Family charters make sense for family businesses, in particular for those controlled by the second or later generations. But what exactly is a family charter, and what advantages can it bring?
Broadly speaking, a family charter is a framework, usually in document form, that defines how the family is expected to relate to the business – as employees, owners and family members. They can be particularly beneficial for businesses with revenues of over US$50m, and for when a family member moves from an operational role into more of a shareholder role.
Family charters typically cover the following:
- The family’s vision and philosophy. This is a good starting point for any charter. Setting this out clearly can help to establish the principles of the business, which will be constant from one generation to the next.
- How the next generation will engage with the family business. The charter might say what age the next generation must reach and what level of educational attainment and business experience they must have before they enter the business.
- Who is entitled to shares. This may be quite specific – for example, it might set out that shares can’t go outside of the bloodline.
- What the requirements are to sit on the board, and at what age succession needs to be in place.
- A framework to deal with family exits (family members wishing to leave). This will include views about valuation and reserves for exits.
- A family council. This will probably operate outside of the operational business, but will report into the main board. Family councils typically meet quarterly to discuss many of the issues listed above. And there may be a conflict resolution mechanism within the council to deal with disputes between family members.
Family charters aren’t legally binding. Instead, they rely on the moral obligation of the family members who sign up, but that is normally enough to make them workable.
Families that implement charters to define how they interact with the operational business are likely to reap significant rewards.
Anecdotal evidence suggests that having a charter can help family businesses perform better. And because charters can help to mitigate conflict, family businesses that have them are likely to be around for longer.
More and more family businesses are beginning to see the point of family charters and are implementing them. And many are turning their informal structures into formal family charters.
It’s very easy to put off creating a charter, but those family businesses that do set one up will benefit from it as they go along.
John Cooney, Partner, Family Business Leader, United Kingdom and Ireland, EY