Family firms usually start out as simple organizations. But as they develop and grow they face greater complexities and challenges, often leading to tensions among the owning family over how they run the firm together.
Many of Asia’s top family businesses were founded after World War II, and those that have survived and thrived are now at a critical stage. As the owning family’s third generation of leaders come of age, many want to put in place rules for its interaction with the business. A common solution is to develop a family constitution outlining the values, principles and procedures that the family agrees to follow.
Such constitutions are important tools in managing expectations, avoiding misunderstandings, specifying roles and responsibilities, fostering greater harmony, and ultimately taking better decisions. If done well and followed, they offer a strong foundation for a sustainable future. Indeed, a recent study of family firms in Spain showed that family businesses that have a constitution performed better than those that do not.
Without such a document, entrepreneurial founders take from the business what they need and appoint whom they like, but once multiple family members enter, problems may well start to arise. If one family member enjoys a lavish lifestyle financed by corporate resources, for example, or if another decides to appoint a problem child, the resulting tensions can spiral into a full-blown feud -- the leading cause of family business failure.
Thus, it is helpful to set rules together about issues such as dividends, role of new generations, remuneration, ownership, succession, family decision-making rules, conflicts of interest or exit. Yet while such topics sound straightforward, issues such as how much compensation family members are entitled to can quickly become a focus of dispute.
During my study of family firms across Asia, I’ve come across those who feel family members should work hard in return for minimal earnings, and those who feel the fruits of the business should be enjoyed by giving family members ample benefits and exposure in life.
Both approaches have merits and shortcomings.
One solution is to see these choices as a trade-off, and to plan for potential drawbacks. For example, patriarchs who insist their offspring should work from the bottom up with little remuneration may need to pay more attention to keeping next generation motivated. Similarly those encouraging all family members to live their passion with ample compensation should take time to ensure they remain profitable.
More on Forbes: How To Ensure A Family Business Stays In The Family
The process of taking such decisions as a family is essential in drafting a constitution, forcing individual members to explain their thinking, create buy-in, and develop commitment. Some family members may find the process stressful or time-consuming. From my own observations, working with family businesses across Asia, here are six tips to make the process as effective and stress-free as possible:
1. Build awareness
Instead of only worrying about risks such as economic downturns or digital disruption, family leaders should make time to address family risks. Many have seen painful examples of conflict in their own family, through friends, or in the media. Once family leaders realize that these conflicts are avoidable the importance of organizing the family side of the business usually becomes evident, and drafting a constitution becomes an investment in the future.
2. Demonstrate commitment
Commitment from the top is key, especially in Asian firms led by patriarchs. In my research I’ve seen many families where the children obeyed the patriarch without discussion, only for feuding to break out immediately after the head of the family (usually male) passes away. So all family members must commit to listening to one another, speaking up, and be prepared to place the common interest and the long run future of the business above their own individual interest.
3. Pick the right moment
Picking a good time to make decisions as a family is crucial. Some families take a business crisis as a starting point, resolving to learn from mistakes and become better. Others prefer to address family governance when the business is running smoothly and dividends are flowing. Waiting until a full blown feud erupts is not a good time, as even making simple decisions becomes difficult.
4. Treat it as a journey
Nobody is perfect and every business needs continuous improvement. If all parties accept this and embrace the process of improving, developing a constitution becomes easier. Aim for achievable milestones and keep the pace going. As long as the entire family is committed, the elephant in the room can be addressed before it tramples the business.
5. Create a positive atmosphere
Drafting a constitution is a great opportunity to count your blessings, and to realize how much more the family could achieve. Being in a pleasant environment, and combining serious discussions with enjoyable social activities also helps. Humor is another important ingredient for success as it helps to manage emotions.
6. Get the right support
Make use of the huge range of skilled consultants that are available -- family business experts, lawyers, private bankers, trust specialists and even therapists. Simple businesses can manage with basic support, but complex family firms with large conglomerates may need all of the specialists mentioned above. Families should find experts that suit their style, as long as it is someone who can effectively lead the process.
With the right starting point, realistic expectations, adequate support and a positive mindset, family firms have much to gain from drafting a family constitution.
By taking a few simple steps it need not be daunting to achieve better family governance.
