To govern the relationship between shareholders, family members and managers, many family-owned and family controlled companies write family constitutions.
When establishing a company, companies write "Articles of incorporation" (sometimes also referred to as the Corporate Charter) that define the primary rules governing the management of a Corporation. Depending upon the legislations of the countries, this articles of incorporation may be open to third parties and this is especially valid if it is a listed company.
The family constitutions on the other hand, makes explicit some of the principles and guidelines that shareholders will follow in their relations with each other, other family members and, company managers. The family constitution has no legal bearing on the issues covered and instead refers to the appropriate legal documents, including articles of incorporation, buy –sell agreements, and so on. The primary rationale for a family constitution is the realization that no amount of legal expertise or foresight in the drafting of legal documents can match the goodwill and personal responsibility that the family members, both active and inactive in the management of the company. The family constitutions backed up with shareholder agreements might help the family members active in the company feel stronger from legal perspective on the company side.
Family constitutions add value to family governance. In the absence of good family business governance following issues come to the table;
- Conflict of interest between the family and the family Business
- Missing good corporate governance practices
- Failure in the transfer of family values and family legacy to the next generations
- Next generation family-member development
- Failure to make long term strategic plans
- Lack of proper decision making processes and platforms (e.g.: family meetings and family councils)