The Family Charter is the cornerstone or foundation document of a family governance system. It is the bedrock on which everything else is built.
It is also known as a Family Constitution or agreement. It is the main document that the family use to outline their values and vision for the family business.
Whilst rare they are gaining recognition and being adopted by many families. In this episode i explore why they are useful and how to get started with your own.
Transcript of Episode
Well. Hello and welcome to this week’s episode of the family business podcast. I hope everyone out there is doing well, having a good week, whatever it is you’re up to. you may have seen in the news this week that, Prince Harry and Meghan Markle are deciding to step away from Harry’s family busines , now I’m not saying that they should have listened to this podcast, but, you may find that some of the things that we discussed today around what a family charter is, could have helped. in the, decisions that Harry and Meghan have made recently, or in particular, how the family would deal with such a, issue.
so as I say, we are going to be covering this week what a family charter is. We’re going to be looking at why they might be useful, what some of the barriers are and how to get started on putting one in place. if you’ve not come across a family charter before, you aren’t alone. And they are quite rare that they are gaining recognition.
And more and more family businesses are adopting these documents as they become aware of what they are and the benefits of them. but in essence, they can and perhaps should create or form the cornerstone. Of a family governance system. So in last week’s episode, I discussed what governance was and went through some of the, benefits of good governance and the family charter is the bedrock on which everything else is built.
What is a Family Charter?
It is also known as a family constitution or a family agreement, and it is the main document that you would use to outline your values, your vision, and your relationship with your family and the business. So if you’ve ever heard of the book by Simon Sinek called start with why the family chapter is kind of your way, of articulating your family’s why and what the purpose of the business is. .
why we moved to a series based approach on the podcast, rather than me just interviewing people about stuff. the podcast designed to highlight additional ways in which you can implement different forms of governance or tools if you see them as tools to thread them, enhance the strength of your family business.
Good governance can help drive your business forward and help to avoid some of the challenges that come with the additional complexity that is present through working with your family. These episodes are designed to highlight to you the tools that can be used and a family charter is a very good starting point.
Each family charter is entirely unique and it should reflect the values and personalities of your own family and your business. the purpose of a family charter is to outline the relationship of you as a business, owning family to your family business, and also the relationship of family members with each other.
When it comes to the business, it’s important to point out that they’re not typically legally binding. Because they tend to deal more with values and behaviours and principles rather than than formal rules. But they can be used as a supplement to some of the legal documentation that would be used within a family business.
And we cover those later on in the series on governance. The family charter is a private document is not necessarily something that you would make public. Because it has some personal things in there that you’d perhaps wouldn’t want to make public. And it’s certainly not something that is published on company’s house or anything like that.
it should be values based and it should be family driven and therefore bespoke to your family. I would urge caution away from Googling family charter, downloading a template. And adding your family name to the top. Because what will tend to happen there is that it will go into a drawer or gather dust and have absolutely no value whatsoever.
is much better for it to be something that is designed and built for your own family and for your specific business.
Why are Family Charters Useful?
So why might it be useful? Well. Firstly, I would say that the family charter should be seen as the creation of a living document, and it should be something that’s easily accessible to everyone within the family and something that is understood by the family as a whole. .
One of the most useful and valuable elements that come from the implementation of a family charter is the fact that you as a family are actually having the conversations.
And these can be facilitated if necessary, but you’re having the conversations around what could be some pretty sensitive and difficult topics, but rather than waiting until something has gone wrong or a particular situation has arisen. You’re having those discussions in a proactive and safe way that can be hugely valuable to you and to your family.
The family charter can outline or reiterate the sort of standards and behaviours that you would expect from family members, but in terms of how the act with the business, but also with each other. So you can start to, lay down some of the guidelines and principles around how to manage family dynamics.
Because they do have an impact on the family business. So rather than focusing necessarily on the output in terms of the actual documentation that comes when you’ve put a family charter in place, see the conversations and the discussions that are had when putting them together as another output. And they can be, as I say, hugely, hugely valuable.
So what are the sorts of things that you would normally put in a family charter? Well, very often they start with or open with a value statement. Now, these would typically contain the usual bumps, words, trust, loyalty, respect, honesty, those kinds of things. But the values should truly reflect the values of your family.
So don’t be. Drawn into thinking, well, it has to be trust because of, of course, we are trustworthy. Dig a little deeper and understand from each other what you mean by trust. What do you mean by loyalty? One person’s viewpoint on what honesty means could be different to another person’s viewpoint on what honesty is.
And this is a great forum to be able to have the discussions around what each of us thinks about those values. That would then result in expectations being managed because there’s no gray areas. There’s no kind of doubt as to what each of those words mean for each member of the family. And then it can be something that truly reflects what you as a family belief.
along with the values. That you would like everyone to adhere to. The family charter can also include statements on why the business exists. So what does this purpose and this can then help develop statements around ownership intention. So for example, is it the intention for the business to be family owned and family manage forever, or are there alternatives that could be explored at a given point in time?
Will future generations be expected to be custodians of the business for the next generation after them? And if so, what are the things that the family can be doing to help prepare each of the next generations for taking on the custodianship of that business? Is the business seen as a vehicle for generating wealth, which in turn can provide opportunities away from the business?
And again, if that’s the case, what other. Kind of terms and rules of that that the family would want to adopt. And if the intention for your family is to become them for OPIC, to what extent do you want to, that to be the case? And again, what the rules or principles that you would like everybody to adhere to?
It can also help outline who can own shares in the business. So in some, they stipulate that there can be blood relatives, only others include spouses, children, step children, adopted children, et cetera. It can cover things like can unmarried partners own shares in the business. And it’s also a good way to start discussing what might happen in the event of a divorce or death of a shareholder.
You might also want it to cover things like whether a external shareholders would ever be permitted to own shares within the family business. And if so, under what conditions along with who can own shares in the business. It can also cover who within the family can work within the business. What requirements are needed and what the remuneration and dividend policies are.
So if you want to insist on external experience or a minimum, minimum, even educational requirement, you can put that within the family charter and then use that to build family employment policies, which again, is something we’ll come onto later in the series. As a general rule. Good information flow and good communication is really important to the success of a family owned business.
And so creating a family charter that outlines what the correct communication forms are, will lead to greater success for the family and the business. And again, without going into huge amount of details on things like family counselors and family assemblies, the charter can provide guidance for the constitution of the family council and the family assembly.
So who should be on it and what powers do they have? Those kinds of things. and getting everybody’s buying at this stage means that adding additional forums for positive family governance doesn’t come as a surprise. Another thing that perhaps isn’t a surprise within family business is that there is a pretty much an inevitability that there will be conflict at some point.
And so the family charter can include mechanisms to encourage resolution of conflict before it turns into something bigger and nastier than it is. So it may suggest, for example, that at the first point of conflict being apparent. Either in between two particular family, groups or between individuals that they seek mediation, for example.
As I say, one of the biggest, if not the biggest benefit. Of producing a family charter is that all of this gets discussed and it gets discussed in a safe environment. We would suggest and perhaps expect this because it’s what we do, but we would suggest that these discussions are facilitated so that you’re not just left to your own devices to start thrashing out these issues without somebody who is experienced in having these discussions set round the table with you.
But it is a fantastic opportunity to ensure that everybody within the family is heard and everyone’s expectations are understood, and this will obviously help to manage those expectations over time. The final element to consider, perhaps within the family charter is what the terms of review are. So how often should you start to review the charter.
And, good practice would suggest perhaps every three to five years. But sometimes changes in circumstances mean you have to continue to look at it, and that it needs to be sooner than the sort of recommended three to five years. So that’s, an overview of what you would normally have included within a family charter.
And that’s not an exclusive list. If there’s other things that you want to add. Having that were important to you and your family. It’s absolutely the right form to have it in there. but let’s say it’s the discussions around it as so valuable. given that we know that good governance, can help to avoid future conflicts, and that family charter is the bedrock to this, strong governance process or strong governance system.
, why aren’t they more widely adopted? Well, some of the common barriers that we come up against, the first one being, what’s the point? given the scope of what can be included. So everything I’ve gone through already, plus, obviously the, there’s almost an unlimited list of stuff that can go into it.
It can seem a pretty intimidating process and this isn’t something that is going to be done in a couple of weeks. It is probably something that would take closer to a year or more to put in place. But for me, that is a positive. The reason it’s a positive is that if something’s worth doing, it’s worth doing well.
And so by having the conversations that need to be held in order to put a family charter together. Is worth spending the time on is worth spending the money on having it facilitated so that discussions remain focused so that you cover everything in a proactive and safe way, rather than perhaps a confrontational way.
Now, this also means that it comes with time and cost. So you might be thinking blue neck 12 months and it should be facilitated. We don’t have the time. We don’t have the resource to dedicate to this. But by breaking it down over that time, you can spread the time commitment and you can split the cost.
So time and costs should not necessarily be seen as a barrier because if you’re working with somebody who can help you facilitate that, they’re not going to be wanting to do it all in a week either. It should be something that should be spread over time and discussions held in the right form. So that again is a beneficial thing rather than it being a one off stinging me.
High cost for something that has no value. It is something that you take your time over that you have family buy-in over, and that is hugely valuable to both your family and to the business.
Another common barrier we come across is that people generally don’t know where to start. If you look at it, family charters are not something that should be a copy and paste exercise. So it’s not surprising that people don’t know where to start because if it’s not something that’s been hugely adopted by every family business out there, there’s not many.
Examples for people to follow, and it needs to be something that’s bespoke to the family.
How to get started
So where do you get started? What I would say here is that if this is something that is new to your family, but is something that is of interest, one of the best things to do is to make everybody else aware within your family of the benefits of a family charter.
So shameless plug, getting them to have a listen to this. episode, go onto the internet and find some more information about family charters, and then you can appoint somebody to be a family champion. Now, family champion is somebody that is there to advocate the benefits of strong family governance and the family charters that can be their job to go away and do the legwork on researching who needs to be there to help implement a family charter.
This is not often the business leader because you’ve probably got enough to be doing. If you’re leading the business, then you don’t necessarily want to become a family champion, but is somebody who should be passionate about, the family and the family business. And if you want to find out more about the role of family champions.
Go back and check out episode 55 of the family business podcast. And my interview with Joshua Knecht. He explains how the role of family champion is present in the majority of family businesses that he, and a very famous, academic in the States called Dennis Jaffe has studied. And these businesses go on to exist beyond a hundred years.
And vast majority of them have somebody within it. Who is the family champion. So it’s worth checking that out and see if there’s somebody within the family that would be, suited and willing to take on that role as a family champion. If you’ve got any sort of family meeting or any kind of forum where you discuss matters of the family business at family charters, do you agenda.
It’s a good way to, if people see it on the agenda before the meeting and they don’t know what it is, they will either come to the meeting with a fair degree of curiosity, or they might again, go to Google and, did a little bit of their own research to find out why. And then you can start the conversation from, from that meeting again, you probably expect me to say this.
But we would recommend employing an advisor to guide you through this process and the benefits of using an experienced family business consultant who’s used to working in business families, is that they can remain objective. They will help with the establishment of a family charter and draw on their own experiences and those expense of working with other families to provide education and guidance on some of the discussions you might want to be having.
They can also have, a positive impact by outlining some of the sort of fundamentals of family dynamics and ensuring that everybody is heard. The process can take time, remember, and having professional facilitation helps everyone stay on track.
So to summarize. A family charter is the foundation of strong and effective governance for a family business. It outlines a relationship with the business owning family to their family business and the relationship of family members to each other. As far as the business is concerned, it includes things like family values, principles, dividend policies, employment policies.
Ownership, responsibilities, all that kind of stuff. And although it takes time and effort to put in place, the benefits can be huge. More and more families are going through this process and putting in place family charters I hope that that’s been useful, but as ever, if you’ve got any questions, if I can be of any assistance whatsoever. Please do get in touch either via Twitter or via our website families, podcast.com or you can email me directly.
email address is firstname.lastname@example.org and until next time, take care.