Modern money: how family constitutions can pave the way for harmonious family businesses

02 July 2020

As families and businesses are more blended than ever before, there’s an increasing focus on finding ways to protect a family from any fallout that arises from the running of the business – and vice versa.

John Hunter, ZEDRA Guernsey’s Business Development Director, lays out some of the ways that family constitutions are helping maintain family harmony at the same time as sustaining strong companies.

What is a family constitution, and what does it cover?

In essence, a family constitution, or charter can address any number of themes which are related to the management of the family’s business. It doesn’t constitute a legal agreement, but instead lays out the desires of the family and clarifies a code of conduct that they are expected to follow.

Family constitutions vary from family to family, and helpfully, covers topics like entitlements, remuneration, share ownership and succession. The family constitution could also clarify the rights of relatives who don’t work for the family business but who have applicable voting rights for example.

What are the advantages of having a family constitution?

Balancing a family business is challenging at the best of times, often because the company is deeply ingrained in the family’s personal life.

One of the most valuable things about a family constitution – aside from the end document itself – is that it paves the way to talk about complex and sometimes sensitive topics where family and business meet: succession, voting rights and share allocation are key examples.

‘The danger of casting such meaningful discussions aside is that these topics can become the downfall of the of the business in future years as a result of family members trying to pull the company in different directions, or being at odds with the next generation on how the business should be run… Sadly that can potentially harm family relations, too. Some families do manage to navigate several inter-generational hand-overs without a constitution with success, but it’s almost undoubtedly easier with such a document,’ says John.

ZEDRA’s role of trustee

‘Family constitutions are often popular with our trust clients. In our role as trustee, we reference the document and continually ensure that it’s adhered to. Our situation as an independent party means we are ideally placed to remind relevant family members of the guidance the constitution provides. To achieve this, the family and the trustee (together with their respective advisors) should ensure the trust deed reflects the terms of the constitution document so that it can be adhered to in a practical and workable manner,’ concludes John.

For more information, please contact John Hunter.

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