A family charter can help guide family members through challenging business situations.
Having a charter often results in stronger family relationships and improved communication.
Charters can also be beneficial for non-business issues like the sharing of a family vacation home or the transition of wealth.
Unique challenges arise when a family owns a business. Which family member(s) will lead it? How will profit distributions be decided? How can individuals sell their ownership stakes? These issues are best handled in advance and through many discussions. It may also be helpful to create a family charter (also known as family constitution) to embody some of the answers, and most importantly, the mechanisms to address questions as they arise in the future. As challenging or potentially beneficial situations present themselves, having a formal document in place can help facilitate family communications and maintain harmony.
A Framework for Business Decisions
There are many ways to write a family charter; the approach you take should reflect your unique family and business needs. Some people choose to create a comprehensive document that provides specific guidance on fundamental business issues and serves as an example for future generations. Others prefer to write a broader, more general charter that focuses primarily on communications and voting rights to help the family avoid or resolve a potential situation.
Below are some of the topics typically included in a family charter:
How many and which family members will sit on the board
The inclusion of independent directors and the selection process
The representation of non-family members such as management, current and former employees, or an employee stock ownership plan (ESOP)
Board committees and whether they will include family members
Under what conditions can family members be employed
How will they be managed and compensated
The replacement process when senior managers, including the CEO, retire (particularly when family members fill such roles)
When and how profits are distributed
Under what conditions the business can retain profits to fuel growth
How, if at all, differing cash flow needs among family members will be addressed
Shareholder Liquidity and Family Exit Rights
When and how family members can sell a portion of their shares
Under what conditions can they sell all their shares and/or exit ownership of the company
The frequency of meetings, their content and structure
The business questions that will be addressed by the entire family
Once written and agreed to, don’t let your charter languish in a drawer or on a bookshelf: take it out regularly, maybe annually, and review it for current relevance. A “living” charter that evolves over time with your family, business and the world is likely to be more effective. It may also improve communications and help prevent mistrust among family members.
Strengthening Family Bonds
Possibly the greatest lasting value derived from a family charter is the opportunity for better communication, driven in part by regular meetings (as noted above). The key is to be transparent and involve everyone in discussions about the company and the family-business intersection. For instance, you might use your family meetings to talk through business activities such as increased or decreased profits, top-level hiring decisions, core business strategy, mergers and acquisitions, or large investments.
Be sure to include spouses in the meetings. Poor communication can engender a lack of trust between individuals and between branches of your family tree. You might even go as far as to include language in your charter that guides future generations to bring new spouses into the discussions early on. Your charter might also recommend pre-nuptial agreements, or that spousal codicils are written in parallel to internal family agreements and trusts. That way spouses have at least some voice for themselves and their branch of future descendants.
And don’t forget the younger generations, especially if they’re expected to have a role in the business someday. Your charter can create mechanisms whereby younger family members are made aware of the document and how it works. These communications might start when the individuals reach their mid- or late-teens—although, how and when to start may be a decision best left to parents.
Not Only for Businesses
A charter can be beneficial even if you don’t own a family business; perhaps there are other assets your family jointly owns like a vacation home. Additionally, planning for the control and transition of wealth of any type can be challenging. A family charter and good communication practices can make the process easier. This is especially true when you realize that “wealth”’ is not just money— it’s the values, principles, traditions, stories and challenges that have made your family what it is today.
For these reasons, you might use your family charter to:
Create traditions and rituals, such as a regular family party or reunion
Craft documents that record the history of the family and the business
Preserve artifacts that have been instrumental to the family’s success
These topics can be helpful for instilling the family’s principles and values in future generations and motivating them to build happy and productive lives that similarly pass-on good principles to even more generations.
The list of topics above is a good starting point for creating your own family charter, but you’ll likely want to include other issues specific to your situation. Consider reaching out to peers who have family businesses to learn what they have done. Our team of wealth management advisors can also help you create a charter suitable for your family and business. Contact Cerity Partners to learn more.
Meet the Author
Pierre is a Partner in the New York office and has more than twenty-five years of experience founding, investing in and providing strategic growth advice to early-stage and middle-market companies. In addition to mentoring executives, Pierre has advised business-owning individuals and families on the personal/ownership side, as he has experienced many inheritances and business-ownership situations in his own family.
Prior to joining Cerity Partners, Pierre was an advisor to three early-stage internet companies helping them develop business plans, identify capital sources, and make initial team hires. He also worked with several emerging hedge funds and VC firms to secure capital and create internal operational and business structures.
Pierre was previously at Two Sigma Investments, a diversified hedge fund with $8 billion under management across global equities, currencies and commodities. At Two Sigma he was responsible for clean-energy investing, VC investing and Chinese private equity investing with Two Sigma’s proprietary capital. Pierre was responsible for Two Sigma’s Asia/Pacific business development and investor relations, raising capital from the major institutional investors in each part of the region and developing close relationships with more than 200 institutional and family-office investors in the region.
Pierre earned his Bachelor of Science in Engineering from Princeton University.
Pierre is on the Management Committee of the New York Hedge Fund Roundtable and a member of the International Executive Resources Group and The Economic Club of New York. He is on the Advisory Board of the Center on Business and Poverty and the University of Wisconsin-Madison and the Impact Council at Boundless Impact Investing. Pierre is a mentor on the Princeton Entrepreneurship Council; a mentor for candidates in the Masters of Quantitative Finance program at the Bendheim Center for Finance; and a judge for the nationwide TigerLaunch business-plan competition.