A family constitution is a morally (rather than legally) binding document that defines the family’s vision, mission, and values, and which broadly explains the legal structure and asset or business operations of the family enterprise.
Any family wanting a multi-generational legacy should have a family constitution, especially if the 3rd generation is moving into a leadership role.
Families who manage to create multi-generational legacies value communication and transmission of their values. Dennis Jaffe calls these “100-Year Family Enterprises” and points out their ability generate—not just financial assets, but a sense of community and vision among their members.
These success stories feature engaged family members who actively want to participate in and identify with the family. One way to build this “buy-in” among family members is for the family to explicitly lay out what family members are buying into. This is where the family constitution comes into play. As a relational contract (as opposed to a legal contract) the family constitution explains what the family enterprise does and provides an inspirational vision of who the family is.
A majority of families with a multi-generational legacy have formed their constitutions at the 3rd generation when processes can be explained and decisions made around the dinner table. However, a first-generation family of wealth with a vision to creating a multi-generational legacy could lay the foundation with a simple constitution stating the vision, mission, values of the family and expressing its intent to leave a gift of love for future generations.
The Why, What, How, Who, and When
Why: The family constitution is one that binds, inspires, guides, and educates current and future generations of family. To get a document that truly reflects the family’s priorities, family members themselves must write it (or update it, if they have one already). As advisors, the Grupp Law Firm guides its clients through the process as part of its family governance and education services.
What: The family constitution explains the family’s history—its shared Heroic Family Journey—defines the family’s values, mission, and vision, explains the distribution system, business bylaws, and/or trust structure of the family.
How: The family brainstorms what values it currently holds and would like to pass on as a legacy. Then it writes successive drafts that refine the idea for future generations. Advisors and active owners may need to work in a smaller group to explain the governance structure and business bylaws for the rest of the family.
Who: Both active and passive owners in the family should participate, though perhaps in different roles. Consider roles before the composition process. Choose someone who will be the scribe to create and store the final document.
When: At a family retreat. If there are not many family members and governance is still small, for example G1 spouses and a few G2 children, perhaps just block out part of a weekend together.
Article I: Core Purpose: Vision/Mission/Values of Family for Business and Itself
This part establishes purpose of the family and the family enterprise and the reason for setting up a governance structure. It is usually drafted by the whole family together, working across generations. It contains:
- Preamble from G1 to future generations
- Family history
- Family/Business mission, vision, and values
- Family code of conduct
- Definition of Family
- Definition of Ownership
Part II: Overview of Family Enterprise Organization and Policies
This section defines the family’s reason for having its businesses and indicates how the family connects to these ventures. It may outline the structures that govern the family business. It also makes clear how family members can become involved in the various family ventures.
- Family’s relationship to family business/Family Enterprise
- Ownership and Governance Structure
- Policies for family member employment in the business
Part III: Governance and Legal Structures
This section clearly outlines the legal and financial structures that bind and organize the family and how these structures work in practice. While this section is usually drawn from the legal documents, it should be written to clarify how the family is organized, how the shareholders are involved, and how trusts work. This section helps each family member know the rules for how the resources are allocated, how decisions are made, and what they can expect:
- Organizational Chart of Governance and Legal Structures
- Roles and Responsibilities of Committees and Officers
- Distributions to Beneficiaries
- Amendment Process
- Policies on Funding Family Members’ Entrepreneurial Ventures
Part IV: Family Council and Assembly—Mission, Organization, Responsibilities
This section outlines the family governance structure of family meetings, the family assembly, and the family council. It explains what the council does and how the family meets, decides, and creates practices that evolve out of its mission and values. It includes elements such as the following:
- Family Board
- Family Assembly: Purpose & Procedures
- Conflict Resolution
- Education and Support of the Rising Generation
Part V: Philanthropy and Social Mission
This section describes how the family defines and acts on its values in its role in the community and gives back. It covers such items as:
- Purpose of Family Philanthropy
- Social Values
- Decision-Making Process for Family Philanthropy
Questions to Consider
There are almost limitless topics that a family could explore in its constitution. To narrow the possibilities, consider the most important questions first. These may also be the most contentious. Here are some examples to get started.
What is flourishing? Flourishing individuals have agency. To start with, their basic needs are taken care of. Beyond that, they have meaningful pursuits that engage their skills, enriching themselves and their community, whether financially or spiritually.
The flourishing family has a culture that is supportive and inspiring. Like good soil, the flourishing family lets family members take root and grow. The elements within it cooperate, collaborate, and complement each other. Each family will define flourishing within its own context. The family constitution should ask: what does flourishing look like for us a whole and as individuals?
What is Your Family Wealth?
What is your Family Wealth? There are three kinds of Wealth that are each equally important to the long-term success of the family enterprise. Identifying how much of each your family possesses is a vital first step in the process of creating a constitution.
Family Character: What the family is. This includes family members, as well as the family’s vision, values, habits, and traditions.
Family Activities: What the family does. This includes the activities of the family that benefit the family and their community. For example, business activities, philanthropic ventures, and relationships/social engagement.
Family Goods: What the family has. This includes the property that the family owns, including financial and physical assets. It can also include the family’s legal structures that support its governance systems.
When writing your own family constitution, take some time to reflect on what your own Family Wealth is and how you might build it for future generations. It is as important to successfully transfer the family assets as it is to pass down family values and identity.
What is the relationship between family and business?
The relationship between the family and the family business can be an area for conflict or misunderstanding. Sometimes, family members are an integral part of business operations. At other times, they are shareholders but not actively involved. Some families have operating business, while others may have sold a business and use their capital to invest in entrepreneurial ventures. Whatever the situation, there must be clear rules and requirements that define the boundaries of family and business. While these may be enumerated in company bylaws, placing them in the family constitution will help widely disseminate the information among the family, leaving less room for misunderstanding or resentment. There should also be a clear explanation of how a family member can leave the family if he or she owns shares of the family business.
What is the definition of family?
This is a sensitive topic, but very important to discuss early on in the process. Most families with a multi-generational legacy are inclusive and incorporate the talent, character, and wealth of others to become stronger. However, there still needs to be criteria spelling out the privileges and responsibilities of family membership. Consider defining the roles of active and passive ownership to highlight the responsibility that each family member plays, even those who are not decision-makers.
Style and Format
There is no right or wrong written style for a family constitution. Some families may prefer a more formal format that lays out bylaws and policies using specific, legal language. Other families may be more comfortable with colloquial language that inducts older children and teenagers into the family’s system of governance. The most important thing is that the style chosen reflects the family and its needs. Furthermore, later generations should not hesitate to update the language as needed. The family constitution is a living document, even as it holds to the founding principles of the family.
At the Grupp Law Firm LLC, we have created a flexible template for the family constitution, that includes the most important items discussed above. We also help the family find their voice to express what matters most to them in the family constitution. Contact us to learn more information on the family constitution and other governance & education services.