Family Constitution: The need of the hour

The Financial Express | 10 January 2023

A family constitution is a formal written document which establishes a set of rules based on family ethos, values, requirements and attending factors.

Family businesses are one of the oldest forms of business ownership. They play a critical role in their socio-economic environments through their contributions to the country’s business growth and stability. Family businesses in India account for a 79 percent of the national GDP. It is interesting to note that despite the influx of MNCs since liberalisation, India is home to the third-largest number of family businesses globally.

Sustainability of the business across time and inter generations becomes a challenge. Factors like absolute control of promoter, lack of training to next generation, hierarchy, resistance to change, undefined roles, ego tussles, lack of vision and planning, unaligned goals and lack of conflict resolution mechanisms often result in plateau in business growth or even disintegration. For business continuity families must try to address all those factors which may lead to differences, disputes and disintegration.

Family governance perpetuates corporate governance which further enables business continuity. A family constitution serves as an important tool to ensure a successful and seamless inter-generational transfer and management of family wealth and business.

A family constitution is a formal written document which establishes a set of rules based on family ethos, values, requirements and attending factors. These rules serve as a guiding protocol which assist the family in navigating various decisions on the management of family businesses (management vs ownership related issues), assets, investments and application and utilization of family wealth. These include family’s vision and the shared values; family’s reasons to continue and nurture the family business; managing and growing the family business; ring fencing family assets from business risks; criteria to employ, role of family members and professional management in running the business in legally compliant manner; decision making process on matters of common interest including wealth management and periodic distribution for various needs; mechanism related to exist of a family member / branch of family and the conflicts or disagreements including the issues like ROFR, valuations etc.; matters related to leadership and role of family council in democratic decision-making process, managing disagreements and conflict resolution.

A well thought and written family constitution paves way to constitute family council, record family arrangement on joint and undivided assets, form family trusts and execute Wills of concerned family members, thereby addressing all needs for a proper succession planning.

An external consultant is often advisable when preparing a family constitution given the various strands such a document will draw in. A neutral consultant can detect any underlying issues to be addressed and facilitate meaningful debate between family members.

Family constitution inter alia also provides for a Family Council which generally overseas the functions of the family office and plays a significant role in democratic decision making. It is the apex body which comprises of adult members representing each branch of a family and provides a platform to all the branches of the family to participate in decision making in a democratic way.

Rooted in cultural values and community principles, family businesses have competed strongly and have continued to remain relevant. Just how an impediment to success is stagnation and aversion to change, the family must understand that the relevancy of the family constitution is tested basis the ability of the members to sense and adapt to change. The document must be evolving in nature and respect the dynamic changes in the economy in global context and the stakeholders.

(By Anju Gandhi, Partner; Jahnavi Dwarkadas and Avni Gupta, SNG & Partners, Advocates and Solicitors)