ADV I S E R S F O R U M
A constitution is
a tool to preserve
a family’s legacy
BY FREDERICK D. LIPMAN
AND LINSEY B. BOZZELLI
A
and their businesses grow over
multiple generations, the number of individuals involved in a family business
naturally increases, family members’ expectations regarding the business may diverge
and related conflicts may arise. An important way to
manage and deal with these types of contingencies is by
creating a document commonly called a Family Business
Constitution.
Although constitutions are often written about and
discussed by family business advisers, few family business owners have taken advantage of this useful tool.
However, those families who have created and implemented a constitution have found the document to be
instrumental in preserving the legacy of the business and
helping to sustain the enterprise for future generations.
Professor John Ward, co-director of the Center for
Family Enterprises at the Kellogg School of Management
and author of several leading books on continuity in family businesses, describes a family business constitution
as “a comprehensive articulation of philosophy, principles and policies for the future that balances and synthesizes the welfare of family, owners and the business,
[and] is among the most important steps a business-owning family can take to secure and strengthen its business
and, most preciously, its family” (Daniela Montemerlo
and John L. Ward, The Family Constitution: Agreements
Lipman-Bozelli reprinr.indd 28
S FAMILIES
to Secure and Perpetuate Your Family and Your Business,
2005). A constitution also engenders pride in the family
and its business by connecting past, present and future
generations with each other.
Purpose and form
Depending on the particular family, its business, its stage
of development and the family members’ desires, a constitution can take many forms. It can be either a short
document or a very long and complex one. Traditionally,
a constitution serves the following main purposes:
1. It documents the mission, values, philosophy and
principles that govern the family and its business, including the struggles of past generations.
2. It outlines the business’s strategy and its long- and
short-term goals.
3. It defines dispute resolution processes to deal with
potential conflicts affecting the business and the family.
4. It defines the roles, composition and powers of
key governing and other constituencies of the business,
including key management, directors, shareholders and
family members.
A constitution is typically a formal, written document
(or set of documents) that is reviewed, acknowledged and
signed by all family members involved in the business.
However, it is generally not a legally binding agreement.
Rather, it is a statement of principles and guidelines for
the business and the family members’ relationship with
the business. In effect, a constitution creates a moral
obligation among the family as relates to the business.
Being morally bound in this way signifies the commitment of each family member to preserve the family’s
legacy and grow the family business for the benefit of
future generations.
Despite not being legally binding itself, the constitution could include or refer to other legally binding documents. For example, the constitution may suggest that
each family member be a party to (if applicable) premarital agreements, employment contracts, shareholders’
and buy-sell agreements and estate planning documents.
The constitution is not intended to alter the provisions of
existing governing documents that provide for the legal
structure and governance of the company (e.g., certificate or articles of incorporation and bylaws)—and this
should be noted in the text of the constitution.
The process of creating a constitution is a helpful exercise for a family business.
It forces the involved famFrederick D. Lipman
ily members to discuss and
and Linsey B. Bozzelli
define their shared vision
are partners in the
and come to a common
Philadelphia office of
understanding as to how
Blank Rome LLP. Lipman
to document this vision, as
is also the author of The
well as any other matters
Family Business Guide
addressed in the constitu(Palgrave Macmillan, 2010).
tion. Again, depending on
4/11/12 2:33:51 PM
the family, its business and the management and gov8. Guidelines relating to retirement, including retireernance structure, this process may be very simple or ment age and other matters.
9. Stock buy-sell processes and policies (including
very complex. For this reason, most families choose to
detail
as to certain triggers, such as death, disability and
engage an objective outside adviser with experience in
termination
of a shareholder).
creating family business constitutions to lead and drive
10.
Guidelines
relating to the sale of the business or
the process and, in some instances, to serve as a referee.
other
exit
strategies.
Regardless, in most instances, it takes a family several
11. Policies relating to premarimonths to create a workable business
tal
agreements and estate-planning
constitution that all involved parties
A
family
business
matters.
are willing to sign.
12. Policies regarding the proviconstitution creates a
Specific provisions
sion of family financial support.
moral obligation among
13. Policies regarding ownership
The specific provisions of a constituand
management by non-family
tion are unique to the family and the
the family as relates to
members.
business, but a constitution usually
the business.
14. Procedures for amendment of
begins with a statement or preamble
the
constitution.
relating to the mission, values, stratAs
is
likely
evident,
any of these matters could be
egy and philosophy of the business as well as statements
addressed
very
simply
or
with much complexity.
describing applicable history, life experiences and tradiIt
is
important
that
any
constitution be considered a
tions. The remainder of the constitution then lays out
working,
flexible
document
capable of moving with the
rules and regulations to be used to govern how future
times.
It
should
be
regularly
reviewed and updated to
generations should run the business and treat each other.
ensure
that
it
remains
relevant
and to reflect any changes
These rules and regulations can cover any number of
that
time
and
circumstances
necessitate.
However, the
matters, including the following:
constitution
should
also
make
clear
that
any changes
1. Composition and rules of conduct for the governing
made
to
the
document
should
be
consistent
with the
bodies of the business (which commonly include a traintent
and
goals
set
out
in
the
constitution.
ditional board of directors as well as a separate advisory
council made up of only family members).
A family business priority
2. Leadership and succession plans.
3. The hiring, compensation, evaluation and termina- A family constitution has been shown to be an importion of employees who are family members.
tant tool in preserving and honoring the legacy of a fam4. The identification, development, training, appoint- ily business for future generations while also defining
ment, evaluation and termination of management and the strategies and goals of the business. It also serves to
members of governing bodies.
engender pride and engagement in the strengths, tal5. Policies relating to communications and disclosures ents and sacrifices involved in the formation and growth
between the business and family members.
of the business. While a constitution may not prevent
6. Processes and procedures relating to the resolution conflicts, it can establish a way to manage and resolve
of disputes among family members.
them, as well as a way to define the roles of individuals
7. The rights and obligations of shareholders and provi- involved in the business. Each family business should
sions relating to stock ownership, including benefits avail- treat the creation and implementation of a constitution
FB
able to family shareholders not active in the business.
as a high priority.
Q
Reprinted from Family Business Magazine® March/April 2012
© Family Business Publishing Company • 1845 Walnut Street, Suite 900 • Philadelphia, PA 19103-4710
(215) 567-3200 • www.familybusinessmagazine.com
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