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Family Constitution: Why you need one

In 2021, PwC’s Family Business Survey identified that only 9% of family businesses in Nigeria have a family constitution in place that help guide their business while only 15% have established conflict resolution mechanisms. This underscores the finding that many family businesses are run without formal structures.

Although the survey may have suggested that family businesses have succeeded without formalised structures, the absence of these structures has resulted in the next generation being disinterested in the business. This is more worrisome if you consider that there may be no successor for the continued existence of the business.

The global jolt of COVID-19 highlighted the keyman risk for many family-owned businesses. This is the risk that corporations rely on one or few individuals who are core to the operation of the business and their absence could prove disastrous for the business and by extension, the family that relies on the wealth. The solutions to this start at the heart of the family which is a subset of the family business.

The questions to be answered lie in the governance structures in place. Governance asks questions on who controls an organisation or family in this case, how are decisions made, how is information gathered and how effectively do we communicate.

The lack of holistic structures addressing these leads to the exacerbation of the keyman risk and collapse of family businesses. Just as good corporate governance is akin to well-run companies, the family must also own its governance structures. A family constitution is one governance tool we will focus on in this article.

Why is governance important for family businesses in Nigeria?

Family businesses in Nigeria, from the billion-naira conglomerate to the small roadside business, contribute at least 50% of Nigeria’s GDP and 80% of the workforce. It is a significant contribution and one that can give Nigeria the positive results most yearn for if managed properly. The business environment is one thing, but the ethos of the business is just as important.

Many family businesses have established ways of doing things but not many identify the need to document policies/procedures that help guide decision-making or avoid unhealthy interactions with the money-making venture. Often there is an unwritten assumption that the first-born male in Nigerian societies assumes leadership roles, but only after the founder passes.

This is a sure recipe for crisis with stakes being higher when the family has no experienced progeny but does not realise this.
It is a proven theory in jurisdictions with longer surviving family businesses, that where roles and responsibilities in the family are identified and each component of the family business understands how the other functions, decision-making is easier, strategic business growth is assured and dispute resolution is more effective. The critical starting point is the family constitution.

What is a family constitution?

Prof. John A. Davis, Family Enterprise Lead at MIT – describes the Family Constitution as “the family’s policies, guiding vision and values that regulate members’ relationship with the business.” This written document typically contains the objective of the business, the establishment of the decision-making council, the non-negotiable items, duties and responsibilities of key stakeholders, broad guidelines for the treasury/finance function, training/career development for family members, succession planning, and the process for amending the constitution.

In solving the problem of eliminating ambiguities, a Family Constitution operates as a unifying document that binds the different opinions shared by each family member into a single acceptable document.

Establishing a Family Constitution, therefore, ensures that fundamental issues such as core values, vision, and mission statements are clearly articulated and free from ambiguities from the get-go. It can even state how finances from the family business should be appropriated at any given time. This could have averted the scandal that occurred in L’Oréal Cosmetics.

As reported by Reuters and Famcap, Liliane, the majority shareholder of L’Oréal had a rift with her daughter, Francoise due to Liliane’s relationship with a celebrity photographer, Banier, who received huge sums of money and gifts worth €1billion from Liliane. Francoise filed a complaint against Banier for exploiting her mother. The conflict continued for years until Liliane agreed not to see Banier anymore and Francoise was appointed guardian of the family fortune in addition to her son becoming a board member.

A Family Constitution also helps in establishing an appropriate decision-making body (usually the Family Council) for the family business. You may call the family council the family’s board bringing a sense of accountability, similar to the board of a well-run company. The family council provides clear guidelines to the business on the strategic direction of the family business.

The process of putting together a family constitution can compel a family business to define its strategic business objectives, values, vison, and mission.

Read also: Cosmas Jr. Maduka – Respect in business is earned not granted

How do we go about it?

The family constitution is not a one size fits all and should be tailored to the complexities of the business. For example, the governance issues in an owner managed business are different from a sibling consortium where different sibling branches of a polygamous family operate.

Difficult governance issues arise from agreeing on a unified family vision and mission, setting family employment policies, shareholding rights and dividend policy. Indeed, history tells us that some of these issues only come to fore after the founder passes or the will is read. The best practice is to anticipate this journey and incorporate the most probable answers ahead of eventualities, within the constitution, while the founder lives.

Establishing a family constitution often requires the articulation of questions such as – what is our vision, mission and core values? Answering these questions requires various family members coming together to voice their concerns, which, in turn, ensures the acceptability of the constitution. Conversations along these lines also position the family business to shift from short-term thinking and helps to bridge the gap between its medium- and long-term plans.

Conflict resolution is a big issue in many family businesses. Where inappropriately handled, a conflict may result in the demise of the family business. Conflicts may be more prevalent in family businesses due to existing filial relationships. Having a policy to govern conflict resolution that is entrenched in/flows from the family constitution is, therefore, imperative. An efficient conflict resolution system begins with preempting conflict.

This entails an identification of conflict scenarios, provision of roadmaps on navigating through conflict, and where possible, emplacing structures that prevent conflict. The conflict resolution system should cover identification of fact-finding committees, access to helpful resources, and an independent party to provide objectivity during the resolution process.

Write your family constitution today

In conclusion, establishing a family constitution is a good first step to integrating good governance within family businesses. The benefits to be derived from having a family constitution includes achieving greater success, reducing conflict, eliminating ambiguities, and improving succession planning. Family businesses can engage consultants who specialise in family business to provide the requisite guidance in the development of their family constitution and begin to enjoy the benefits of having good governance structures in place.

Agbeyi is partner and private & family business leader & Adeyemi senior associate, people & Organisation at PwC Nigeria