There is an old saying that business and pleasure do not mix. Much the same can often be said about business and families. From Caligula in Ancient Rome, through JR’s feuding in Dallas, and more recently Tony’s dealings with the Sopranos, running a family business can be somewhat taxing. Whilst everyday examples of murder and incest are thankfully rare, it is not uncommon to come across families who are at each other’s throats and find it difficult to resolve their differences.
There is an old saying that business and pleasure do not mix. Much the same can often be said about business and families. From Caligula in Ancient Rome, through JR’s feuding in Dallas, and more recently Tony’s dealings with the Sopranos, running a family business can be somewhat taxing. Whilst everyday examples of murder and incest are thankfully rare, it is not uncommon to come across families who are at each other’s throats and find it difficult to resolve their differences. In response to this, we are beginning to see the emergence of what are sometimes called “Family Charters” which are not unlike prenuptial marriage agreements. A Charter is typically a statement entered into by the members of a family business which will address the following issues:
- How the family wishes the business to be run.
- The family’s goals and long term strategy for the business.
- The family’s relationship with the business.
- How the family members should behave towards each other in the context of the business.
What is the relationship between the Family and the Business?
There will obviously be a first generation of family members involved in establishing the business. As new generations emerge, some people will have a direct involvement in the business and others will not. However, those who are not directly involved in the running of the business might still want a say. They may be entitled to inherit shares in the business, thus giving them a financial interest, or they may wish to be involved in the running of the business but there is no room. This can create problems and complexities, and is an obvious breeding ground for disputes. A Family Charter can be a method of avoiding disputes, by reaching a consensus on a number of important issues relating to the running of the business before they become a problem.
Who draws up a Family Charter?
The family will normally draw up a Charter itself, with help from the family’s professional advisors. However, the advisors need to watch out for the following:
- There may be a dominant family member who tries to impose his views on other family members. This can stifle a proper debate and result in a Charter which does not represent a genuine consensus.
- There may be a number of hidden agendas amongst family members which skew the discussions.
In these circumstances, involving a third party who is an experienced mediator or facilitator might help. This person should ideally be independent of both the family members and the business. The idea is that he will not be seen as being aligned with any particular family member and can act as a neutral umpire. Unfortunately, finding someone who can perform this task is often difficult, and it is usually left to the professional advisors to “hold the ring”.
What is contained in a Family Charter?
It is up to the family members to decide which issues to address, but those which might be covered include the following:
- How will the next managing director of the business be chosen? Will he or she come from within the family, or is it better to look for an outsider?
- Who should be employed in the business?
- Who should be entitled to sit on the board of directors?
- What happens if someone wants to sell their shares?
- What happens if there is a dispute between the family members in relation to the business?
- How does the family avoid the feeling of exclusion amongst those members who are not directly engaged in the business?
- How does the family tackle any differences of opinion regarding the direction which the business should take?
- The family’s long term goals or long term business strategy.
- The ethical guidelines to be followed by the business.
- Key business decisions in respect of which the family should be entitled to direct or influence the board of directors.
- Communicating with and providing information to family members who are not directly involved in the business.
- Involving the next generation in the family business.
Many of the issues referred to above are commonly dealt with in Shareholders Agreements, which, as the name suggests, are agreements between shareholders of a company as to how the company should be run and are normally legally binding. A Family Charter differs from a Shareholders Agreement in that it is more like a mission statement and may or may not be legally binding. This is because a Charter deals with a number of issues which are not capable of constituting legal obligations. For example, family values or ethical guidelines are often moral rather than legal obligations. They are expressed in a Family Charter as a series of broad, non-binding principles which set out the family’s policy on certain matters.
In addition, a Shareholders Agreement can only cover those family members who are actually shareholders in the company. In contrast, a Family Charter can cover all of the members of the family whether or not they are shareholders. Thus, a Family Charter is much more inclusive, and is designed to encourage the participation of all family members who have an interest in the business whether or not they are actually shareholders. This is a somewhat novel concept, but helps to avoid feelings of exclusion and resentment.
Caligula is said to have suffocated his grandfather Tiberius in order to gain power. Tony Soprano was shot by his Uncle. I cannot recommend either course of action as a strategy, but there is an alternative worth considering. Drawing up a Family Charter can sometimes force family members to confront issues which they find difficult, particularly where succession is concerned. This can be a cathartic experience, but ultimately invaluable in making sure that the family is unified in its approach to the business and that the business is being driven in the right direction. Provided everyone has a fair say in drawing up the Charter it can be a powerful tool in avoiding what can otherwise be lengthy and costly disputes.
About the author
John Noctor specialises in company and commercial work for major clients.
Published: Wednesday 25th February 2009
Categorised: Corporate Law