May 24 2013 Latest news:
Steven Scarlett, partner at Lovewell Blake
Saturday, July 7, 2012
Family charters are an increasingly popular part of a family business governance structure, helping to safeguard the value and future prosperity of the business while reducing the risk of disharmony among the family.
A family charter (or constitution) is a statement of intent signed by all family stakeholders that documents a family’s vision for itself and the business, its core values and the policies and guidelines that regulate how the family and the business interact.
The charter supports legally binding agreements, such as the shareholders or partnership agreement, and covers other areas including family roles within the business and communication.
Why a family charter?
As a family business grows and passes down through the generations, there is usually an increase in the number of family stakeholders - some will be actively involved and others may not.
This gives rise to increased potential for resentment and conflict around matters such as family employment, ownership, roles, responsibilities and financial rewards.
There are often unwritten rules surrounding how the family interacts with the business and vice versa. Sometimes these unwritten rules are not properly communicated or understood, leaving scope for misunderstanding and disharmony.
The process of preparing a charter will help update and formalise these rules, ensure everyone fully understands the reasons and implications, and also encourage discussion of important topics that may previously have been considered taboo.
Preparing a charter is not simply a form filling exercise.
This should involve discussion among all family stakeholders so that the end result gains maximum buy-in from the family.
Using an experienced facilitator should make this an open, constructive and rewarding process.
As family charters are unlikely to be legally binding, they can be written in clear language and the scope can be wider than shareholders’ or partnership agreements. The preparation will highlight essential issues for potential inclusion in those legal agreements.
Legal advice should always be taken regarding key elements of the charter, such as the rules surrounding share transfers and sales, to ensure these areas are legally enforceable.
Typically these areas will be covered within the company’s Articles and/or the shareholders’ or partnership agreement, which are an important part of the business governance structure, but should not be seen as a replacement for a family charter.
Family charters are often implemented as part of a succession process and can remove perceived barriers to the process. The outcome can be healthy for both the business and the family.
Although the content of a family charter can be tailored to cover aspects important to each case, the core contents typically include:
Family vision and mission statements.
Family employment and remuneration.
Share ownership, voting, dividend policy and exit.
Composition of the board.
Training and educating the next generation.
Position of in-laws.
Protocol for amending the charter.
Social and charitable activities.
As the concept of family charters becomes better known, I expect more families to take advantage of them to improve their chances of remaining a long-term, successful, family-owned business.