Many families struggle to establish a roadmap for navigating wealth, business and legacy transitions over time. As families evolve and successive generations wonder how they can become contributing members of the family’s business, wealth or philanthropy, family leaders often find a benefit in putting basic guidelines in place to govern how the family will work together and resolve potential conflicts into the future. These guidelines take the form of a family constitution – a document that sets forth the family’s values and principles, defines the objectives of the family and outlines how the family will make important decisions. Family constitutions can address a variety of situations, including family businesses, family offices and family philanthropic endeavors. In fact, any family who wants to set forth a system of shared values, mission and history and/or a decision-making framework can benefit from the process of creating a family constitution.

Within the context of a family business, a family constitution can be even more crucial in smoothing transitions over time. A family business constitution can help the owners and employees of the family business understand its competitive advantages and what makes its culture unique and sustainable. It can also address and define the various roles of family members, both inside and outside the family business.

Process over Product

Many families interested in a family constitution may believe that the implementation process is as easy as a call to the lawyer to get a constitution drafted and in place. Family constitutions that have been drafted without sufficient input from the family often create more problems than they resolve. A family constitution is not a one-size-fits-all set of dos and don’ts, but instead a uniquely personal document that reflects a deliberate, thoughtful process that must occur within a family. In the most successful cases, it is the process of discussing, debating and ultimately enacting the family constitution, rather than the end result, that produces the most enduring benefits to the family. Creating a family constitution provides members with a wonderful opportunity to come together, identify and articulate their values and set forth a roadmap for future generations to follow in preserving and honoring the family mission and goals. The process of drafting and establishing a family constitution can bring a family closer as participants learn more about each other, the family’s history and shared motivational values.

Although formulating, drafting and finalizing a family constitution is a significant undertaking, it invariably proves to be a rewarding process that pays dividends for generations to come. A strong family constitution can help anticipate potential problems and provide a set of guidelines to address obstacles when they ultimately arise. Because of the careful deliberation and time invested in creating a family constitution, the document can also become an incredible source of family harmony, love and pride going forward.

Most effective family constitutions exhibit several common principles:

A Focus on Clarity and Values

Traditional governing documents such as shareholders’ agreements, company bylaws and even estate planning documents are characterized by technical language necessary to achieve desired legal, tax and administrative results. This language is not appropriate for a family constitution.

Instead, the family constitution should have accessible and personal language. Even in the context of a family business, a family constitution should put the family first and focus on continuity and harmony. Family constitutions that attempt to insulate a business from family feuds by removing the personality and color that defines a family often end up fueling strife. Instead, the family’s philosophy and values should be the cornerstone of the document.

If the family constitution’s theme is that consensus building and core values are paramount, the family will collectively support the success of the business. A good way to put the family first in the family constitution is to include an entire section discussing values. After all, how can future generations be expected to uphold the family’s values if the family does not take the time to articulate them? It is the family’s values or mission statement that will serve as the balm to new and unanticipated challenges in the family and its business in the future.

An Emphasis on the Family History

Bush Brothers & Company (of the Bush’s Beans fame) provides a simple, concise example of its family’s values at the end of its corporate mission statement: “Together, we will live by the values of integrity, responsibility, trust and caring as exemplified by our founder, A.J. Bush.”

Bush’s values statement is powerful not only in its clarity and brevity, but also because it identifies an important historical figure within the family. Recalling and memorializing the family’s meaningful characters and stories are effective means of identifying and investigating the sources of its core values. Rooting the family values in history and personalities can produce a far more meaningful and enduring statement of those values than simply asking each family member what his or her values are and why. Discovering and documenting the family’s common values is a logical first step in the process of creating the family constitution. While each person’s sense of the family’s values may be different, families are often surprised by the common threads that arise once they take the time to engage in an open discussion about those values.

It is important to keep in mind that enacting a family constitution can be a long, process-oriented endeavor. For some, talking about how to make decisions and creating mechanisms for resolving conflict is not “fun,” so adding an element of family color and history can enliven the conversation and prevent family members from becoming disengaged with the process.

Adrienne Penta, the executive director of the Brown Brothers Harriman (BBH) Center for Women & Wealth, recently addressed the topic of opening the lines of family communication around values and shared history in our fall issue of Women & Wealth Magazine. As she notes, “Your family wealth story can elucidate why you make the choices you do about spending, saving, investing and giving. Attitudes about wealth are framed by the messages delivered to us – whether intentional or unintentional – by those who came before us.”1

A Framework for Making Decisions and Changes

No family can predict the future, and no family constitution can accurately address all the obstacles and changes the family is likely to face. Rather than creating a set of rules that aim to prevent conflict or strife, a well-drafted family constitution should instead set forth a process for developing policies, making decisions and managing conflict. In creating the family constitution, the family should test drive various methodologies to make decisions and resolve difficulties. For example, the family could anticipate a problem that might arise in the future and engage in a mock implementation of the proposed decision-making framework to see how successful it is at resolving that particular issue. This process will help the family adjust its processes to reach the best result.

A family constitution could address how a family is to make decisions in any of the following areas:2

Governance

  • Criteria for board members
  • Makeup of board
  • Frequency of family meetings
  • Membership criteria for family council or family association
  • Funding of family meetings
  •  Communications and relationships between board, family and management
  • Strategic goals (e.g., growth, debt, etc.) for business
  • Selection of professional advisors
  • Successor selection process

Employment at the Family Office or Family Business

  • Qualifications
  • Conditions (e.g., leaves, part-time, etc.)
  • Reporting relationships
  • Compensation, benefits, perks and expenses
  • Performance review
  • Titles
  • Severance
  • Retirement

Ownership

  • Conditions for ownership and voting rights
  • Dispute resolution process
  • Dividends
  • Redemption process
  • Business valuation methodology
  • Estate plan communications, coordination and agreements
  • Marriage contract arrangements

Remember that the family constitution will not create specific and binding rules for these topics but will instead set forth a framework and guiding principles for making future decisions regarding each area.

A Living, Breathing Document

Families should anticipate the need for change in the future and set forth a process for amending the family constitution. It is unrealistic to expect a single, unrevised family constitution to withstand the many changes that will occur in the future. Simple cultural and technological changes can often make provisions in a family constitution irrelevant or inappropriate. Moreover, future family members may not feel an allegiance to a constitution that they did not have a hand in creating.

Rather than establishing strict rules that must be followed by all or, the opposite, superficial guidelines that do not add much depth, a better approach would be to revisit the family constitution every five to 10 years or, at minimum, every generation. Family members can then decide whether the constitution should be renewed, amended or revised entirely. Regular review of the family constitution prevents significant issues from going unaddressed for too long, which can result in resentment and strife. Some families insist that the family constitution sunset at a certain point so that new leaders within the family can be empowered to leave their own mark on the family’s values and mission. While this is not necessary for every or even most families, perhaps each generation should be encouraged to revisit and update the family’s statement of values.

Starting Small: A Family Mission Statement

Many thoughtful families understand the benefits of a family constitution but are not yet willing or able to invest the time to formulate a comprehensive family constitution. Rather than preparing a family constitution that is not well formulated, a busy family could consider starting with a family mission statement. A family mission statement is essentially just one part of the family constitution – the family values statement – abbreviated.

The concept of a family mission statement is borrowed from corporate America. Many successful businesses have short but impactful mission statements meant to articulate what makes their brand unique. Translating this practice to the family setting, a mission statement broadly captures what the family believes – its superpower, so to speak. For example, Steven Covey, author of The 7 Habits of Highly Effective People, formulated his family’s mission statement by asking his wife and children what he thought their family was all about. Specifically, he asked them: “What makes you want to come home?” and “What embarrasses you about our family?” The Covey family ended up with the following mission statement: “The mission of our family is to create a nurturing place of faith, order, truth, love, happiness, and relaxation, and to provide opportunity for each individual to become responsibly independent, and effectively interdependent, in order to serve worthy purposes in society.” A family business mission statement could be a hybrid of the corporate and family mission statement. For example, Longaberger, maker of Longaberger baskets, has a mission statement that speaks to the core of what makes both the family and the business tick: “to stimulate a better quality of life.” While a mission statement may seem like a small piece of the puzzle, a simple statement that encapsulates what motivates and inspires a family can truly lay the groundwork for a more complete family constitution in the future.

The process of creating a family mission and ultimately a family constitution will vary depending on each family’s unique needs and goals, as will the plan for communicating information about the mission and constitution to successive generations. BBH can help establish a customized framework and process for each family to follow. Please contact your wealth planner or relationship manager to begin the process.

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1 For more information on the importance of intergenerational wealth communication around values, read the full article, “Love and Money: Why Communicating Wealth Values Matters.”
2 Excerpted from Ward, John L., “The Family Constitution: It’s the Process That Counts, Not the Content,” Harvard Case Study Solution and HBR and HBS Case Analysis (December 9, 2010).