Free Training Session 4
Family Business Succession Consultant Pakistan
Creating Family Business Constitution Pakistan
Understand your family business, its components, and all stakeholders and people who serve the family business. Make them align and draw their boundaries.
Family Business Constitution Template Pakistan
The term “Family Business Constitution” may sound formal, but an unwritten version of it is already available in your business. A family constitution is inherently present in every family business. It is a collection of family members’ assumptions, common understandings, and expectations.
A family constitution is a document that puts the shared vision, beliefs, and objectives of family members into black-and-white form. It outlines the process or framework for communication and interaction among family members involved in the business and those who are not. For the younger generation who wish to enter the business, it helps align their assumptions and expectations, providing a clear outline of their key roles and responsibilities.
Why Do We Need a Family Constitution?
- Preparation for Challenges
- Mix of the Family and the Business
Family business challenges are predictable, and you don’t need extensive forecasting to identify them. If problems or challenges are predictable, we can plan for them in advance.
Understand that family life and business are two different entities. Mixing them without careful management can threaten both relationships and overall wealth. By understanding and managing the mix of family and business, we can make our business last longer and keep our family happy and united.
Our businesses often fail in the hands of the second generation, and even if they succeed, the survival rate after the third generation is very low. The major reason for business failure is internal conflicts that arise from
(i) unclear family vision & missions.
(ii) undefined values.
(iii) un-outlined roles.
Addressing Unspoken Agreements
In the early years of a business, it is typically managed by one founder or a few business partners, making the management structure quite simple. As the business grows and evolves, many key issues are addressed by unspoken and unwritten agreements, which are often taken for granted. This approach can sustain a business for a few decades, but as the next generation becomes involved, different family members bring their own perspectives and are unaware of the unwritten agreements. Therefore, it is necessary to draw all agreements and values into black-and-white form.
This family constitution is nothing more than a framework. It is the set of rules your business and family are already following, and now you are bringing all those into a black-and-white form.
The Role of a Family Business Constitution
Educating everyone about business rules in advance can reduce risks and conflicts.
In our culture, people often question the need for a family constitution. This constitution provides direction for both family and business relationships. It includes a mission statement, long-term goals, and values, all available in a black-and-white format for everyone. It defines a conflict resolution mechanism and addresses sensitive issues such as transferring business management from the senior generation to the next, ensuring post-retirement benefits, and handling potential disagreements.
Our family and business have become quite complex, and they will only become more in the coming years.
Our family will grow, ownership will transfer to the next generation, and our business activities and assets will increase. These changes will affect our family’s and business’s health, wealth, and happiness. So, we need to decide whether to document our informal understandings and assumptions or let things continue as they are.
If we don’t create a formal document, our family members’ assumptions and expectations about the business could cause confusion. For example:
- Someone might think, “I assumed you wanted to manage the business.”
- One of several business partners might expect that all their children will get jobs in the business.
- Someone might believe everyone will have equal voting power and rights.
Often, the response to such assumptions is, “Why would you think that?” Misunderstandings among the next generation about work-life balance, wealth, and business management can lead to serious conflicts.
In our society, family members who want to know about the next business owner, work in the business, or learn about wealth distribution usually wait for a problem to arise. We hope things will resolve themselves. But planning and saving these informal, unwritten family agreements into a formal, black-and-white document can strengthen our family bond and unity.
We believe that the Family Constitution, with clearly stated guiding principles and protocols for family wealth structures.
You don’t need to worry that working on a family business constitution will increase disputes or conflicts. When family members are given equal opportunity to discuss, it will positively impact both the family and the business. Discussing rules or selecting the next leader can be difficult, and keeping the discussion on track is even more challenging. But a structured discussion, with everyone respecting each other, can start positively. The goal of the discussion is not to reach a conclusion but to understand each other and maintain respect. Mutual respect and understanding are the backbone of these discussions.
You will be surprised how a new member or even a young child can contribute to the family constitution. Their suggestions can be valuable and become part of the constitution.
A family constitution does not guarantee there will be no disputes or conflicts, but it will reduce their number and intensity. We will have a set of rules, protocols, or guidelines to resolve disputes.
I hope Now you have understood that investing time and energy in writing our business constitution will provide guidelines to manage our business effectively and give our broader family a complete framework to work together. This will improve both business and family health.
Who Will Sign this Constitution?
When our young generation reaches 18 or 20 years old, they should be invited to sign the family business constitution. Family businesses often perform better than corporate businesses, a topic for another day. Remember, the major reason for business failure is internal family conflicts.
Family Constitution is the set of assumptions, common understandings, and expectations of family members:
- Shared Vision
- Beliefs
- Objectives
Reasons for Internal Conflict:
- Unclear Mission
- Unclear Values
- Unclear Roles & Responsibilities
- Your Next Generation Can’t Understand Your Unspoken & Unwritten Agreements
What are the benefits of going through the process of creating a family constitution?
- Clarifying roles helps to avoid role conflicts.
- Providing forums for discussing family and ownership issues prevents such issues from exploding in the wrong forum.
- Providing an “exit mechanism” offers a way to “let off steam.”
- Having things in writing ensures family members are all on the same page, preventing misunderstandings.
- The family constitution typically includes a process for dealing with family conflicts. Families with a defined conflict management process have a better chance of surviving. It ensures conflicts are addressed and dealt with, rather than avoided.
- For family ownership, the constitution helps to keep ownership united and fosters family commitment to the business’s future. Over time, “ownership is more important than management,” so defining the ownership role is a key task.
- In a family business, having a fair process is often the only way to make difficult decisions that family members can accept.
- Beyond preserving family financial capital (or the business), a well-crafted family constitution helps maintain family peace and harmony, preserve family relationships, and protect family traditions.
“The palest ink is better than the best memory.” – A Chinese saying
The key benefit of a constitution is providing the family with a fair process for making joint decisions together, a decision-making process that gains widespread family support. Additionally, rooting the family values in history and personalities can produce a more meaningful and enduring statement of those values than simply asking each family member about their values and why.
What is the process for creating a family constitution?
Now, let’s discuss how to create your family constitution!
A family constitution is created through constructive, positive dialogues among family members. It is compiled after many family meetings, ideally facilitated by an experienced advisor.
The concept of defining the problem is extensively used here. In these meetings, you need to extract your family’s and business’s values, beliefs, and objectives. Discussions will focus on business relationships, family relations, and future plans.
Each family member should be given the opportunity to explain their vision and values. It is not necessary for the entire family to share their views at the same time; small groups can discuss among themselves and then present their discussions to the whole family.
A family constitution can be brief or extensive. It could be a one-page document with guidelines or extend to 1,000 pages, depending on your situation. However, it must include three essential elements: values, beliefs, and objectives.
Convert Your Informal Understandings & Assumptions Into Written Agreements