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Family Office – Family Policy and the Family Constitution

To govern the relationship between family members, managers, and shareholders, some family enterprises write family constitutions. The family constitution makes explicit some of the policies and guidelines that shareholders will follow in their relations with each other, other family members, and family office/ family company managers. While family constitutions are more prevalent in larger multigenerational families, they represent an important asset to family unity and the culture of patient family capital starting with second-generation family enterprises. The family constitution usually has no legal standing with regard to the issues covered but it does have a bearing on the legal documents, including articles of incorporation, buy–sell agreements, and so on, that support the family’s intentions and goodwill as set out in its family constitution. The principal articles contained in family constitutions typically deal with the following topics:

  1. Mission and vision.
    The family’s vision and the nature of its commitment to the firm and its continuity are presented in the first article.
  2. Values.
    The family values that have successfully guided the firm in its relations with customers, employees, suppliers, partners, competitors, and the community are detailed.
  3. Family brand.
    This article guides family members in its owner–firm visibility, the use of the family name, relations with the government, traditional and social media. The desired behavior of the family toward its enterprises and their management is spelled out—what behavior is expected of family members who are in management and what family members need to be aware of in order to protect the company’s and the family’s reputation.
  4. Employment policy.
    The requirements family members need to meet in order to be considered for employment are enumerated. These are often segmented into requirements for employment in management posts, requirements for internships, and requirements for lower-level positions. Requirements for management posts often include an undergraduate degree plus five years of work experience outside the family business or three years plus an MBA. This policy may also spell out whether in-laws qualify for employment or are prohibited from becoming company employees.
  5. Next-generation family-member development.
    This policy sets out the commitment and procedures guiding the education and professional development of next-generation members. It often also defines the level of financial support available for the college and graduate education of next-generation family members.
  6. Ownership policy.
    Stock ownership, classes of stock, and ownership transfer policies are defined. Business-valuation processes are often spelled out. Buy–sell agreements in existence are discussed. Voting and shareholder representation on the board and other entities may be acknowledged. Legal documents governing transactions of any kind are listed and their authority is recognized.
  7. Family bank and/or family venture capital fund.
    Special funds allocated to sponsor the development of new ventures or new initiatives by members of the family are discussed and the overall terms of use of these funds are explained.
  8. Dividends and family benefits policy.
    This section of the constitution educates and guides shareholders on the expectations for returns on invested capital. It discloses reinvestment requirements. It may also, if the family has agreed to it, set a ratio of reinvestment to distribution of shareholder returns. Policies related to risk and risk management, including debt-to-capital ratios, may also be discussed here.
  9. Liquidity policy.
    This article discusses business valuation, buy–sell agreements in force, redemption funds, if any, and their use in wealth-creating events.
  10. The board of directors or advisory board.
    Its make-up, standing, authority, and relation to management, shareholders, and other entities are discussed. Its primary functions and operating procedures are disclosed.
  11. Family council meetings.
    Their purpose, primary functions and relation to the board and shareholder meetings are discussed. Membership and its standing and operating procedures are discussed.
  12. Shareholder meetings.
    Their role is discussed, as are their authority and legal standing. Their relation to the board and the family council is also discussed.

Make sure to act when you have the time instead when it is needed!

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