The Governance Gap: Why Wealthy Families Should Consider a Constitution
Creating a family constitution may sound daunting, but it can help protect significant wealth, especially if you own a family business. Learn why it might be right for you.
If you’re an entrepreneur or have experience running a business, you would be familiar with the concept of governance. In essence, it is a formal set of rules, procedures and processes that companies use to guide the various facets of their operations. Good corporate governance aligns everyone at a company, from ownership and senior leaders to junior employees, ensuring accountability and clarity around everyone’s responsibilities.
For family businesses, as they grow and become more valuable, governance becomes more important in helping avoid misunderstandings and potentially damaging missteps. Ultra-wealthy business owners face many complex situations that could significantly impact the financial future of their business if not handled promptly and properly.
The family constitution
To be proactive, family business owners can consider drafting and adhering to a family constitution, a formal document that serves as a framework for how family members should act and engage with each other in the business. It can be written to reflect a family’s values, governance beliefs, decision-making protocol, matters of succession in the business, and more.
It’s also useful for families with sophisticated wealth management needs and shared assets of financial significance aside from a business, such as real estate or other major investments. In this blog, we’ll focus on family businesses.
A well-crafted family constitution is designed to promote mutual understanding and common goals, reduce disagreements, and strengthen family cohesion to help a business to operate smoothly and thrive. While a constitution may not be appropriate for everyone, it’s valuable for a family to consider it when embarking on their process of discovery and open communication. As they discuss things further, they may find that a constitution does, in fact, suit their needs.
Questions to address
As you go about creating your own family constitution, consider as a group how to answer the following questions.1 After all, a constitution is a family-wide initiative, and not a tool that allows the family’s leader to impose their wishes “from the grave.” Be sure everyone has the opportunity to voice their opinions and provide input into the final agreement, as it gives respect to all members and makes it easier to reach consensus.
- Where do we come from?
- Where are we now?
- Where do we want to go?
- What are our guiding principles?
- Should the business always be owned by the family?
- Can the family release their interest in the business, and if so, on what terms?
- What criteria should there be for employment of family members in the business?
- How do we make decisions?
- Who should lead?
- Should that leadership rotate?
- How often should we discuss succession?
- Should there be a family council?
- Should there be any associated provisions, and if so, what?
If there are other issues specific to your family business that you’d like to address, then add them to the above list. Your family constitution will not only formalise your shared vision for the future of the business, but it will also function as a blueprint for how you intend to make those shared visions a reality. The constitution will help clarify roles and responsibilities and solidify a sense of belonging as everyone gets involved and contributes to creating the document.
A family constitution represents a core risk-management tool that uses strong alignment to avoid (or at least minimise) conflict that could prove detrimental to a company’s financial health. That’s why many successful families implement a family constitution to help them safeguard and grow their collective wealth.
Corient is here to assist you
If your business (or family’s sizeable investments) could benefit from having a formal family constitution, Corient can help. We have experience supporting families to record or fine-tune the documentation of all aspects of their capital.
In addition to the obvious financial aspects, we can help with effectively organising and articulating points related to broader human, social and intellectual capital. We’ve also found that many people prefer having an unbiased, unconflicted advisor to support the family and help facilitate essential but challenging conversations.
Please contact a Corient Wealth Adviser to learn more about how we can help protect your family’s wealth, relationships, purpose and legacy.
1 https://www.step.org/press-office/what-family-constitution-and-why-do-we-need-one
ABOUT THE AUTHOR
Matthew Fleming
Matthew is a Partner and Head of Governance & Succession at Corient. He is responsible for helping clients develop and implement plans for passing on their legacy to subsequent generations. Matthew's experience includes positions with Stonehage Fleming, Fleming Media, Ian Fleming Publications and James Bond Enterprises as well as being a professional cricket player and former army officer.Educated at Eton, Matthew has held appointments as Chairman of AGL Comms, Director of the Norfolk and Norwich Hospital, Director of the England and Wales Cricket Board, and President of the Marylebone Cricket Club.
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