If you run an enterprise alone or with only one partner, no committees or obstacles prevent you from making decisions or changing direction on the fly. The same is likely true if you operate an enterprise with your adult children because they grew up listening to and watching you. They understand your values and vision, and the lines of communication—at the dinner table and at the office—are open and well-used.
Now imagine the effect on the lines of communication when a third generation enters the picture. When your children have children, and in-laws join the family there are several dinner tables instead of one. Individuals seated at each table bring different experiences, beliefs, and value systems, and the makeup of each table continues to change as children grow up, marry, and even divorce. Some family members are genuinely interested in being involved in the family’s enterprise, while others trust other family members to work in their interest without their involvement.
How will you communicate your values and vision to this broader family network? How will you maintain strong family relationships? What can you do so that—long after you’ve left the scene—family assets continue to support family members rather than become an anchor that depletes assets or the wedge that drives family members into separate camps? For many multi-generational families, the answer to these questions is a family constitution because family constitutions keep families together.
Family Constitutions Keep Families Together By Establishing a Common Foundation
A family constitution is a written document that describes:
- The values that the family wants to live by
- What it means to be a member
- The family’s Why: its reason for existing as a unit
- The guidelines within which the family operates
- The behavior that is expected of family members
- What the family will and will not do to maintain equality and fairness among all family members
While not legally binding, a family constitution provides clarity and structure to generations of family interactions and is a foundational document that family members must come together to modify.
No Family Constitution Equals Lots of Unanswered Questions
When a family lacks a constitution to communicate a consistent message to all family members, the risk of conflict increases. Instead, family members can’t know exactly what is expected of them and behave according to their own beliefs and values. For example, if Gen 2 announces a family meeting, family members—who are trying to do what they think is expected of them—don’t know if attendance is mandatory or whether it’s acceptable to miss one (or more) meetings.
Without a family constitution in place (as the following example illustrates) family members also don’t know how the family uses its resources to support its members.
The founders (Gen 1) had two children (Gen 2). These two children and their spouses had seven children (Gen 3). Members of all three generations were owners. Three of the seven members of Gen 3 were actively involved in the family enterprise, and two of them expressed interest in pursuing MBA degrees. One of the four non-business-involved members of Gen 3 also wanted an MBA.
- When the family offered to pay tuition for the family members who were actively involved in the enterprise, the family member who was not active in the business predictably objected, “I’m an owner too, so how is this fair?
- When another member of Gen 3 decided to pursue a graduate degree in social work, that owner also asked why the family declined to pay for his degree.
- If one of the degree-seekers had been a stepchild, would the family pay for an advanced degree?
These are just a few of the questions Gen 1 tackled related to only one issue! Other issues include philanthropy, additional inclusion/exclusion situations, and the family’s decision-making process.
Families that do not have active businesses in their portfolios also benefit from family constitutions because their portfolios operate in many ways like businesses. As wealth grows, people inside and / or outside the family manage how decisions are made and by whom, and choices are made regarding: purchasing and selling various types of investments, tax strategies, lease agreements, distributions, etc. A family constitution provides values-based guidelines for these decisions.
When Does a Family Need a Constitution?
Gen 1 owners often foresee that their families could one day benefit from creating a family constitution, but not only do they not really need one, they see them as a layer of bureaucracy and added complication. (In some cases, members of Gen 2 and even Gen 3 agree.) When Gen 2 becomes active, the benefits of a family constitution become clearer, even though the two generations typically communicate well. When Gen 3 enters the picture, however, the value of the constitution becomes apparent because the fusion of multiple value systems, influences from in-laws and varying levels of interest and involvement in the family enterprise often create conflict, misunderstanding, and mistaken assumptions. By Gen 3, the number of people involved in the enterprise typically exceeds the number needed to oversee the enterprise. That means some individuals must be excluded from governance if the enterprise is to operate efficiently.
In our experience, families typically decide to create a family constitution to manage the transition of the enterprise from Gen 2 to Gen 3. Installing a constitution to increase the odds of a smooth transition, however, is just one benefit. As Gen 2 transitions the enterprise to Gen 3, family members have the opportunity to practice operating according to the constitution. When Gen 4 shows up, everyone knows how the constitution works. The original intent behind creating the family constitution may have been to manage a transition, but in effect, its creators have provided an enormous service to all future generations.
The optimal time for your family to create a family constitution is before it is needed rather than once a conflict has arisen and emotions run high. Constitutions are not carved in stone and family members may change them to adapt to current events or challenges facing the enterprise. Still, they are valuable tools that visionary individuals use to establish a foundation for the ongoing success of the family enterprise.
The Value of “Constitutional Communication”
When families meet to discuss a family constitution, the benefits can be huge, but so is the complexity of the task. Values and priorities that may have been assumed or unspoken are brought into the light, considered and either validated in the constitution or discarded. Values among generations must be aligned. Discussions typically reveal and address areas of disagreement and misunderstanding.
Family constitutions demonstrate to all family members that they are valued. A constitution conveys to everyone the opportunities that are available and invites—not requires—them to make the most of them.
Candid conversations not only uncover areas of conflict, but they usually bring family members into greater alignment and create rich soil for solid and harmonious relationships. The decisions families make as they create the family constitution describe how the family works, and how it defines fairness and equality.
If you are interested in learning more about how your family could benefit from or create a constitution, give us a call. We’d love to share our experience and best practices.
Elizabeth Ledoux is a co-author of the award-winning It’s A Journey: The MUST-HAVE Roadmap to Successful Succession Planning, as well as Accelerate Your Entrepreneurial Flight and Understanding the Growth of the Entrepreneur. She frequently speaks to organizations and business owners about challenges and opportunities in private and family business transitions, business and individual growth, and the business succession journey.