What goes in a family constitution

A family constitution is the family’s written agreement with itself: who we are, what we’re trying to do together, and how we’ll make decisions along the way. Families also call it a charter, a protocol or a creed. The name matters less than the conversations it forces.

What it is, and what it isn’t

A family constitution sets out the family’s vision and values, and the rights, responsibilities and rules that apply to the people who own, run or benefit from the family enterprise. It says what the enterprise is for and how the family plans to get there. A good one also covers continuity: what happens when the unlikely but serious thing happens.

It is not legally binding. The documents that bind are the shareholders’ agreement, the company constitution, trust deeds and wills. The family constitution sits above them as a statement of intent, and it should be consistent with them. Where the constitution sets an expectation with legal consequences, such as prenuptial agreements or the price at which a relative can be bought out, the binding version has to be drafted by your lawyers in the documents that carry legal force. Rules on this differ by country and by religious and family law, so take the questions to advisers where your family lives.

So why write one? Because the binding documents say what can be enforced, not what the family meant. The best family constitutions often become a storytelling device for each generation, recording the family’s ways and showing a new member what it means to belong and contribute. A cookie-cutter legal template can’t do that.

If your family lives under more than one kind of law

This Program is written in the tradition most English-language family governance writing comes from, where shares, trusts and wills do most of the work. Many business families live elsewhere, or across several places, and four ideas change what a constitution can promise. Know their names, so you can ask about them.

• Civil-law family protocols. In much of continental Europe and Latin America the family’s equivalent of a constitution is often called a family protocol (the Spanish protocolo familiar is the best-known example). In some countries parts of a protocol can be formalised or registered and gain a legal standing a constitution written in the common-law tradition doesn’t have. Ask: “Is there a local form of family protocol here, and which parts of ours, if any, should take that form?”
• Forced heirship. In many civil-law countries the law fixes a share of an estate that must go to children, and sometimes a spouse, whatever the will says. A clause about how shares pass may simply not be possible as written. Ask: “Does a reserved share for children or a spouse apply to any of us, and which of our ownership intentions does it limit?”
• Religious inheritance law. For some families, religious law (Islamic inheritance rules are the best-known example) sets who inherits and in what proportions, either because the state applies it or because the family chooses to follow it. Ask: “Does religious law apply to any of our estates by law or by our own choice, and how do our constitution and our wills sit alongside it?”
• Matrimonial property regimes. In many countries a marriage brings a default regime for what a couple owns together, which a couple can sometimes choose or change when they marry. This is where a prenuptial agreement’s work is often done. Ask: “What regime applies to each married member, and what does it mean for shares or trust interests they hold or will receive?”

None of this needs to be settled in the first draft. Write the family’s intentions in plain words, mark the clauses about ownership, marriage and inheritance for your advisers, and ask a lawyer in each country where a member lives or holds assets to map the draft onto local law. The constitution builder’s cover note says the same.

Write the rules before anyone needs them

The single most useful principle is to agree policies while they are still abstract. Spencer Burke, who advises families at a multi-family office in St Louis, heard it from one family:

“But this one family had told me the key, Spencer, is set the policies for the future when there are no names attached to them.” (Spencer Burke, [00:25:27])

Whether family members can work in the business, whether spouses can own shares, what happens if a marriage ends: these are far easier to settle while the young people they’ll apply to are at primary school. Wait until a particular son-in-law is at the door, and every rule looks like a judgement on him.

What a constitution usually covers

Philip Marcovici’s book The Destructive Power of Family Wealth has one of the most thorough and well thought out lists of what a constitution can contain, and I recommend it. The areas below draw on it.

• Where the family comes from. The origins of the family and the enterprise, and the values of the founders, usually as a preamble.
• What the family is trying to achieve. Its mission and vision for the family, the business, its employees and the community. This is also the place for the family’s views on philanthropy and responsible investment.
• Who counts as family. Spouses, stepchildren, adopted children, children born by surrogacy, partners who aren’t married. Settle this before a specific case arises, because it can be emotional and divisive.
• How the family governs itself. Usually a family council: who sits on it, how they’re chosen and replaced, and how decisions are made, including what happens when there’s a split vote.
• Ownership versus stewardship. Whether the next generation are owners free to do as they like, or custodians holding assets for generations not yet born.
• Education and employment. What education the family will fund, whether a certain level of education is needed to join the council or the business, and the conditions for family members who want to work in the enterprise.
• Pay for family members in the business. A thorny one. If one sibling runs the business full time and another owns an equal share while pursuing another career, how is the first one paid? The example I use is a daughter running the business full time while her brother, a doctor, owns half. A common starting point is market-rate pay for the job, kept separate from dividends for the shares.
• Marriage and trusts. The family’s expectations about prenuptial agreements and trust arrangements, and whether these are a condition of inheriting. The constitution states the expectation; the legal documents carry it out.
• Shared assets and expenses. Who can use the holiday house, the boat or the ski chalet, when, and who pays.
• Backing family ventures. Whether the family’s capital can support a family member’s new venture, on what terms, and whether that venture may compete with the family business.
• Pruning and harvesting. How a family member who wants out can be bought out, and at what price. When the family would consider selling a business and reinvesting the proceeds.
• Family gatherings and mentors. How often the wider family meets, and whether the rising generation is given mentors from outside the family.
• Legacy. What legacy means to this family, while leaving room for each member to pursue their own goals.

The constitution template in this program follows this ground in eleven sections, one per module, so you can draft a section as you finish each module.

Start with story, not legal text

If I were starting from scratch, I wouldn’t begin with a template. I’d begin by getting the founder or elders to tell the family story, the ups and downs of getting started, what went well and what didn’t, and what they hope for the future. Record it as an interview using the Life Interview (Module 2), ask them to write it down, or start a family book.

Telling their story gives the first generation a stake in the process from day one. And the family’s values, vision and mission tend to show up in the stories on their own, so you’re writing down what’s already there rather than inventing it in a meeting room.

Jonathan Goldhill, a fourth-generation member of a large clothing manufacturing family, suggests:

“And in that constitution, while we’re naming secretaries and treasurers and things like that, why not name a historian who really likes that?” (Jonathan Goldhill, [00:11:25])

Capturing a little history each year, he points out, is far easier than reconstructing thirty years later.

Keep it alive

A constitution is a living document. Review it at the family AGM (Module 9), add policies as circumstances change, and keep a record of what changed and why. Juan Carlos Salame’s family in Ecuador wrote its protocol about fifteen years before he spoke to me. It begins with the family’s values and covers how the board works and how new family members and in-laws can join the business. He’s honest that it’s due for a review:

“We have the protocol, but as I told you, the protocol is 15 years ago.” (Juan Carlos Salame, [00:28:14])

Having something written is the first step. Revisiting it is the next.

Try this as a family

Who: the adults who will sign off the constitution, plus at least one member of the rising generation. How long: two hours for a first session. How: take two policies from the list above that are likely to matter within ten years. For each, write the rule without anyone’s name in it. Then test it against every person it could apply to. First question to ask: “Which decision is our family currently making about a specific person that should really be a policy?”

For your constitution

Open the constitution builder and work through section 3: who counts as family, the family council, and how decisions are made. You choose from options, each with the reasons families choose it, and the builder writes the clauses in plain words. If your family has more than one person taking part, each of you chooses separately and the builder shows where you agree. Then note which of the other ten sections feel most urgent for your family. The paper template in the worksheets does the same job if you’d rather work on paper. When a section is drafted, the Constitution to shareholders’ agreement crosswalk worksheet checks it against the shareholders’ agreement, trust deeds, wills and other documents that actually bind.

Listen

• Spencer Burke: How a corporate finance lens treats family ownership as something to be explained and designed early, including the “policies with no names attached” rule. Spencer Burke - The St Louis Trust Company Multi-Family Office
• Juan Carlos Salame: How a family kept a written protocol, a board and weekly conversations working together through a slow handover. Juan Carlos Salame - Scaling a Third Generation Ecuadorian Retailer & Credit Provider
• Rob Robson: How the Robsons run the family as its own enterprise, with a constitution and a quarterly family partnership meeting. Rob Robson – Building & Operating the Business of Family
• Jim and Paul Warner: Why modelling comes before any constitution. Jim & Paul Warner - Successfully Navigating Multi-Generational Family Dynamics

If you’d like help with this, Enterprising Families works with families on it.