The rules most families live by are unwritten until someone disagrees. A practical guide to writing them down while there is still time to agree.
Most wealthy families already live by rules. They are simply unwritten: who gets a job in the business, how dividends are decided, whether in-laws come to meetings, who speaks for the family when the founder is not in the room. While the founder is active, those rules work because one person holds them in their head. The trouble starts when that person steps back, and the family discovers that each branch remembers the rules differently.
A family constitution, sometimes called a family charter, is the document that writes those rules down while there is still time to agree on them. This guide explains what one is, what it usually contains, and a practical process for drafting one that the family will actually use.
The IFC Family Business Governance Handbook, published by the World Bank Group’s private-sector arm, describes the family constitution as “a statement of the principles that outline the family commitment to core values, vision, and mission of the business”. It notes that the same document goes by many names, including family creed, family protocol and statement of family principles, and that it also defines the roles and powers of the key governance bodies and how family members can take part in them.
Three points about its nature are worth settling early:
The IFC handbook observes that most family companies have no formal constitution but do have an informal set of rules and customs, and that as the family grows it becomes crucial to write those rules down and share them with every member. The practical reasons are familiar to anyone who has watched a family business pass between generations:
Content varies with the family’s size, stage and involvement in the business. The IFC handbook lists the elements a typical constitution covers: family values, mission and vision; family institutions such as the family assembly, family council, education committee and family office; the board of directors; senior management; the authority and relationships among the family, board and management; and policies on important issues such as family employment, share transfers and CEO succession. In practice, most charters are organised along these lines.
A short opening section on why the family chooses to stay together as owners, what it wants its wealth to do, and the values it expects members to uphold. Keep it specific. “Integrity” and “excellence” appear in every charter; statements such as “we reinvest before we distribute” or “we do not lend to family members from the company” actually guide decisions.
Define membership for governance purposes: lineal descendants only, or spouses as well; at what age members join meetings or gain a vote; what happens after divorce. These definitions drive almost every later provision, and they are among the most sensitive, so they deserve careful discussion rather than a template.
Set out the forums through which the family acts. The IFC handbook describes the family assembly as a forum for all family members, usually held about once or twice a year, and the family council as a smaller working body elected by the assembly, typically once the family grows past about 30 members, with a manageable size of 5 to 9 members meeting 2 to 6 times a year. Smaller families may need only a regular, well-run family meeting. The constitution should say how members of each body are chosen, their terms, and what each can decide.
Separate the family’s role as owners from the board’s role and management’s role. Say which decisions need shareholder approval, how family directors are nominated, whether independent directors are expected, and how the family office, if there is one, reports to the family. Our comparison of single-family and multi-family offices covers the choice of office model itself.
This is often the most contested section. The IFC handbook warns that families without clear employment policies can end up with more family employees than the company needs, some unsuitable for their roles. Policies range from barring family employment altogether to admitting family members subject to conditions such as education, outside work experience and age. Whatever the family chooses, the guiding principles are the same: fair treatment relative to non-family staff, a real vacancy rather than a created one, and a clear route for exit.
State who may hold shares, whether shares may be sold or pledged outside the family, how a member who wants to leave can exit, and on what valuation basis. A fair, pre-agreed exit route is one of the most effective ways to avoid disputes, because it removes the sense of being trapped. These provisions almost always need to be reflected in binding legal agreements.
Set the principles for dividends and any family support, such as education funding, rather than fixed numbers. Numbers change with the business; principles such as a target balance between reinvestment and distribution should last longer.
Describe how leaders are selected, in the business, on the board and in the family’s own bodies. The point is to agree the process and criteria in advance, not to name a successor in the constitution.
Agree a staged route for disputes, for example a direct conversation, then the family council, then an external facilitator or mediator, before anyone reaches for lawyers. Then set how the constitution itself is reviewed and amended, including the majority required, so that it can change without a crisis.
A constitution is one part of a wider approach to family governance and legacy and succession. It works best when the family also has capable advisers around it; our guide to choosing a wealth manager above $10 million covers that side.
Usually nothing. The terms are used interchangeably, along with family protocol, family creed and statement of family principles. All describe a written statement of the family’s values, governance bodies and policies.
Generally it is treated as a moral agreement among family members. Provisions that must be enforceable, such as share-transfer restrictions, are normally carried into legal documents like a shareholders’ agreement, company articles, trusts or wills. Take legal advice in each relevant jurisdiction.
Ideally while the founder is still active and before a transition, sale or dispute forces the issue. The IFC handbook notes that a written constitution becomes crucial as the family grows in size.
It depends on the family’s size and how contested the issues are. The consultation and discussion typically take far longer than the writing, and rushing them tends to produce a document that does not hold.
This article is general information. It is not legal, tax or financial advice, and not a recommendation to adopt any particular governance structure. Whether provisions of a family constitution are enforceable depends on the law of each relevant jurisdiction and on the legal documents that implement them. Take advice from qualified legal and tax professionals before acting.