Key Aspects of a Family Constitution - EIG

– by Badri El Meouchi (Corporate Governance Consultant)

As Family Owned Enterprises (FOEs) grow into the second or third generation, it becomes important to formalize the mechanisms of governance within the family as well as within the company. One of the key tools for enabling this process is through the development of a Family Constitution which outlines the Family’s policies on a variety of key points. This article provides some valuable insights on the general structure and specific objectives of a Family Constitution.

A family Constitution should begin by identifying the values and objectives of the family business: What are the values and the culture of the Company? This is usually addressed through a statement of family values and beliefs and an outline of family business principles.

One of the key aspects covered by a Family Constitution is how the Family makes decisions. Best international practice suggests that decision-making within the family should be institutionalized through the establishment of a Family Assembly and a Family Council. The Family Assembly usually consists of all the family members (including spouses, children and non-shareholders) who meet around twice per year – either for informative meetings or simply as a social gathering. The purpose of the Assembly is to create a spirit of inclusiveness and openness between family members, while also ensuring that Family members are well informed on developments within the Family and the Company. Every 2 or 3 years, the Assembly also elects the members of the Family Council, which in turns makes decisions on behalf of the Family.

Within the context of a Family Constitution, the family should carefully consider the following points^[1] to ensure that they are well covered and described within the Constitution:

Family Assembly

• Objectives of the Family Assembly;

• Functions of the Family Assembly;

• Meetings of the Family Assembly; and

• Secretary of the Family Assembly.

Family Council

• Objective of the Family Council;

• Composition of the Family Council;

• Functions of the Family Council;

• Decisions of the Family Council;

• Meetings of the Family Council; and

• Secretary of the Family Council.

Another key feature of a Family Constitution is to address employment of family members in the company through a clear company policy which specifies which members of the family are eligible to join and the criteria for entry.

This policy should be communicated throughout the firm and consistently applied, for it can have a tremendous psychological effect on the entire workforce and non-related management. This section of the Constitution could also include a Family policy governing employment, which would clarify how the family business would deal with loyal and talented non-family employees as well as the potential necessity of independent/non-executive directors or outside advisors. It should also identify how to professionalize the business and decide if experienced and capable managers with outside experience need to be brought on Board. It is also important to address succession issues by specifying the rules applicable to next generation family members willing to work in the business and why the family is committed to next-generation business and ownership – this is usually presented in a charter on succession planning to key employments, especially General Manager position.

On the subject of Shareholding and provisions of the Shareholders’ Agreement, the Family Constitution should specify what the family business should do when facing any issue related to the shares of the company. This should include rules governing sale/transfer of shares, dividends and subsidies for family members, rules governing issuance of shares, guarantees and liens on shares as well as all other relevant provisions contained in the shareholders’ agreement.

Regarding conflicts of interest, The Family Constitution should also specify how the family business can appropriately manage and prevent all potential situations giving rise to conflict of interest.

Many Family Constitutions also include sections like the Family’s Code of Conduct, Family training and education as well Family philanthropy. To conclude, all of these provisions serve to align the expectations of family members, through an inclusive approach that involves them in the decision-making process and minimizes the emergence of fear and mistrust between family members. It also serves to reassure key non-family employees who might otherwise be concerned that they cannot grow and develop their career in a family owned business.

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^[1] Corporate Governance reference Guidebook for FOEs, p.42, Lebanese Transparency Association, 2010.