Successful family enterprises are different in many ways, but they have at least one thing in common; they are well organized. Their success is achieved through thoughtful planning, and part of this organized approach often involves creating a Family Constitution. Source: www.familybusinesssolutions.co.uk

1. FAMILY BUSINESS SOLUTIONS
YOUR GUIDE TO A FAMILY CONSTITUTION

2. Contents
Your guide to a Family Constitution. 1
1. Your existing Family Constitution. 2
2. Creating a formal Family Constitution. 4
3. Ownership issues. 6
4. The Family part of the Constitution. 10
5. Your Family Constitution. 12

3. 1
YOUR GUIDE TO A FAMILY CONSTITUTION
Successful family enterprises are different in many ways, but they have at least one
thing in common; they are well organised. Their success is achieved through thoughtful
planning, and part of this organised approach often involves creating a Family Constitution.
“Family Constitution” might sound a bit and assumptions in the hope that everything Often all the ownership is concentrated in
formal and “not for us”, but in fact your will continue to work, or to invest in getting the same family but in reality a family will
family will already have an unwritten version a few things written down. have power to do most things they want if
of a “family constitution”. It is the they control more than half the ownership.
Here we explain the formal Family
combination of assumptions, understandings Constitution. We hope it will help your Many business families diversify their interests
and expectations that exist in every family family to decide whether having one will into other assets and activities that they share
about “how we do things around here”. allow you to achieve the balance you want together, such as financial investments, land,
The problem is that over time a family between being a successful enterprise and property, farms, philanthropy, leisure assets
and their enterprise usually become more a successful family. (holiday home, boat etc), new ventures and
complex; the family grows, ownership so forth1. We’d describe this as a “family
fragments as it passes down through the enterprise” and we believe that strategies
Family Business and Family Enterprise that seek to optimise all forms of a family’s
generations and the family enterprise
wealth need to include practical advice on
changes, which sometimes involves We are often asked what we mean by the
how each of these assets and activities can
diversifying into other assets and activities. term “family business”. Our definition is an
be well organised.
It then becomes risky for the future health, operating business in which members of the
wealth and happiness of the family and same family have most of the power. This The idea of a Family Constitution is relevant
their enterprise to be based entirely on an could be one nuclear family (parents and to a family business and a family enterprise,
informal constitution. The key decision kids), a multi-generational family (add in but to avoid endless repetition we mainly use
that needs to be taken is whether to grandparents) or a network of families (a the term family enterprise to include a family
persevere with informal understandings large extended family or clan). business. We hope this clarifies the matter.
1. One client with an investment in a football club wondered which heading applied; investment, leisure asset or philanthropy!

4. 2
1. YOUR EXISTING FAMILY CONSTITUTION
It might not occur to a family that they already have an informal Family Constitution.
But the fact is that in every family there will be a mixture of understandings, assumptions
and expectations that underpin how the family makes important decisions, or, put another
way, “it is how we do things around here”.
The informal Constitution reflects the “I assumed you’d want to work in our If families and other important stakeholders
family’s beliefs and attitudes in relation family enterprise.” want to know who will be the next owners
to a wide variety of important matters, or how family members get a job in the
“I thought my spouse would get a job in family enterprise or how wealth will be
such as:
the family enterprise.” distributed fairly, they can either wait for the
• Wealth issue to become a hot topic and hope it will
“I’d expected to become the next managing
be resolved (based on understandings etc) or
• Leisure director“ or “the majority owner.”
they can plan for what they want to happen.
• Gender “I thought everyone would receive an Families who like to plan for their futures
equal share of the family enterprise.” rather than leave matters to chance prefer
• Education a written Family Constitution to the informal,
And, frequently, the answer from a
unwritten version. They also tend to be very
• Family harmony relative is, “really, why did you think
practical people who assume that there will
that?” Often these misunderstandings
• Privacy be different views and opinions on important
occur between generations who,
issues like succession, ownership and so
unsurprisingly, have different ideas about forth, and they take the view that it is better
• Work
wealth, work-life balance and so on, and to debate these issues calmly in advance of
• Work-life balance these disagreements can easily result in the need, rather than waiting for something
harmful conflict. to blow up.
• Fairness
Complex issues abound when the interests
• Relationships and marriage and ambitions of a family overlap with the “Clogs to Clogs” and other clichés
needs of their enterprise. For example, in a
Another way of making the case for a written
• Individual expression family business the decisions that are best
Family Constitution is to address head-on
for the business might cause disharmony one of the clichés about family businesses
• Philanthropy in the family, or what makes for a that is often expressed as “clogs to clogs” or
contented family life might cause ructions “shirtsleeves to shirtsleeves” in 3 generations.
The obvious risk with a Constitution based
in the business.
entirely on understandings, assumptions Or as one of our clients rather robustly put
and expectations is that it can result in The good news is that many of the it, “the first generation starts the business,
misunderstandings, mistaken assumptions challenges that enterprising families face the second generation builds it up and
and unfulfilled expectations. It is easy to are predictable and the predictable can then the third or fourth generations just
think of examples. always be planned for. p*** it against the wall.”

5. 3
Statistics are often quoted about how few The response to these changes in family Clichés can contain elements of truth,
family enterprises survive to the 3rd generation. enterprises is often to try to adapt by even wisdom, but in this case “clogs to
Rather than putting this low survival rate down absorbing as many changes as possible clogs” is not because family enterprises
to the ‘clogs to clogs’ cliché, we like to think without radically altering the informal Family are poorly run or because enterprising
that there is a better explanation. Constitution. This is often accompanied families are dysfunctional. It’s because
In every family enterprise there are a by phrases like “if it ain’t broke….” and the Family Constitution is not updated
number of people with an important stake, “that’s how we’ve always done it.” to keep abreast of developments.
who make demands for resources that are In place of the cliché, the truism that
This strategy of adapting to change,
inevitably limited in some respects. There should be broadcast is that success needs
without making any major changes,
is only so much time, money, love and careful planning. Don’t leave matters to
appeals to families who are in business
opportunity to share around in a family chance and don’t just hope that an informal
enterprise to meet the demands of the together because, like most of us, they
don’t like change because it always feels Constitution will adapt naturally to fit
enterprise itself, the owners, the family,
risky. However, the informal Constitution changing circumstances. The practical
the board and employees, outside investors,
that worked for a nuclear family is less alternative to hoping for the best is to step
customers and creditors.
up to the challenge of creating a bespoke,
likely to serve the interests of a group of
The informal type of Family Constitution written Family Constitution.
siblings (and spouses and grandchildren)
emerges as a way of coping with all
who become involved in, or attached to,
these demands. It is the family’s way of
balancing the different interests, and this the family enterprise, and it is really going
tends to lead to an expectation that to struggle by the time the enterprise
everyone with a stake in the enterprise will passes to a generation of cousins.
understand and adhere to the informal In order to keep up, the Family Constitution
norms and expectations that have evolved has to be changed, which means more
as “the way we do things around here.” than just adapting or tweaking the informal
However, while the balance of interests at any version. If this is not done, what worked
time in a family enterprise may appear stable, for the first generation doesn’t work for
it is never static; things never stay the same. the 3rd generation and the accumulation
As already mentioned, the needs of of misunderstandings and unfulfilled
individuals and the enterprise are constantly expectations combine and contribute
growing and changing so every family to the demise of the family enterprise.
enterprise is always in a state of flux. Hence “clogs to clogs”.

6. 4
2. CREATING A FORMAL FAMILY CONSTITUTION
The best way to start creating a formal Family Constitution is by clarifying,
“Why the family want to be in business together?” “What is this all about?”
“What is the “glue” that bonds us to each other and to our shared investment
in the family enterprise?” “What returns are we looking for?”
These questions might sound obvious; but This is one of the things that makes This is not a tick list and every family
the tricky part is that the reasons why a family enterprises different from other has to articulate their own version of
family want to stay connected through a types of business. a shared purpose.
family enterprise often change over time. But when the family understand why they
In non-family enterprises, it is assumed
It cannot be assumed that whatever drove are in business together, there is no doubt
that the sole purpose is increasing
one generation will necessarily persuade that this can be a great strength. The “glue”
shareholder value for the current owners.
the next generation to devote part of their binds them together and makes them willing
In contrast, the reasons why a family want
lives to the family enterprise. to stick with the family enterprise through
to be in business together might be a
For example, founders are often motivated mixture of the following: thick and thin.
by the entrepreneurial dream of being • Providing the desired level of financial Equally, the absence of a clear shared
in control of building a new venture and purpose poses significant risks and dangers.
security for a growing family.
creating a legacy to pass to the next Without it, as time unfolds, there will just
generation. But the next generation face • Achieving a lifestyle. not be enough “glue” to bond the family
a different challenge. • Creating, preserving and/or extending members to each other and to their collective
investment. In the absence of “glue”, things
Are they committed to preserving and a legacy of family ownership to pass
tend to fall apart. And when this happens,
extending this legacy? Do they have a shared to the next generation.
it often results in the family’s wealth and
understanding of what it is? Does it mean
• Pride in a brand (especially if it’s the their personal relationships being wasted
as much to them as it did to the founders?
family name) or a reputation for being in needless conflict.
Does the family want the family enterprise
a family enterprise. When families end up in conflict, it usually
to continue because it provides them with
career opportunities, or a good investment, • Providing career opportunities for family involves family members who have different
or because it is their name above the door, members. ideas about what they want from their
or because they feel responsible to the other family enterprise. One might want to
• Attachment to a particular industry, maximise the return on investment while
stakeholders, or because it is good fun or
product or geographical area. another wants to preserve and extend
because it is a bit of each of these and some
• Keeping a growing family in touch with a legacy to pass to the next generation
other things besides?
each other as they get on with their of family owners. There is ample scope
A very important point about understanding for conflict here but the real problem
own lives and grow up and grow apart.
the shared purpose in a family enterprise is is perhaps that these family members
that it is usually a combination of financial • Putting something back through should never have been joined together
and emotional reasons. philanthropy. in a family enterprise in the first place.

7. 5
Articulating and writing down the shared
purpose, and putting it at the front of the
written Family Constitution, makes it far
easier for individual family members to
decide whether a role in the family
enterprise will either help them achieve
what they want for their lives or constrain
them and thwart their own ambitions.
The standard against which family members
should be encouraged to measure their
enthusiasm for the shared purpose is
ultimately very practical; is it “good enough”
for me to want to be part of the family
enterprise, in whatever role(s) I choose;
owner, executive, leader or family member.
The standard of “good enough” is, frankly,
as good as it can be in the real world,
and if it cannot be achieved in the eyes
of some, then the practical question that
needs answered is how to let family
members who do not want to be in the
family enterprise exit gracefully, and allow
others, who have a sufficiently strong sense
of shared purpose, move forward together.
If structures are created that bind people
into a family enterprise against their will,
the feelings of reluctance, disappointment
and even coercion will leak out eventually,
usually with troublesome consequences.

8. 6
3. OWNERSHIP ISSUES
A Family Constitution should clarify who can own part of the family enterprise and
the roles and responsibilities of those owners. The following should help a family
to work out their answer to these deceptively simple questions.
Return on investment
There is a fundamental difference between such as the opportunity to create or maintain The key is to make it clear what owners can
owners who expect their investment to a legacy of family ownership to pass on to expect, which makes it important to write
produce a market rate of return (we’ll call the next generation of the family. it down and sort out the detailed rules that
them Value-Out owners) and those who reflect the family’s agreed attitude in relation
The Value-Out owner and the Custodian
attribute importance to returns that are to ownership.
might rub along together when the family
not based on immediate financial reward enterprise is doing well enough to satisfy For example, every family enterprise needs
(Custodians). their different desires, but if – or should controls over how ownership shares can be
that be when – things get tough, the sold. Value-Out owners will expect to have
The commitment of a Value-Out owner
differences between them will be far more an opportunity to cash-in when they want
will depend on receiving satisfactory
difficult to resolve. One might say, “it’s time or to sell if they are offered a premium price,
financial returns. If these are not achieved
to sell” while the other thinks “that’s not for example, by a competitor.
then, like any other rational investor, he or what this is all about”.
she will want to be able to sell their shares This would not appeal to the Custodian who
and redeploy their investment in order to One type of owner is not a better person will be concerned about securing the longer-
than the other; the point is to decide which term benefits of family ownership and,
secure a better return.
type of owner you want in your family consequently, would assume that there will
The Custodian, on the other hand, is likely enterprise. Many families mix a bit of both be a limited opportunity to sell, even in good
to accept trade-offs between financial but usually have a tendency more to one times, and that the potential purchasers will be
gains and other types of “return”; type of ownership than the other. limited to other owners and family members.
ONE TYPE OF OWNER IS NOT A BETTER PERSON THAN THE
OTHER; THE POINT IS TO DECIDE WHICH TYPE OF OWNER
YOU WANT IN YOUR FAMILY ENTERPRISE.

9. 7
Bloodline or spouses? Are shares “matrimonial property”?2
Some families limit ownership to bloodline We are often asked this question by • Not change the shareholding during
descendants of a founder, while others want families who are concerned about what the marriage (before separation), or if
spouses and partners to be included as will happen to shares in the family the shareholding is to be changed (for
owners. Those in favour of spouses and enterprise or family business in the event example, a company re-organisation/
partners being allowed to become owners of marital breakdown. buy-back), make sure that there is a
will view their inclusion as strengthening the separate ‘post-nup’ in place (see below).
ownership group through introducing some “Matrimonial property”, which a divorce
court will look at with a view to equalising If the shares are sold during marriage,
diversity. It will also help to maintain the
between spouses, consists of everything make sure that there is a separate ‘post-
“glue” among a growing family as
of value acquired individually or jointly nup’ in place and put the sale proceeds
ownership passes down the generations.
during the marriage to the date when into a separate account in the name of the
Since spouses and partners will be parents
co-habitation ceases. seller and not an account in joint names
of the next generation of owners, they will
of the spouses.
be more likely to convey a positive message There are important exceptions to this,
about the importance of the family enterprise including gifts and inheritances, so any It is vital to keep the ‘paper-trail’ showing
if they are owners, than they would if they where the money came from. This money
shares that are handed down by one
were excluded from ownership. may still be regarded as matrimonial
generation to the next do not become
property by the courts, but there is a
Those in favour of restricting ownership to matrimonial property, although subsequent
greater chance of avoiding the money
bloodline would highlight the benefits of changes to the shareholding may mean
being treated as matrimonial property if
managing a smaller group of owners and that the shares become matrimonial
it can be clearly shown that it came from
argue that the bloodline descendants of a property.
the sale of the shares.
founder are more likely to have a shared
If you don’t want shares to be treated
understanding of ownership than people However the following is worth noting.
as matrimonial property then you should:
who marry into the family. They would also In the event of separation or divorce there
draw attention to the adverse consequences • Acquire them before marriage rather might still be scope for argument over
if some family members transferred than afterwards. whether the value of the shares should
ownership to spouses while others decided be taken into account in negotiating a
• Inherit shares rather than buy them.
not to do so. Another concern might be financial settlement, as any award made by
what would happen to ownership in the • Receive them by way of gift from a court must be reasonable having regard
event of matrimonial breakdown. someone other than your spouse. to all the resources of the parties.
2. Our text is based on our understanding of Scottish Law. In England & Wales and Northern Ireland, different rules apply to matrimonial property.

10. 8
3. OWNERSHIP ISSUES
Pre-nups and Post-nups Working and non-working owners
This stands for pre-nuptial and post-nuptial Some families strongly believe that owners Alternatively, they might decide to take a
agreements. In Scotland, the general rule must work in the family enterprise and career in the family enterprise in order to
is that a pre-nuptial agreement is binding that if they choose another career, they qualify for ownership but feel they are being
and can, on divorce, oust the jurisdiction will not be entitled to a share of ownership. bound by “golden handcuffs” and resent
of the courts in relation to future financial The attraction of working owners is believed the fact that they were forced to give up
provision. If you want to enter into a pre- to be that it will avoid conflict between on their own career aspirations in order to
nuptial agreement, it’s better done well in working and non-working owners, and
become an owner in the family enterprise.
advance of marriage to avoid the claim especially resentment among the working
that someone was railroaded into signing owners that their efforts are profiting In truth, working and non-working owners
at the last moment. those who could not be bothered to help can collaborate successfully provided the
the family enterprise by the sweat of rules (in a written Family Constitution) are
Post-nups are very useful. They can allow
their brows. clear; for example by having a dividend
the necessary contractual documentation
to be updated when circumstances in the However, others might take the view that policy for all owners and a remuneration
family and business change and so prevent restricting ownership to working owners policy for working owners that, together,
difficulties at a later stage if a couple can have unintended consequences. Family make clear who gets what from the family
separate. This can allow for much greater members who decide to pursue other enterprise. It would also be worth clarifying
flexibility when undertaking business careers and are cut out of ownership may if any decisions need to be made by working
reorganisations, especially if this might feel they are also being cut off from the and non-working owners together, rather
result in shares that are not “matrimonial family, especially if the family enterprise than just by the working owners, for
property” before the reorganisation, represents a significant portion of the example, decisions that involve a significant
becoming such afterwards. family’s overall wealth. risk to the family’s wealth or reputation.

11. 9

12. 10
4. THE FAMILY PART OF THE CONSTITUTION
Family issues always affect a family enterprise and it is pointless to try to treat a family
and their enterprise as if they were entirely separate entities. As the family grows and
becomes more complex, the governance of the family becomes important.
Where there are a relatively small number However, it is essential to understand that ensure that the Family Constitution includes
of family members with an interest in the if the “glue” that binds the family together an agreed procedure to help resolve these
family enterprise, important discussions is not maintained and, instead, is allowed conflicts and keep the family enterprise as
concerning the family can usually take place to dilute, over generations there eventually healthy as possible.
spontaneously – “around the kitchen table” will come a point where it is not strong
A Family Assembly can play an important role
– whenever needed. But as a family grows, enough to hold the family enterprise
in educating and informing the wider family,
this type of informal governance needs to be together. Hence the social value of the
including the next generation, about the
replaced by more thoughtful structures, like Family Assembly should never be
structures that affect their lives, for example,
a Family Assembly. The rules about the role underestimated.
technical structures such as family trusts,
of the Family Assembly should be set out in
The formal role of a Family Assembly is which will outlive their creators. On a broader
the Family Constitution.
often to formulate and comment on family educational front, the Family Assembly often
policies that affect current and future helps to increase the family’s awareness of
Family Assembly generations of the family and not just the business practices, which can be useful to
existing owners. This could apply to the family members whether or not they pursue
The Family Assembly is a forum where the
family’s philanthropic activities or aspects a career in the family enterprise.
interests and concerns of the family can be
of their relationship with the enterprise,
addressed. Because it is a flexible structure
for example, in relation to employment
that can be adapted to suit the needs of Family Council
and remuneration of family members or
different families, it is very important to
the exploitation of the family’s reputation The constitution of the Family Assembly
define clear goals and tasks for the Family
in marketing and PR. will also need to specify how it will be
Assembly. Otherwise there will be
ambiguity about its role and it will be Another Family Assembly policy may be an administered, how often the Assembly will
difficult to evaluate whether or not the agreed procedure on how conflict among meet, what formality is required to convene
Family Assembly has been successful. family members or between the family and and run the meetings and how any formal
the enterprise should be resolved. When decisions are to be taken.
The goals could be social, formal and
there are many interests (individuals, family Sometimes it is helpful to appoint or elect
educational. As a family grows and the
branches, various business and other a separate group with responsibility for
demographics become more complex, a
interests etc) interacting and competing for
Family Assembly can generate the type of running the Assembly and being the main
the finite resources that a family enterprise
social interaction that will help to create governance link between the wider family
can provide, there inevitably will be
and sustain the “glue”. The importance and other parts of the enterprise, such as
moments when the anxiety that this
of this tends to be better appreciated by the board of directors. This separate group is
competition causes spills over into conflict.
families than advisers, who tend to devalue called the Family Council and the illustration
the importance of establishing a social role That’s just part of the reality of a family shows how important a role it can perform
for the Family Assembly. enterprise, so it is pragmatic and wise to in overall governance

13. 11
Family Assembly
Appoints/ Information/
Elects Communication
Family Council
Family Business Family Business Annual Family
Policies Education Meeting

14. 12
5. YOUR FAMILY CONSTITUTION
In this edition of Business and Life we’ve highlighted
the following sections of your Family Constitution.
Section 1: Our Shared Purpose The other parts of the Family Constitution The Final Words
will depend on the type of assets that are We were recently asked by a client to sum
• A statement of why we are
in business together. part of the family enterprise. For example, up in a few words what an enterprising
if the family owns a business then the family should do if they wanted to continue
constitution should cover things like: to build wealth across generations. We
Section 2: Ownership Governance
• Role of the board. weren’t even being offered the opportunity
• The role of owners – of getting everything onto one side of A4
Value-Out or Custodians. • Composition of the board. paper but, responding to the challenge, we
• Bloodline or spouses. repeated what was said at the beginning;
• Selecting and appraising board
“get organised”. Two words that
• Working or non-working members.
progressive family enterprises interpret by
owners. creating their own Family Constitution.
• The role of non-executive directors.
• Return on
• Communication between the board and
investment/dividend policy.
the owners and wider family.
• Transferring ownership.
• Remuneration and incentives.
• Decisions reserved for
owners (including how • Decisions reserved for the board.
these are made).
• The responsibilities of any board
committees.
Section 3: Family Governance
If the family enterprise involves different
• The role of family
assets and activities (property, investments,
members.
philanthropy etc.), the Constitution should
• Family Assembly and Family clarify the relationship between the family
Council. and each of these activities. If the family
• Family policies (e.g. invests the time and effort in clarifying the
employment and balance of power between the owners, the
remuneration of family wider family and the company, partnership,
members; philanthropy; charitable trust or whatever, there is far less
education of next scope for the type of conflict that can
generation; PR). otherwise afflict a family.

15. 13
More information
from Ken McCracken:
kmccracken@familybusinesssolutions.co.uk
or
Susan Hoyle:
shoyle@familybusinesssolutions.co.uk
Published by Family Business Solutions Ltd
302 St Vincent St Glasgow G2 5RZ
Tel: 0141 222 2820
Fax: 0141 204 2326.
Family Business Solutions Limited (FBS) is a limited company registered
in Scotland with registered number SC199202.
The information contained in this newsletter is for general guidance
only and represents our understanding of relevant practice as at February
2010. FBS cannot be held responsible for any action taken, or any
inaction, in reliance upon the contents. Specific advice should be taken
on any individual matter. Transmissions to or from our email system and
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regulatory purposes. (c) FBS and its licensors 2010

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