THE important thing in drafting solid agreements is the journey.
No matter how united the family clan is, the generational transition from founder to offspring and the complexity of the offspring to a multi-generational family where cousins with diverse interests become shareholders can invariably take its toll on the family business. That is why families embarking on this governance journey must reflect on their collective vision and mission before pursuing a well-crafted family constitution.
So what constitutes a flawed constitution? I am adding more issues with the hope that faulty documents can still be rectified and harmony restored:
- The lack of emotional commitment by the next generation leaders either because they were not exposed to the business early or were not given the opportunity to participate
- The presence of a stubborn, defiant and ego centric or an ailing, weak and broken senior business leader, both without any succession plan
- Entitled, complacent or rebellious next generation family members
- The contents were influenced solely by senior generation leaders’ recommendations and the information were open-ended and produced more questions than real answers.
- The members were left on their own to implement the rules. After the signing, they resumed their usual routine and disregarded what was agreed upon.
- Family members were confused. They didn’t understand the substantial difference between family, business and ownership governance. They thought having a family constitution could produce immediate results.
- Soliciting inaccurate, insufficient and worse, wrong advice from other consultants, lawyers and accountants
A good insight coming from a family member sums up the entire constitution building experience: “We signed, took selfies on our last day, and then there was no one else to turn to when it was time to implement. It was obviously a waste of time.”
Ownership governance risk
In a book written by Gersick, Davis, Hampton and Lansberg entitled “Generation to Generation: Life Cycles of the Family Business,” the authors highlighted one of the thorniest issues under the ownership dimension that every family agreement must incorporate: “One of the most pervasive lessons we have learned is that when the legitimate interests of ownership do not have a forum for expression, issues of control and return on investment will find a way to emerge in either the family or the operating business. When those issues do come to surface in the ‘wrong’ circle, they are almost always disruptive–and sometimes destructive.”
I couldn’t agree more.
During the last quarter of 2018, a significant part of our governance intervention in Asia focused on ownership issues. And the same petty issues were amplified right after a key senior leader became incapacitated or passed away.
So why was there conflict despite having the family constitutions? Our collective evaluation pointed to mostly “cut and paste” stipulations on sensitive areas related to ownership, and the issues pointed to the following neglected or missing components:
- Some constitutions were silent on provisions that favored active owners over passive shareholders. For most agreements, ownership and benefits were equalized among siblings and cousins.
- This points to the importance of having a mechanism for allowing share ownership to be consolidated and the need for such a mechanism (exit plan or a family shareholders’ agreement) should have been highlighted.
- The possible alternative of prolonging inheritance by way of a trust agreement should have been considered.
- Several conflicts started over the issue of how to value the shares in the business including a bad exit of one family shareholder that triggered a liquidity crisis immediately after she sold her portion to other sibling shareholders that stayed.