Throughout the evolution of the humankind, in almost all cultures proverbs have been created to emphasize how difficult it is to transfer a successful family business from one generation to the other, sayings such as:
In the USA: “From shirtsleeves to shirtsleeves in three generations.”
In Italy: “From the stable to the stars and back again.”
In China: “From peasant shoes to peasant shoes in three generations.”
In Scotland: “The father buys, the son builds, the grandchild sells, and his son begs.”
It is generally accepted that almost 70% of all families fail to sustain their family wealth across multiple generations. Less known is that research has revealed that almost 60% of these failures are result of poor communication and trust among family members.
Family life and business are a difficult mix that obviously brings risks to any business venture and to family relationships. However, if these risks are properly managed, they could be converted into advantages. For example, in a healthy business environment, few people are going to be as committed to the business as family members.
Recognizing these realities, more and more families engaged in business are realizing the importance of creating a family constitution. As with a national constitution, a family constitution is created by consensus—together the family members make a record of their collective vision and mission of the business and state the principles upon which the business is founded, the things that make the family successful and unique. The process of creating a family constitution has an added value in that it forces the family to think about and discuss their decision-making process and it reinforces the family bond. A family constitution is not enforceable by law, but it creates a sense of moral obligation for the family members and increases their commitment.
Typically we see that, in its infancy, a family business is managed and controlled by its founder(s) without material governance difficulties. As the family grows, and new generations emerge, the business finds itself shaped by the direct or indirect involvement of an increasing number of family members. In addition, as a family business expands over time, it demands more from those responsible for its daily management and control, creating unequal levels of involvement and commitment among the members of the multigenerational family.
Some of the issues that the drafting a family constitution will help the family address are:
· Lack of succession planning
· Unclear family hiring practices
· Poor communication (inadequate lines or frequency of communication)
· Unfair or inadequate family compensation structures
· Out-of-date ownership structures
To illustrate, consider this anecdote. A father with four sons started a family business that became successful. Two of the sons chose education and training compatible with the business and were keen to lead the family business in the future. The father wanted to ensure that the two business-oriented sons were adequately compensated for their involvement and employment in the business but also wanted to treat his all his children equally and so was anxious to make some provision for his “non-business” sons. The family collaborated on a family constitution that defined the authority and responsibility of the two business-oriented sons and detailed their employment, remuneration, and share ownership, while making provisions for the other two sons to benefit from the business.
Most important of all is that the family members realize and acknowledge the importance of communication. Senior members of the family should be respected and stimulated to pass values, rules, and behaviors to the younger generation through example, practices, anecdotes, etc. The younger generation needs to realize and be mindful of the importance of nourishing “the goose that lays the golden eggs” instead of killing it. A family constitution is one tool to aid the passing of knowledge and values from one generation to the next.