A Guide for Family Businesses

Every family business needs a constitutiona document that spells out the company's vision and offers guidelines that can prevent disastrous conflicts

The owners of wrayco Industries—two brothers, a sister, and their parents—recently held a meeting in a quiet retreat near their Stow (Ohio) headquarters. Their task: to write a family constitution. The family wanted to come up with a consensus based on their hopes for the future of the $38 million company, which manufactures specialty fuel tanks for construction and other equipment. By the end of the weekend they had drafted a document "to address core business issues that could create conflict within the family long before they actually did," says Brian Gibb, one of the brothers and vice-president of business operations. Says Gibb: "We established standards for employment for family members and determined in broad terms how stock would be passed from generation to generation. The family constitution gave us a living document to reference much as Americans reference our nation's Constitution."

Regardless of the existence of estate plans, legal documents, and trusts, families in business often decide to write a constitution that deals more concretely with the goals of the business. A "constitutional convention" gets the family members who have to share the vision for the company engaged, and engaged people are much more prone to support the guidelines they help write.

The constitution spells out the family's history and commitment to the company, and it establishes policies that guide the relationship between the business and the family. They're often written by first- and second-generation family business leaders as their companies become more complex. The sooner it is written, the better. Family constitutions have to be written before they are needed, when there is a feeling of trust and little or no conflict.

To make the exercise a success, involve as many people as possible, including those with expertise in the subjects being discussed as well as those whose behavior you want to influence. Here are the principal areas it should address:

1) The family's vision and commitment to the company.

2) The family values in their relations with customers, employees, suppliers, partners, and the community.

3) The desired behavior of family members who are employees.

4) Guidelines for hiring and retaining talented employees, including prerequisites for employment of family members, including education and experience. Some families, for example, require an undergraduate degree and three to five years of experience outside the family business. Others require an MBA for top management posts.

5) The commitment and procedures guiding education and professional development.

6) Guidelines addressing who can own stock, which classes of stock, and how shares can be transferred.

7) Information about a family bank and/or special funds allocated to employees' entrepreneurial activities.

8) A dividends and family benefits policy that advises shareholders on reasonable expectations for returns on invested capital.

9) A liquidity policy that discusses business valuation procedures, buy-sell agreements, and redemption funds.

10) The role of the board of directors or advisory board.

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