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Family Business Survival Guide: The Family Charter

22 October 2015

Family charters (also known as constitutions) are agreements entered into by family members in relation to their family’s business. The purpose is to set out the business practices which family members should follow from day-to-day, in addition to the long-term strategy of the business.

A family charter allows family members to focus their minds on important business issues. Typically these can include ownership, what is required before family members can become employed and/or have a shareholding, voting and control, dispute resolution and succession. The agreement is not usually a legally binding document (in contrast to a shareholders’ agreement) however family members may decide for parts of it to be so. It can be adapted to meet business needs as a business grows and include family members who are not direct shareholders, such as the beneficiaries of a family trust owning shares in the business.

There are significant benefits to entering into a family charter. The agreement can provide certainty and minimise family conflict by clearly laying out “rules of the road”, thereby avoiding lengthy and costly conflicts. The process of reaching such an agreement can also be a constructive exercise, as families work together to develop a transparent and unified approach to the business.

Their biggest advantage is that family charters provide a clear separation between the collective interests of the business and the often varying interests of individual family members. They can provide a fair way to deal with sensitive issues such as succession and the death of family members. This can be particularly valuable for families where emotions and loyalties come into play in ways not witnessed by non-family businesses.

The family charter is a powerful creature due to its ability to include a “code of conduct” of family values and standards of behaviour to be instilled both in the business and personal sphere. This can be valuable in helping to maintain the goodwill and brand of a business, by setting expectations to avoid behaviour which could otherwise result in adverse effects on the business’ reputation.

A well drafted charter can be a unique and sensible investment for a family business. Not only do they provide businesses with a clear and organised governance structure, they also encourage families to think ahead and work towards common goals, with a view to fostering both business and family well-being.