August 1, 2018
In our previous publication, we had explained that a Family Council is a small sect of the Family Assembly tasked with the responsibility of coordinating the affairs of the family business and protecting the interests of the members of the family. One of the first duties of the Council is to formally aggregate family values, principles, vision and mission into a body of guidelines. The guidelines should address governance rules in relation to the family business, interaction among family members, family’s interface with the family business, extent of involvement of family members in the family business, and qualification criteria for family members who wish to take active role in the family businesses, etc. These guidelines will assist in defining the various aspects of family governance structure and how the various subsets of the structure play their respective parts in ensuring sustenance and growth of both the family and family businesses in an ever-changing world.
Institutions are governed by certain guidelines in form of rules, regulations or principles that provide a sort of direction on the conduct of its members. These guidelines dictate the affairs of the institutes and command strict adherence and sanctions if broken. Social institutions, such as the family, are also governed by such principles, which are sometimes unwritten and passed from one generation to another. As the family evolves and the family businesses expand, the values and governance rules upon which the family and its businesses are built cannot be left to some unwritten norms, verbally transmitted across different generations. In fact, as a result of the significant influence of social media outlets and the fact that the historical value pillars of the society, such as religious bodies, schools, etc. are now increasingly “under the influence” of these social media outlets, it has become paramount for families to document and formalize their respective values and principles. The document described above is referred to as the Family Constitution (‘‘Constitution’’). We will now proceed to discuss the nature and importance of the Family Constitution in a family governance structure.
In simple terms, a Family Constitution is the family’s Rule Book. It is a documented code of conduct for the family members and everyone involved in the family business in relation to the family businesses. The IFC Family Business Governance Handbook defines the Family Constitution as a statement of the principles that outline the family commitment to core values, vision and mission of the business; defines the relationship among governance bodies; and advises on how family members can meaningfully participate in the governance of their business.
Essentially, a Family Constitution is a document with detailed framework on how the family and family business will be administered. It is an integral part of the family governance structure in that it articulates in clear terms the vision, mission and core values of the family, and also stipulates rules/ processes to be followed by all stakeholders in the family business on key business decisions. It can be likened to a company’s articles and memorandum of association, all rolled up into one comprehensive document. The Constitution guides the internal interactions among family members, as well as between the family and its external business environment.