PRIVATE WEALTH M A N A G E M E N T

BY BARBARA R. HAUSER

Family Constitutions:
Report (and Recommendation) from the Field
Wealthy families are increasingly interested in family constitutions and view them as important tools for family preservation. Advisers can be very helpful in providing resources to these families if they know what family constitutions are and the purposes that they can serve.

ealthy families who want to stay together should seriously consider working on a family constitution, and advisers can be very helpful in providing resources to these families. Based on the following observations from the field, wealthy families are increasingly interested in family constitutions. In New York City recently, a select group of wealthy families were asked, Do you have a family constitution? The answer was no. In May in Lahore, Pakistan, a select group of leading family businesses held a special event on the importance of family constitutions. In Saudi Arabia and Dubai, some prominent families are working hard on developing their own family constitutions (as a one- to two-year project). In Istanbul in January, at the annual International Corporate Governance Summit, the focus was family businesses and best practices (including family constitutions) for implementing strong governance. In Asia, families are beginning to turn to family constitutions as a tool to keep the family (and family business) together, adapting a Western concept into their own close family systems. British private client lawyers gathering in Monaco in May showed interest in adding legal provisions (such as prenuptial requirements) into family constitutions. Why is there such a growing interest in family constitutions around the world? What is a family constitution, and what is its purpose? How can advisers help families in the process of creating a family constitution?

INCREASE IN INTEREST IN FAMILY CONSTITUTIONS

First, why the increasing interest? Families are increasingly aware of the harm caused by internal conflict in times of generational transition. The oft-repeated proverb of shirtsleeves to shirtsleeves in three generations resonates with families around the globe. (See Jay Hughess classic book, Family Wealth: Keeping It in the Family, and his recent one, Family: The Compact among Generations.) Motivated families are seeking information about global best practices to prevent that destructive family conflict. Because of the demographics, the Arab Gulf States in particular are poised for a generational change that will make or break the continuing success of the large families and large family businesses (which make up more than 90 percent of the economy). The coming transitionfrom a typical revered patriarchfounder who is not used to receiving challenges by family members to one or more siblings who may not have the full support of all of their siblingsis by its nature very difficult to talk about, but in the silence, the seeds of disruption grow even more. I am impressed by the high priority given to keeping families close in this region.

DEFINITION OF A FAMILY CONSTITUTION

What is a family constitution, and how does it help combat the application of the failure in three generations proverb?

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When a family decides to create its own family governance, it should begin with a family constitution. I often ask families to view their family as a small country and to ask themselves what rules they would make and how they would make them. Families use various terms to describe a family constitution: charter, mission, rule book, code of conduct, and so on. I promote using the word constitution to keep the connection with country governance (in which constitutions have been used since the time of ancient Greece). Note that this process begins with a commitment by family members to see their identity as part of a group (the family) as a high priority for each of them. In other words, they must want to stay together as a family. If this is not a high priority, they will not have the necessary motivation to work on a system of governance. In the United States, families are also generally smaller and more widely dispersed than in many other countries, and many of the large family businesses have become public companies. As a result, there is relatively less interest in family cohesion, and families who do stay together focus more on family office and wealth management issues than on family governance. A family constitution should be the core set of rules about (1) what kind of decisions family members will make to apply to the family and (2) how they will make those decisions. Families might also want to agree on certain areas where the family will not interfere because those areas are kept as individual freedoms (such as in the Bill of Rights in the U.S. Constitution). Some family constitutions are more than 50 pages long. Some families delegate the wording entirely to a consultant or a lawyer. Some firms are even selling family constitutions in book form. Family constitutions are most successful when the family does the work (with the guidance of an experienced adviser) and has the hard discussions about (1) what kinds of rules there will be (and whether everyone will follow them) and (2) how those rules will be made (and changed). As John Ward has consistently argued, it is the process of going through these difficult discussions and reaching agreement that gives the family the true value of a family constitution. (See his books The Family Constitution: Agreements to Secure and Perpetuate Your Family Business and Unconventional Wisdom: Counterintuitive Insights for Family Business Success.)

With regard to Asian families, Christian Stewart, a colleague based in Hong Kong, was quoted in the New York Times (28 March 2011, Business Dynasties Need to Plan for the Delicate Task of Succession) as recommending that Asian families begin with the governance project of writing a family constitution: A family constitution formalizes the rules about who is in the family council, how the council makes decisions, and how it votes. The key thing about this is having a fair process for the family members to make decisions together, Mr. Stewart said. Its all about joint-decision making. If the actual constitution focuses on the two areas I propose, then specific decisions about family policy will carry similar weight, like resolutions passed by a countrys parliament or bills passed by a countrys congress do.

ELEMENTS OF A GOVERNANCE FAMILY CONSTITUTION

The very first decision, of course, is who will be at the table to work on the family constitution. That group, who will represent the larger family, will act in the role of a family council (even if a different name is used). Making this decision is not usually a very time-consuming process, although the process for selecting future members (e.g., whether the representation should be by branches and/or generations) might be. In some cultures, it is assumed that spouses (or sisters) might not be included, but I have found those assumptions to be changing. When the family council is in place, members can begin working on the constitution. My advice is that the first section of the constitution should begin where country constitutions beginwith a preamble stating the purpose. It is very important for family members to discuss together why they want to form a set of rules that they will agree to follow. After the purpose of the constitution come the familys rules. For example, the purpose could be to keep the family business together for multiple generations, so the rules might address who can be employed in the business, how dividends are decided, and whether any stock transfers are allowed. It is important for the family to make its own decisions in these areas. For example, it is fairly well accepted in family business circles that a family should have some requirements for a family member to be employed in the family business. The discussion is usually limited to the family members educational degrees

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and experience outside the family business. One family I have worked with decided not to have any requirements and is deciding based on the individual. This was a resolution (or policy) that was derived from the constitutions rule-making process, and I have no reason to think it will not suit that family well. Families are not as interested in abstract discussions about how rules are made as they are in discussions about the difficult, real issues that have been simmering. What has been happening in practice is that the two different levels are combined and the abstract rule-making process is used to make some practical decisions. Family constitutions vary tremendously. Their content comes directly from the particular concerns of the family. I always begin with individual interviews, which often reveal unexpressed tensions. Those touchy issues become the practical agenda items at the family council meetings. The process works. It gives family members handson experience and training in how to go about resolving their apparent differences and will neutralize the stirrings of family conflict. So, the process of making their

own family constitution will itself enable families to defeat the three-generation proverb. To keep it a living document (especially one that each generation can change), each constitution ends with the rules for changing it in the future. A rigid document has little chance of lasting. More importantly, having the acknowledged permission to change it makes it more likely that each generations family members will feel committed to it and will feel free to adapt it to make it their own.

RECOMMENDATION
When family members share an interest in living together like a small country, they will benefit from investing time and joint effort into developing the rules of government they want to have. A family constitution will create a peaceful procedure to resolve the inevitable conflicts that arise in generational transitions. The very process of creating a family constitution will ensure a brighter future.
Barbara Hauser is an independent family adviser at Barbara R Hauser LLC. Her recent book, International Family Governance, discusses family constitutions in more detail and in a broader context.

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