The Family Charter: A Road Map
Dr. Tamar Milo and Adv. Ifat Ginsburg
The decision to write a family charter is a little like deciding on a major home renovation. You’ve known for some time that it must be done and the rest of the family is also pressing to get it over and done with. But the project keeps getting postponed. After all, this is an undertaking that demands attention and the involvement of the entire household. It’s something that doesn’t happen very often, and there’s no deadline. And so, exigencies keep taking precedence, and the renovation is again and again put on hold.
The owners of family businesses and wealthy families are in a similar situation. Many of them have heard of the family charter. There are academic courses, programs offered by financial institutions and articles in the press. Families who consult us have usually heard the term, and they know that sooner or later they should have a paper of this kind in their family. But in practice, only a few take the necessary step. We have no statistics, but we know that the number is very low.
Families who have taken this path have gained far more than an important legal document. They have gained foresight: a mature conversation between the branches and generations of the family about its future and the future of its assets. They have created clarity that allows family members to manage their lives based on knowledge rather than on illusions, hopes and expectations. They have begun to prepare the successor generation for ownership and have created shared responsibility, rather than just a share in reaping the benefits. We call it “growth”. The key lies with the owners – the older generation, which has the courage to look ahead, which understands that the future belongs to organizations that are managed with transparency, to family members who work together out of choice, and that each generation must choose anew if and how to manage its affairs jointly.
This article was written by a family business consultant and an attorney who specializes in wealth management. The goal is to draw a road map for a family charter for those who have already heard the term but want to learn more about it. We maintain this integration between the consulting and legal disciplines in our work with families, and from time to time we rediscover just how crucial the two perspectives are for the process of creating the family constitution to be the right one.
What is a family charter?
The research on family owned businesses that has developed in the past several decades has drawn the attention of professionals and nations all over the world to documents written by families who own businesses that have been handed down the generations, with the aim of defining an established set of principles and rules on which basis the family and its assets are managed. These documents have been called by various names: family protocol, family agreement, family constitution. Today, they are considered an important element in protecting the wellbeing of the family and safeguarding its assets.
Creating the family charter is essentially a process that builds trust between its authors. To accomplish trust, we need to be united in our belief – belief in the importance of building a common entity and belief in our ability to shape our shared present and future. But this is not enough. Building trust is a process rather than a single act. It mandates a careful and sensitive examination of shared values, individual reflection by each of the family members on the question, “What do I get out of it?”, and an ability not to undermine trust in our everyday conduct. All of this requires coaching: coaching in communication, in listening, in teamwork, and in acceptance of others. And in the end comes affirmation – after we have heard the different views, examined possible scenarios, accepted the optimistic, skeptical, naïve, critical and practical parts of ourselves, comes the moment of ratification: the ability to accept the decision of the group as an authority and to heed it enables the charter to exist and to shape the family’s conduct.
The family charter as a legal document
The family charter also has many aspects from a legal perspective and can be formulated in different ways, which will, of course, influence its validity and status. First and foremost, the family charter can serve as a kind of “umbrella document” that is declarative in nature, and will serve as the family’s compass and include its vision and its most fundamental principles. Thus, the charter will be ever-present in the background when legal documents are drafted by the members of the family, whether in the business context (governance of the business, partnership and entrepreneurship agreements between members of the family) or the personal context (prenuptial agreements, wills and family trusts). The family charter will therefore serve as a “framework agreement”, the principles of which will be reflected and applied in all other legal agreements that accompany the family.
On many occasions, we encounter family members seeking to keep the ownership of the family firm exclusively in the hands of the descendants of the founder generation (no spouses or third parties). But if the desire is to arrange for this in advance rather than rely on the contents of a will, which, by nature, is likely to change, the family’s wishes in this context must be clearly defined and effectively and bindingly formulated. A family charter, combined with external documents (e.g. trust arrangements and wills) can, therefore, provide an adequate response to the family’s wishes and protect its property.
What does the charter contain?
As we said, the family charter has many variations. The oldest and perhaps best-known example is the Mogi Family Creed (owners of the Kikkoman Soy Sauce company, now in its 17th generation of family business ownership). Their constitution is the family’s “guide for life”, so to speak. More modern documents are generally more detailed and serve as a unifying umbrella document that refers to a suite of subjects related to the family’s ownership, at present and in the future.
Both of us often receive a request to email a sample charter so that the head of the family can delete what isn’t right for his family, add the appropriate information, and wrap up the business quickly. “You’ve surely made a lot of charters. You must have some kind of standard format”. Well, we’re sorry to disappoint you. Yes, we do have a list of subjects that should be included in the charter. But there’s no fixed format. The variety of charters is almost as great as the number of families that create them. Some choose a short, declaratory document that primarily makes reference to beliefs, values and a few rules of conduct, others write a legal document that is similar to the company’s bylaws. Between the two extremes lies an almost unlimited range of options.
To an outsider, the charter may appear trite – a dry legal document. But to the members of the family who spent hours discussing one clause or another, each sentence corresponds to a unique characteristic of the family’s essence and being: the ethos of the founder generation, the painful separation from a partner, relationships with sons and daughters-in-law, the house they grew up in, the dreams and ambitions of family members, and the probing, intense conversations that led up to the formulation of the charter. All of these are there, between the lines, and would mean nothing to a stranger. Therefore, espousing a standard form of a family charter is like signing an prenuptial contract without the members of the couple knowing each other, having spent time together, having built a relationship of love and trust and having made the decision to build a home together.
Who will benefit from a family charter?
The family charter is first and foremost meant for families who exclusively own their own business. However, it might also be right for a family that has substantial holdings in a private business. In these circumstances, a family charter can be expressed in the company’s bylaws. As we mentioned, the goal of a family charter is to preserve the controlling cluster and the family’s ownership of the business. The charter will ensure that the family operates as a single unit and will not allow one member of the family to be manipulated against another.
And what about families who hold financial assets rather than a functioning business? In a 2011 article by Lansky and Pendergast published in the Family Business Advisor, the authors argue that families possessing financial assets managed by a family office need a family charter even more than do those who run a shared business. The reason for this is that the business itself dictates a framework of constraints and the founders’ moral legacy, which in turn dictate rules of conduct, even if unspoken. By contrast, financial assets leave a great degree of latitude when it comes to future activities, to enjoyment of the profits, to the transfer to the successor generation, to transparency and equality. It is therefore essential that the family define its values and its view of the future.
And finally, we believe that a family business and family assets are a bounty, an opportunity and a resource. They open up a wealth of opportunities for shared and individual activity, for making choices, for building and giving. The family charter is a process and a tool. It is a means to turn an opportunity into a sustainable reality. The families we have accompanied through the process of creating their charter prove to us that the effort is fruitful and well worth it.