Wednesday, July 19, 2017

The Family Constitution

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman 


Hello and welcome back to our Family Business Blog, where we’re starting to wrap up our discussion of effective “Stage 3 Planning” strategies. This week we’re taking a look at Family Constitutions and how they can help strengthen family bonds.

While attorneys and other advisors often prepare a buy-sell agreement as part of traditional “Stage 1” and “Stage 2 Planning,” for their family business clients, consultants who assist with “Stage 3 Planning” traditionally help their clients prepare a repository for its core principles, plans and policies, often referred to as a “Family Constitution.”[1]

Best-selling author Stephen R. Covey, who wrote The 7 Habits of Highly Effective Families, describes a family constitution as “the literal constitution of your family life,” which “can be the foundational document that will unify and hold your family together for decades—even generations—to come.”

The process of preparing a Family Constitution and its component parts (i.e. the Core Principles, Plans and Policies that make up “Stage 3 Planning”) can be a valuable experience that contributes to building shared understandings and family bonds.  Moreover, having access to key agreements in a single document that can be referenced as needed can help create and nurture a sense of fairness, and, in turn, harmony. While every family can decide for itself, most families who create family constitutions do not intend the document to have legal consequences; they are, however, intended to be “morally enforceable” and become a meaningful piece of a family’s culture.

 One legal scholar, noting the increasing use of family constitutions as a “prescribed remedy for the high failure rate of family businesses,” observes that “[s]uccessful families are bound together more by strong values and purpose than by shared business ownership. Shared values [and mission] are the glue that keeps family businesses going across generations.” [2]

 Next week we’re finishing our discussion of “Stage 3 planning” by discussing their limits, before moving on to “Stage 4 planning.”

[1] Stephen R. Covey, The 7 Habits of Highly Effective Families 102 (1997).  Referring to the family’s repository as a “constitution” as opposed to a mere “agreement” serves as an expression of the family’s commitment to certain fundamental values, from generation to generation. See Kelin E. Gersick & Neus Feliu, Governing the Family Enterprise: Practices, Performance and Research, in The SAGE Handbook of Family Business 211, 212 (Leif Melin et al. eds., 2014) (“The recent increase in interest in family constitutions may be in response to the maturation of a large cohort of entrepreneurial post-World War II nuclear families through sibling and multi-generational partnerships to complex, geographically-dispersed family networks.”).

[2] McClain, supra note 62, at 866. For more information, see generally Daniela Montemerlo & John L. Ward, The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business (2010).

Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to “Stage 4 Planning” Strategies, 65 Buff. L. Rev.,  May, 2017

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