What is family governance?
Effective governance is critical to the success of families in business, particularly for enhancing and preserving generational wealth. Family businesses survive and thrive on the harmony and collaboration of family members, and often have a level of intimacy among members not found in a typical company. Effective family governance enables productive and rational economic decision making, and helps the family govern both the enterprises they own and their wealth. To fulfil this mission, family governance systems should be linked to the heritage and values which families have built their wealth and prosperity upon, and should serve as an anchor for preserving the family’s identity.
A family constitution can assist by capturing the family’s vision and values. A family constitution governs the relationship between family members and other stakeholders, making explicit the policies that various stakeholders should follow in their dealings with one another. While family constitutions are a recent addition to New Zealand’s family governance landscape, they present an important tool for preserving values and growing a family’s wealth.
What do family constitutions address?
A family constitution sets out the principles and governance protocols that enable the efficient and successful operation of a family venture or office. The family constitution, by its nature, is designed to interact and interlink with the current and proposed legal structures (such as companies, foundations and trusts) of a family business, often addressing the areas that are of key concern to the family’s heritage and values.
Typically, a family constitution addresses governance, ownership, and employment.
While there are a variety of formal means for adopting corporate governance practices and principles (such as through shareholders’ agreements, trust documents and distribution policies), these do not typically capture the bespoke requirements and characteristics of a family’s dynamic. Often, such formal documents do not adequately address the differing attitudes that family members have with the family business, or the presence of other non-family stakeholders in the business. Family constitutions detail governance arrangements by establishing the principles that family members and other stakeholders must adhere to, at a bespoke level.
The governance protocols established by a family constitution can play a critical role in the management of family affairs, and may include:
- who can be a board member;
- the requirement for, and the frequency of, family meetings;
- funding of family meetings;
- the strategic goals for the family business (particularly for future growth, debt, etc.);
- how professional advisers may be selected and engaged; and
- the selection process is for successors.
Transferring ownership of the family business is often an issue that many families agonise over. Implementing a family constitution smooths this process by putting in place a clear plan for the transfer of power and addressing conditions for future ownership and voting rights. In the interim period, the development of a family constitution can have the benefit of establishing family buy-in by involving both older and younger generations in the process. This involvement can reduce the potential for tension and conflict in the interim period as older and younger generations attempt to co-exist. A family constitution can address:
- what the conditions are for ownership and voting rights;
- what dividend policies are to be put in place;
- the business valuation methodology that will be used; and
- the nature of estate plan communications, co-ordination, and agreements.
A family constitution is also useful for clarifying and enhancing dispute resolution mechanisms and how to handle relationship breakdowns, which mechanisms may serve as a driving factor for establishing a family constitution. The family wealth dynamic is often complex, and how disputes are resolved takes careful consideration. Having a process in place to ensure that disagreements and disputes are handled in an effective manner is essential for ensuring the longevity of the family business.
Employment in the family venture
Finally, a family constitution is a valuable means of setting out the criteria for employment in the family office or business. The family constitution, with its inherent flexibility, can address:
- what qualifications are necessary to be employed by the business;
- what reporting relationships will be established;
- how employees will be compensated;
- how performance will be reviewed;
- what titles employees will be given;
- what severance packages will be available; and
- what retirement policies are in place.
Establishing a family constitution
The process for establishing and maintaining a family constitution is collaborative. Regardless of the form the end document takes, the process of establishing the family constitution is often what families find most valuable. It should be remembered that although family constitutions are not typically binding, and are more akin to a statement of intent, the process of developing the family constitution may lead to legally binding documents (such as shareholders’ agreements) being enacted to better define the desired structures. Therefore, it is important that the family constitution works seamlessly with other key documents (such as wills, company constitutions and trust deeds) to achieve the desired outcomes. Regular review of the family constitution will help deliver the most valuable outcomes for families.
Family constitutions are typically developed in three stages:
The initial stage of development involves identifying the values and needs that are personal to the family. This involves considering whether a family constitution is appropriate and identifying the initial ingredients which will drive the design process for the family constitution. Often, the most senior members of the family will participate in smaller group meetings or individual meetings with advisers to ensure personal views are tabled, with more junior family members being included at the design stage.
The next stage involves a review of the family’s key priorities. During this stage, parties will discuss implementation options, and consider whether any areas have been overlooked. Input from professional advisers will often drive discussion and help formulate a family constitution that considers the complexities unique to the family.
Facilitated workshops are valuable at this stage of development and may be held as a one-off retreat or across several months. Ultimately, this stage will depend on the preference of the family.
The final stage involves drafting and finalising the documentation and considering whether any pre-existing documentation concerning the business or family structures should be amended. In some instances, substantial changes to pre-existing structures will be desired by families, and such changes can take months or even years to complete. The complexity of the new arrangement will be decided by the family’s approach to protecting, preserving, and enhancing the family wealth and values.
If you have any questions about family constitutions, or family governance more generally, please contact one of our experts.
This article was authored by Brayden Print, a Solicitor in our Corporate and Commercial team.
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