Can family constitutions protect families from disputes?

It’s natural that a family that have accumulated wealth through corporate ventures may find it challenging to talk about or plan for certain aspects of the business. A family member’s management style, aptitude for a certain role in the business, thoughts about who should take over, performance or renumeration expectations can all be typical sticking points, although sources of contention can arise from any corner.

A family constitution isn’t a legal document, but it might address various themes or different topics related to a family’s business. A family constitution will typically lay out the overarching desires of the family and clarifies a code of conduct that family members are expected to follow. Beyond this, family constitutions may lay out specific or precise expectations or guidance for the family in question.

Why are family constitutions important?

Even the most supportive and loving family, will, at some point, need to have hard conversations when they run a successful family-owned business. Having a family constitution doesn’t stop issues arising, but the document lays the path for a mutually beneficial and constructive discussion when these difficult – but often very important – topics need to be aired and decided upon. We rarely know of clients who wish they didn’t have a family constitution, but we have seen clients regret not having put one in place.

Without the right framework or a plan in place, difficult conversations that arise naturally can create potentially avoidable bitterness or resentment – particularly if one or more family members don’t feel heard. Family constitutions can, essentially, create a ‘safe space’ to have these difficult conversations and ensure that everyone has a chance to be part of the discussion and air different views as the family moves towards some kind of resolution.

Family constitutions can be particularly important for families with a business run by multiple generations, given differences in education, culture, values, ideals, experience and age can play a significant part in how each individual approaches discussions and the business. Likewise, younger generations may be used to open discussion or challenging the way the business is run – a family constitution can help different generations find a middle ground for discussion with others in the family who may well have very different expectations or feelings about hierarchy and who should be able to provide input and influence decisions.

What does a family constitution do?

The way a family approaches inevitable difficult discussions and challenging communication is often central to how easily and smoothly issues can be resolved. A key part of this family communication process is being able to acknowledge and address family issues and create forums to deal with them, either at the family council or in family meetings. The guidance in the family constitution can effectively create a ‘safe space’ for discussions.

Because of the complexity of running a family business, family constitutions are often popular for families who have a trust.

Family constitutions can bridge both the personal and professional interests of the family. Many of our clients don’t want to see conflict or disagreement that stems from the family business hurt their family or cause serious issues. Equally, the family business is important and often something our client might have worked hard for or resided over for many years – they don’t want to see it broken up or become less successful due to family conflicts. Family constitutions are an ideal way to support longevity.

ZEDRA’s role as trustee

When ZEDRA are appointed trustee to a client with a family constitution, we continually reference the document and ensure that the family is adhering to whatever the constitution lays out. If the constitution is available when the trust is being set up, we will work with our clients’ advisors to ensure the trust deed reflects the constitution accurately.

If a family chooses to draft a constitution after a trust is already set up, then it’s important that it mirrors the trust deed (where appropriate) in order that there isn’t any conflict between the two documents. A family constitution cannot ‘override’ a trust deed and vice versa – they must always work in harmony.

Having an independent trustee like ZEDRA is also beneficial for our clients. At times, it can be ideal to have a neutral party like ZEDRA who can step in and gently remind a family member of the details of the constitution if they’re suggesting something which goes against what’s been agreed and documented. We can take the burden off the family to handle this, which can be a relief as it avoids a personal conversation while at the same time making sure the constitution is upheld. As an independent party, we are also ideally placed to remind relevant family members of the guidance the constitution provides.