International family governance

  • Author : Barbara Hauser
  • Date : June 2010
ABOUT THE AUTHOR: Barbara Hauser TEP is an Independent Family Advisor

Very wealthy families are focused on preparing their own family ‘constitutions’ and advisors can provide valuable guidance and drafting assistance. Following is an innovative proposal for a ‘two-tier’ approach.

Why are family constitutions so important?

The three-generation cycle of failure is well-known. The primary cause of failure in wealthy families is the harm caused by internal family conflict. The best preventive measure for a family is to work on its internal family governance (its decision-making process). Countries write constitutions about how decisions will be made. Wealthy families are also writing family constitutions.

What is usually included in a family constitution?

A family constitution is as unique as the family who has prepared it. The names even vary: constitution, protocol, code of conduct, etc. Following is a list of the subjects that are often included.

1. The preamble

Nearly all constitutions in the world begin with a ‘preamble’ – a statement about why they are forming a constitution. The core idea is that a certain group is coming together to decide on the rules by which they will make decisions. That is the essence of a governance system.

The family needs to explain to its members why this seems important to do. This is extremely important, as it contains the reasons for engaging in family governance. To be successful, in my experience, the beginning of the project must have the full support of all of the ‘key’ family members and they must agree about why they are doing this.

2. The family history

This section is of course very personal to the family. The importance of family history cannot be emphasised too much – in the end it is what will hold the family together. The pride of being part of the family will be the shared ‘glue’ among all the members.

3. Core values of the family

Many families like to reach some agreement on their key values as a family. The risk, however, is often that very general values will be listed (such as ‘respect’ and ‘support’) without providing much guidance in the context of practical situations.

4. Formation of a family council

In governance terms, the family council is the representative body of family members. The term ‘family council’ has become a standard description. (It would be like a parliament, congress, diet, etc).

5. Membership
Initial membership

This is one of the first issues to come up: who will be part of the representative group? Questions include: are spouses included? Should children be included?

Selection process of successors

At some point, there will have to be a method to use to choose successor members of the family council. Should there continue to be a balanced membership by branches of the family? By generations?

6. Role and responsibilities
Subjects addressed by the family council

A very early discussion should take place to decide which issues should be addressed by the family council.

Subjects reserved for individuals

In any government system it is important to distinguish between areas that are left to individuals to decide, and those in which the broader family has a legitimate interest.

Voting rights

Representative by generation or by branches? This will depend entirely on the family, but it is helpful to clarify how voting rights will work.

Consensus goal

As a practical matter, a successfully governed family does not use the formal voting mechanism. All decisions will be by consensus.

7. Creation of supporting groups

A very important role of the family council is the creation of additional groups, to cover many different issues, and (more importantly, I think) to include family participation to the largest extent possible. Including younger family members will strengthen the commitment of the next generation, which is so critical to future success.

8. Operation of a family council
Timing and location of meetings

Often a family council will decide to meet on a quarterly basis. The location could vary from one of the homes, a resort location or a business boardroom.

Leadership selection

Someone will need to be responsible for leading the meetings. This could be by election, nomination, or rotation.

Formal minutes of resolutions

It is important to record in writing the various resolutions of the family council, to promote reliability and transparency.

Reports to the expanded family group

With the resolutions in writing, it is also a good practice to communicate them to the expanded family group. The more open the communication, the less likely the build-up of suspicion and resentment, which are so often the cause of friction among the family members.

Receipt and review of requests from expanded family group

Most governments provide a method for petitions of issues to be addressed. The family council would be a good choice to receive such petitions.

9. Sub-groups of the family council
Standing committees

There may be some issues that always arise, and could benefit from a permanent committee (appointed by the family council) to handle those issues.

Ad Hoc committees

There could also be some issues that arise occasionally, which could be addressed by an Ad Hoc committee. One example is the celebration of a particular anniversary event for the family or the family business.

‘Junior’ boards

One ‘best practice’ method in larger families is to create a junior board, for participation by the next generation. This can provide education, training and give an important sense of participation.

10. Relationship with the family business
A family ‘liaison’ group: between the family and the business

If there is an active family business, the family governance structure can provide an excellent liaison to the governance structure of the family business. This can keep the owners informed and involved. This can provide a way to give the family input to the business.

Creating conditions for working in the family business

If there is an active family business, a common issue is whether there should be requirements for a family member to meet prior to being able to work in the business. Common requirements include attaining a certain educational degree, or experience in working in another business.

Coordinating the family governance and the business governance

If there is a board of directors for the business, the family council can coordinate communication between the two groups.

Restrictions on the transfer of shares of the family business

Another common concern is whether gifts or sales of any of the shares should be allowed. It is often possible to restrict the ownership of family businesses to family members.

11. Rules governing the use of family assets (eg homes, farms or aircraft)

Almost everywhere in the world, there are some shared family assets that cause conflict among the family about their use. This is an excellent topic to be addressed by the family council.

12. Family philanthropic/charity projects

In addition to operating businesses, many families are quite active in philanthropy. The family council could appoint a permanent group to oversee the family’s charitable activities.

13. Family educational programmes

When families are focusing on the long-term success and continuation of the family (and of the family business, in many cases), they often focus on the education of all of the family. Many families work to develop family education programmes to ensure that the future generations will have the capacity to wisely and effectively participate in the continuation of the family’s ventures.

14. Family venture funds

Another area that many families address is the creation of a family fund that is available to invest in a family member’s new venture. This is to promote a spirit of entrepreneurship, in a way that involves oversight (and participation) by a larger group of the family.

15. Full family gatherings

To encourage communication and pride in being part of the larger family, many families engage in a full family gathering on a regular basis. These are often once a year, and may include times devoted to the history of the family, to celebrations of family achievements or to learning from invited speakers.

16. Conflict resolution

The final area to address is how conflict will be addressed by the family council.

17. Procedures to amend the family constitution

Finally, it is very important that the family treats its family constitution as something that grows and develops along with the family. This is not a document that is ‘written in stone’ and which rigidly imposes requirements on future generations. Those who participate in its formation and amendments will follow it because they want to follow it. In this way it truly becomes a family constitution, by and for that family.

The innovative ‘two-tier’ proposal

Now that the list of subjects has been laid out, let us consider country constitutions once more. In country constitutions the initial focus is on establishing the procedures for making legislation, and not on the legislation itself.

Accordingly, I would argue that a classic family constitution should be limited to establishing the actual family decision-making process. The practical decisions that are made, using that decision-making process, can be a ‘second tier’ of resolutions that have been adopted.

Tier one

Under a two-tier system, the first tier would include the provisions relating to the creation of the constitution (preamble, history and values) and the formation of the family council (role, selection and operation). These all relate to how decisions will be made in the family. This tier one would be the actual family constitution.

Tier two

The second tier would include the actual decisions that are made, such as: the conditions in order to work in the business; restrictions on the transfer of shares; rules governing the use of family assets; the operation of family philanthropic/charity projects; the establishment of family educational programmes and family venture funds.

Benefits of a two-tier system

With a two-tier system, the family (and advisors) would pay very careful attention to tier one: the decision-making process. (If there are family trusts, it may be appropriate to attach this tier as an exhibit, to provide guidance to the trustees as to the wishes of the family).

The expectation would be that tier one would not be changed on a frequent basis (although the article about amendments would remain a crucial part of tier one).

The second tier becomes a compendium of the decisions made by the family (or family council) over time. These can be ad hoc issues, or issues that might need changes and updates on a frequent basis. They correspond to acts of legislation by countries.

Families who adopt a two-tier constitution will be among the strongest lasting families!


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