This week, Yasmine Omari, a Manager with the Deloitte Middle East Family Enterprise Consulting team in Dubai, explores the importance of creating a family constitution.
When one discusses constitutional legacy, political connotations are often the first thoughts that spring to mind. Family business systems are not too dissimilar to political systems, be it autocracies or democracies. Successful family businesses tend to have certain key features that make them successful, such as clarity of purpose and values shared by their members. They adhere to an established code of conduct, and are aware of stakeholder expectations, undertaking activities accordingly. Such features are not dissimilar to successful political parties that are driven by a set of ideologies, meeting the needs of the people.
In addition, there are obvious similarities between well-governed political parties and well-run family businesses. Not only do they have shared ideologies and values among the members, but both also tend to maintain strong organisational structure, systems and processes.
However, just as a government or family business can flourish, they can also fail and face opposition or rebellion.
Business families with a history of family feuds and failures can be seen as deficient on several dimensions of institutionalisation. They may fail to keep the family and the business above the personal agenda of individuals for example. Individuals may want to acquire power and secure their own self-interests and this leads to loss of focus on other critical fronts.
Ultimately, this can lead to rebellions in family businesses that can come from the inside i.e. employees, shareholders, or family members themselves, or from the outside – suppliers and customers. From my experience, such rebellions are triggered by change, dissatisfaction and fear.
It is absolutely critical therefore that all risks are mitigated to the greatest extent possible to avoid situations that could trigger business failure or create rebellion.
Governance
Just as a government gains its rights of power from a constitution – a family business can benefit from a family constitution that describes how the business operates and the rules of operation. It can create awareness and understanding in the business, outlining the various systems, authorities, roles and responsibilities.
My colleague Walid Chiniara discusses the value of family governance in his earlier blog post " Quantifying the value of a family governance system."
Checks and Balances
To prevent tyranny, governments must operate under some restriction, and be answerable to the people. As such checks and balances need to be put in place within the framework of the constitution.
The same applies for family businesses. Some rights of the shareholders cannot be infringed upon and it is important that (i) the shareholders know their rights; and (ii) they exercise their rights.
With many governments, independent, non-political judiciary are permitted to keep watch on and if necessary overrule government. Similarly it is beneficial for family businesses to empower a board of directors to take an active role in setting the company's strategy and reviewing its management performance. A board can imposes formality and introduce objectivity and accountability within the family business.
Stakeholder Investment
It might be said that government exists to maintain an environment where both individuals and society as a whole can prosper, all whilst operating within a legal framework that limits its power and protects the rights of the individual.
From my perspective, the same applies to the operation of a family business; suppliers, shareholders, customers, employees all need to be satisfied for the business to prosper. Thus it is important to invest money, time and energy in all stakeholders and all aspects of operations.
Just as a population can re-elect a different party or potentially overthrow a particular governing party, stakeholders can also boycott or cut their ties with the family and the business. This risk is particularly acute when a family business successor takes over and may not initially appeal to, or connect with the people as much as their predecessor.
Using a Constitution
Whilst of course there are inherent differences between government and business, the fundamental concepts of a government constitution and a family constitution are not dissimilar.
In essence a constitution documents the balance of rules vs. rights. It bestows and separates powers and authorities among those who warrant it, with a system of checks and balances while also protecting the rights of various individuals.
For those who may be sceptical about family constitutions and perceive them to be an 'airy fairy' concept, I invite you to consider any past circumstances involving your family business or even family where there were important decisions to be made, and the family may have benefited from guidelines to shape discussions and conversations. Family constitutions can be both immensely unifying and practical.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
