Family constitutions are on the rise

30 March 2022

A family constitution is a formal document designed to outline the rules, rights and responsibilities for stakeholders in a family business.

The document will also typically provide guidance on how to deal with situations which arise in the course of the family business’s operation.

Unfortunately we are seeing a rise in family disagreements over the management, direction or decisions that need to be made concerning the family business and this is where a family constitution can be a valuable resource to have in place.

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 legally binding document, but it can address various topics related to a family’s business. A family constitution will typically lay out the overarching desires of the family and clarify a code of conduct that family members are expected to follow. Beyond this, family constitutions may lay out precise expectations for the family.

Why are family constitutions important?

Even the most supportive and loving family will need to have hard conversations when they run a successful family-owned business.

Without the right framework or a plan in place, difficult conversations that arise can create bitterness or resentment – particularly if one or more family members don’t feel heard. Family constitutions 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. 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 difficult discussions is often central to how easily 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.

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.

How ZEDRA can help

When ZEDRA is appointed Trustee to a client with a family constitution, we continually refer back to 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’ advisers 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) to avoid any conflict between the two documents. A family constitution cannot ‘override’ a Trust deed and vice versa – they must always work in harmony.

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. As an independent party, we are also ideally placed to remind relevant family members of the guidance the constitution provides.

For more information on family constitutions, independent Trustee services or any other aspect of family business, please contact us.

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