the content. For many families the process is the first time that multiple generations have deliberated on the future of the business as it relates to the family. While they may have had countless board meetings on the future strategy of the business. It is the first time they have looked at doing business as a family in the future.

Aysha Anas Iftikhar

Aysha Anas Iftikhar is Founding Academic Director Family Managed Business Diploma Program at the Institute of Business Administration, Karachi