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A Necessary Tool Towards Sustainability
Family Businesses are known to represent the most complex type of business there is; combining business with family challenges, one can easily see why! Family Business Constitutions (FBCs) are a renowned business tool towards sustainability and comprehensive business structures. Which points a FBC should cover and when it should be written, however, causes a great deal of discussion. Yasser Al Kadi, Vice President of the Kadi Group Holding in Saudi Arabia, provides a perspective on the what, how, and when of FBCs.
That tools ensuring the sustainability are a necessary means for all type of businesses is not really an interrogation point. Confronted with the myriad of business tools offered by research and consultancy one can imagine businesses standing irresolute on which ones to adapt and put to work. Family businesses represent probably the most complex business structure there is, as, additionally to the average business challenges, it needs to consider the family construct as a component in strategy and decision-making. Family Business Constitutions (FBC) are amongst the most efficient attempts in helping family businesses to combine its different dimensions into a comprehensive overview. Yet, the definition of FBCs is not only as individual as each and every family is but also shows inherent traits of respective cultures and socio-economic factors.
Family Business Constitutions seem to have become a more frequently discussed topic in recent years. However, some of these constitutions have existed for hundreds of years. While attending a course at IMD Business School in Switzerland I had the opportunity to see an almost 900-year-old constitution of a Japanese company and another constitution of a Spanish company that was no less than 300 years old. In a way, a FBC is a document that provides solutions to problems that might arise in the future or, ideally, even prevents them. It specifies the relationship between the family and the business. Well structured and therefore successful FBCs should maintain harmony and prevent conflicts between family members.
FBC can differ from family to family and from country to country. From reading a constitution you can identify many characteristics such as history and cultural background of a family. For instance, when reading a Spanish company constitution you would most likely find it to be very detailed, showing the methods applied in paying dividends to owners, the election of the board, the transition between generations, and many other aspects. This can be expected from constitutions that are from countries that went through many social and political changes. Since their nature feeling is the desire to protect themselves by having a written agreement for the unpredictable changes that might happen to them in the future.
What Family Business Constitutions should cover
First of all, we should understand that the needs are different from family to family and when developing a FBC families should consider issues that might arise and result in future conflicts. However, in general terms, a FBC should cover the following points:
- Success factors: What drove the company to success in the past? Is it quality, innovation, or flexible credit terms given to customers?
- Exit strategies: How can a family member exit the business? Can he sell his/her share to an outsider or is there a policy that governs this topic?
- Dividends distribution: How should this system work in good times and bad times?
- Family Office role: What are the services that are provided by the family office to the family members? How often can they be used as the family grows?
- Forces Majeure: How does the family react to unexpected events with important impacts?
- CSR and philanthropic activities: How does the family manage it’s CSR and charitable activities?
Who should write the FBC and when
Experience shows that the FBC should, in a first instance, be written by the hands of the family, not by its lawyers. They should all think of the continuity of the business and what should be clarified. The best time to write it is during the first and second generations’ presence in the business as they can see what drove the company in the past and what challenges will be faced by the third generation. Having a professional writer or a lawyer draft it at the final stage is of course, the common practice.
How often the FBC should be revised
A family should expect and conduct changes in the FBC about every 30 years or so. If it is well-structured from the very beginning, the required changes will be minor. However, if the original FBC was very detailed and left no room for generational changes, then it is likely that the whole FBC will be revised.
In a world where fewer and fewer things seem to be under our direct influence, the impact of such structuring business tools such as FBCs can only be beneficial. Facing outside challenges will come easier to family businesses if their internal structure is capable of absorbing change and shows flexibility on a large scale. FBCs that provide these characteristics to a family business may therefore be considered viable long-term means towards sustainability.
Tharawat Magazine, Issue 2, 2009