Family values and constitution: a capital strategy for families

Families with structured governance – whether or not they have a family business – are well equipped to successfully negotiate the challenges they face in their daily lives and in the future. Each family governance structure is unique and adapted to the needs of a given family, and frequently takes the form of a tool called a family constitution. The topic of values and family constitution is a key component of the “governance” section of the Lombard Odier Family Programme¹. What are the main issues?

What is a family constitution and what is its role?

A family constitution, which is also called a family charter or a family pact, is a strategy document defined and shared by the members of a family. It is effectively a guide on how to manage the family assets. Given the conflicting interests of family members, shareholders and the members that manage the company or family assets, a family constitution helps prevent the problems and conflicts of interest that can arise. These generally have an adverse effect on the economic value of the company and/or the assets. The family constitution, which is the bedrock of family governance, is an expression of a family’s values and must be drafted in a way that everyone understands.
 

How and by whom is a family constitution drawn up?

Generally, a family constitution is prepared by family members, owners, shareholders and future shareholders of the family business, at joint workshops. These workshops enable the family members to acquire common knowledge and minimise potential conflicts – it will then be more difficult not to follow the decisions taken jointly. The rights and duties of the family members are thus well understood, better accepted and hence complied with. Sensitive matters are dealt with and settled before they become emotional issues. 

In addition, concrete rules are adopted to manage emotional conflicts. We would like to stress that the process of preparing the family constitution is just as important as the result for the family. The process helps family members identify their common interests and better understand the strengths and weaknesses of the people involved. Learning to get to know and understand each other is essential for preventing conflicts.

This is why family governance experts help families prepare their constitution; they play the role of mediator but do not draw up the constitution for the family members. A discussion managed by an expert in family governance is most often required when there are conflicting issues to be resolved. The expert can effectively steer emotional discussions onto a more objective course and help the family find a common solution which all members agree with and feel bound by. However, the work does not end with the preparation and signing of the family constitution. It is a living document which must be regularly reviewed and adapted if necessary.
 

Is there a standard model of a family constitution?

As each family constitution is tailor-made by the family itself, there is no standard or ideal model. However, at Lombard Odier, we work on the basis of a list of issues that must be taken into account when preparing it.

We advise each family that develops, owns and manages a company jointly and/or manages assets jointly, to draft a family constitution. In our view, this document represents a key aspect of a prevention strategy designed to limit the potential for conflict and problems. It enables family members to discuss things more freely and take the best decisions.
 

What are the first aspects that must be taken into account when drawing up a family constitution?

First and foremost, a family constitution must include the family’s mission, vision and values. That is why the first chapter or section in a family constitution addresses these issues. Although they are theoretical concepts, they are essential to ensure the continuity of the family heritage.

• The mission is the rationale; it is a concrete task that generates benefits and is meaningful. It influences the family’s vision and values. If the family owns a business, the mission may be considered as its core activity. It explains why the business and the family exist.
• The vision is an image or representation of the family’s future. If the family owns a business, it may relate to the field in which it would like to occupy a dominant position. The vision becomes a reality when the mission is accomplished.
• Values are convictions and moral principles or ideals accepted by a person or social group. In this case, we can say that values are the principles of action and behaviour that are brought to bear in accomplishing the mission and making the vision a reality. They constitute the cornerstone of the family.
   

Defining family values is the first stage in drawing up a family constitution. It is not enough just to formulate the family values; they must be put into practice and lived, as this is the only way they can serve as a guide for the younger generations.

• Family values
• Define the family’s identity
• Provide the direction to follow
• Encourage family cohesion
• Strengthen commitment to the business
• Define the direction and management of the business and/or assets
  
   

¹ The objective of Lombard Odier’s Family Programme is to help families organise, protect and pass on their assets. It is structured as ten modules divided into three sections that can be combined to suit the requirements of families and businesses: governance, inheritance/succession and wealth advisory. It is a unique and innovative approach to passing on a family’s financial assets.