Family Constitutions and the Challenge of Business Succession

Family Constitutions and the Challenge of Business Succession

Most family businesses fail to survive past the third generation. Personal disputes, legal challenges, and other obstacles can tear family businesses – and sometimes entire families – apart.

Fortunately, safeguards are available to help ensure a smooth transition between generations. The process of succession can be supported and facilitated[1] before it even begins, with the help of a well-written family constitution.

What is a family constitution and why is it important?

A family constitution is a formal document that outlines the code of conduct, rules, and agreements between all the stakeholders in a family business. It provides unbiased and agreed-upon structures for dealing with any conflicts that may arise between members. The framework of a family constitution creates a space for clear communication surrounding sensitive issues, while providing guidelines which are written for the express purpose of helping to keep the business running smoothly.

Ideally, a new family constitution should be approved by as many family members as possible. Although only a select few are actually involved in writing the document, everyone affected should have an opportunity to express their opinions, make suggestions, and otherwise be part of the creation process.

Family constitutions anticipate difficult and unexpected events. Sudden changes like a divorce, a death, or a lawsuit brought against a prominent member of the family, can be very disruptive to the existing business structure. A constitution can serve as an excellent reference for how to deal with these upheavals whenever they might occur.

Crucially, the family constitution also provides explicit guidelines for the process of succession.

The importance of succession

For family businesses to last through the generations, succession sooner or later becomes an issue of vital importance.

The next generation of board members needs to be properly groomed for leadership. Future leaders of the family business must gain the trust and respect of the other, non-family members of the organisation, so that when the transfer of power occurs, they can be seen as true leaders[2] and not simply the beneficiaries of nepotism.

Some family constitutions actually require younger family members to gain leadership experience[3] in other companies before allowing them to take on their new role as leaders of the family business. This time away from the family forces them to earn the requisite leadership competencies on their own. At the same time, this distance allows the younger family members to build their confidence and skillset without also having to face ongoing pressure and scrutiny from their relatives.

The percentage of family-owned businesses that have written constitutions varies from country to country, but are most common in the West[4] and least common in Asia. This disparity persists even though family businesses themselves are highly prevalent in countries such as Thailand, where around 80% of all businesses are owned by families. Culture and tradition likely explain part of the difference in the popularity of family constitutions across various regions, although it is safe to say that Asian family businesses could benefit greatly from a more widespread embrace of the concept of family constitutions.    

The study Asian Family Firms: Success and Successions[5] notes that traditional cultural values often clash with best business practices. Traditional values favour a transfer of power to the eldest son, while current wisdom favours the most competent, even if they are not a member of the family. These competing values can lead to a dramatic increase in tension. If the family had a constitution they could reference at the crucial moment, then the way forward would be much simpler, as the grounds for decision-making would have already been agreed upon.  

Enlisting outside help

The process of succession may very well determine the long-term survival of a family business. It is therefore often wise to enlist the help of a third party that can aid in the creation of a viable family constitution. Third party experts can assist with the entire drafting process and are able to provide impartial, professional advice to facilitate positive outcomes.

By providing a sound defence against the rifts that can come between families during delicate times, a carefully structured family constitution may well prove to be essential for a business as it prepares to turn the corner and move forward to future success.

[1] https://www.ft.com/content/5d06ec9e-c61b-11e7-b30e-a7c1c7c13aab
[2] https://www.philly.com/business/herrs-chips-philadelphia-family-business-st-josephs-university-20190328.html
[3] https://www.afr.com/news/special-reports/business-family-and-you/how-to-beat-the-third-generation-curse-20160511-gosjyt
[4] https://www.ft.com/content/5d06ec9e-c61b-11e7-b30e-a7c1c7c13aab
[5] https://bschool.nus.edu.sg/Portals/0/images/CGIO/Report/Asian%20Family%20Business%20Report.pdf