“That’s what you are,” I was accused recently by a next generation family member during a discussion about family constitutions. “You’re infatuated with formality.”

“And another thing,” the client continued, “we have an unwritten constitution anyway. The family support what we’re trying to do with the business and we have a way of making decisions that we’re all willing to accept.  You call it a decision-making structure. We call it mum and dad, and later on some or all of us will take over from them. It’s been agreed that only direct family can become shareholders and equal ownership is fine with me.  So what’s the problem?”

She is right; this is a family constitution.

  • There is a set of goals that motivate the family to remain in business together. The family all support what they are trying to do with the business.
  • There is a decision making structure – mum and dad – and the family believe that leadership succession will be agreed with a minimum of fuss; some or all will take over from them.
  • The key stakeholders are all willing to accept these arrangements so there is little risk of conflict.
  • Future ownership is sorted.

It is always difficult for an adviser to resist responding to the ‘what’s the problem?’ question.  It would be possible, for example, to itemise weakness in this constitution that might cause future havoc and distress, but, really, how helpful would that be?

This constitution has the advantages of adaptability and resilience to help the family cope with whatever changes happen to them and their business.  As long as everyone truly gets it, is willing to play by these informal understandings and knows their current and future roles, then there is a good enough family constitution.

Afterwards, as often happens, I thought of something that I should have said.  It isn’t really an unwritten constitution; it is partly written and partly unwritten.

The company’s constitutional documents will be written and presumably family members, or at least the seniors, will have wills in place. Maybe there is a trust somewhere. One hopes that whoever created these documents joined the dots so that shares only go to bloodline and not, for example, to spouses through a will or a trust. Any change to the rule on bloodline ownership would need to be followed through in these documents, so parts of the constitution are written.

When we say ‘unwritten’ we probably mean, ‘uncodified’. The United Kingdom constitution is like this family.  It is partly made up of written laws and unwritten customs and practices.  However, it is not codified, as is the case in other countries whose constitutions are contained in a single document that has supremacy over other law.

In the family business world we should use the term natural constitution to describe the partly written, partly unwritten version that many family firms thrive on.  This acknowledges that the unwritten set of understandings, assumptions and expectations about how we do things in this family and this business are as vital to overall success as the formal parts that are written down somewhere.

It also begs the question, when, if ever, might a family want to codify their constitution in a single document?

Codification of a country’s constitution is often the consequence of upheaval and dramatic change, maybe even a revolution. If a family ever feels that the scale of change in their family and their business might overwhelm the natural constitution, then it is time to consider codification.

This might be due to the business and/or the family becoming bigger and more complex, so that the natural constitution is creaking and there is a risk of mis-understandings, mistaken assumptions and unfulfilled expectations.

But then it is vital to know which the parts of the natural constitution work fine and don’t need to be changed. Families should always be careful not to allow advisers to sacrifice the successful parts of a natural constitution for a supposedly better codified version.

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