Family Enterprise Governance—Ensuring Wealth Creation Success
Why Create a Family Constitution?
Why is a well articulated family constitution that enjoys broad support among family members important to the long term success of a business family? It is created so that the members of the business family have a clear idea of what is expected of them in terms of behavior and responsibilities. The family constitution maps out the rules and the decision making processes that the family agrees to follow as well as the benefits that the family members might receive.
Why is this important in business families? As the business family moves from the first generation to the second to the third and beyond, the number of family members will usually grow exponentially.
Not only is the family size growing exponentially, relationships also tend to be more distant. That is natural for a few reasons: (1) the successive generation family member(s) grow up in different nuclear families where the spouses bring a range of different cultures and values, (2) it’s likely that family members would be interested in different types of careers, hobbies, activities, and so their interests diversify, (3) potentially many family members would live in different geographical locations including in different countries and speaking different languages. Sometimes the rising generation might not all speak the same language. All of these factors would contribute to the family drifting apart over time and especially over generations.
Family Constitution’s Role in Supporting Family Unity
So a critical function of the family constitution is to ensure family unity. The constitution is a way to define the family’s collective identity in terms family characteristics that family members share. It also establishes some rules, decision making processes, and the benefits of being a member that reinforces this common identity over time.
Let’s talk a little bit more about why family unity is so important:
- Concentrates more asset within one ownership structure for achieving economies of scale, higher efficiency and return on investments
- Enables faster and more efficient decisions ability in order to make unconventional decisions
- Avoids family frictions and waste of resources because of family internal conflict
- Make wise decisions that minimizes political behaviors
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What is included in the Family Constitution?
Families tend to tailor the Family Constitution to meet their own unique set of circumstances and challenges that need to be addressed. Yet overall, there are common issues that most business families need to address, which are included in the Constitution.
First, the Preface contains the mission, vision and core family values. These are the key principles that guide the family enterprise.
Second, the Structures of Governance contains the definition of family members, how they are expected to treat each other, and how to provide support to the family. This section also defines the structure of the Family Council and Family Assembly. The Family Council is the governing body that creates programs to promote family unity, define expectations of family member responsibilities, coordinate between the family and the management of its assets, as well as mediate disputes among family members.
The rules of governance also include the Family Employment Policy. It specifies the employment standards for family members to work in the family business. It details the hiring process, compensation policy, performance review, plus promotion (and firing) procedures. It helps to define the career paths for family executives and perhaps the selection (and firing) of the future family business leader. It might also include the retirement policy for family executives.
A critical funcione of the Family Construction is to ensure family unity.
Third, the frameworks for Family Wealth Management focus on designing the family’s overall wealth creation strategy and oversight. It includes managing the family office and coordinating among the family’s various operating businesses.
Fourth are the Family Support Infrastrucutre such as
- Family education that focuses on instilling family values in the rising generation;
- Family financial support policy that details how the family enterprise would support family
- members in wealth creation pursuits or when under financial pressure such as job loss, children’s education, or health crisis;
Coordination among family members’ philanthropic activities; and lastly,
Detail the management and use of family common assets such as vacation homes.
- The Family Constitution is a living document that needs to be used and adapted as the family evolves in order to achieve its highest efficacy.
About the Author
Florence Tsai is the Founder and Managing Director of Centerprising. Florence leads Centerprising’s design of programs and curates our communities. She manages key relationships with members and partners.
Florence holds an A.B. in Economics from Harvard College, an MPA from Harvard Kennedy School of Government, and an MBA from Harvard Business School. Her career path led from Goldman Sachs, McKinsey & Co. and Cambridge Family Enterprise Group to Centerprising, which she founded in 2019.