Protecting Family Wealth
May 11, 2022 Latest News 0 Comments

Importance of the Family Constitution in Protecting Multi-Generational Wealth

The world over, family empires, and family business, have seen the value of in implementing and applying an overall family constitution, with strong and clear rules, binding on the members of the family, which are found to be successful in ensuring the economic viability of the enterprises, and protecting the wealth over multiple generations.

Furthermore, a well drafted and collectively accepted family constitution will often, enhance and strengthen the relationships, as well as solidify the emotional connections which will assist in emotional relationships between the family and the group enterprises.

The most important function of the constitution is that it provides clearly defined boundaries for the family, as well as giving clarity, and transparency to the family.  In addition, the family, how to engage should the inherent potential risk of a dispute should arise.

The constitution will fortify the emotional connection and cohesion of the family, both immediate and extended, because the shareholders and beneficiaries, are working together within know frameworks and parameters.

In a report published by KPMG, it has been found that in German families, as high as 87 percent of family-owned Groups and businesses with a constitution report that they eventually reach closure when they have differing opinions. The same report states, conversely, that only 71 percent of families without a constitution reach a consensus.

The inevitable growth in families, as children grow, marry, and expand, increasing the direct and indirect family unit, the risk for disputes, and disagreements increases.  Furthermore, inherent risk of sibling rivalries, jealousies, and suspicions within family units, is always there, which can rip apart unstructured, and ill-prepared families.

Accordingly, the right constitution, with all members contributions, establishes the right environment, which will be considered as protected, establishes better and higher levels of trust, honesty, openness, and affection.  Therefore, the constitution will become the strong foundation, on which the family connections will be strengthened with the corporate and Group entities.  Family empires and corporate Groups, which are not underpinned by a constitution are more exposed to unresolved disputes, and poorer quipped to manage family crisis.

The most important function of the family constitution is maintaining family ties, and the ensuring the emotional connection of the family.  Thereafter, constitution has the equally important function ensuring and protecting the economic success of the family business and Groups sustainability. Family Groups with defined constitutes, not only are ensuring their future is protected, but also ensure that the immediate short-, medium- and long-term operational management is also correctly governed.

This can be attributed to the fact that the constitution will also contribute to defining the framework, which will regulate the management and corporate structures within the Group and Group entities, such as an advisory board, management successions, profit distributions, and the exit strategy for any members or beneficiaries’ which wish to do so.

A high level approach to establishing a family constitution:

  1. Interview each family member and identify and understand the individual needs.  Furthermore, acknowledge that there are sub family dynamics within families, which evolve daily, monthly, and annually.  The higher the number of shareholders, the more important a family constitution becomes. This is because the cornerstones of the management structure are usually defined in the family constitution.
  2. It is exceptionally important to develop, define and ratify the family constitution together.  Workshops, or family retreats with consultants and advisors should be used to jointly develop the family constitution.  This will also prevent a situation where certain members believe that they are being marginalized or excluded and reduces suspicion against fellow family members.
  3. Do not rush the family constitution. The family must be aware that the entire process can take up to twelve or eighteen months.  This will become the manual, the rulebook, by which the family binding itself, and ultimately developing supporting legal documents, such as shareholder agreements and partnership and joint venture agreements.
  4. Families must use this opportunity to establish and define visions, goals, and structures as well as succession rules, business stratagems and models, members involvement and roles.
  5. The appointment and establishment of a family council or a family manager (family CEO?).  the larger the circle of shareholders, the more frequently entrepreneurial families fall back on a family council, specific rules for the handling conflicts and special communication modes such as family newsletters or family video conferences.
  6. Appointment of the right qualified advisors and consultants.  Especially in the globalized world, with constantly changing regulations, and cross border trades, it is important that the right advisors are brought in timeously.
  7. Be aware that not all family members, shareholders and beneficiaries are concerned purely on the money.  Many aspire for business and organizational positions, and the necessary recognitions which come with this.

The importance of a correctly and well drafted family constitution cannot be over emphasised.  The right constitution will ensure that the family and shareholders enjoy a better and more complete and fulfilling emotional relationship, but also ensuring that the Business and enterprises are correctly structured.

The right constitution, with the correct business model, will ensure an agile and scale able family empire, with a protection mechanism which will allow for the seamless transition of wealth across multiple generations.

Who are We?

We are a fully integrated international business management and growth strategist.

Founded to acquire, develop, manage and/or grow offshore businesses in developed and emerging international markets with high growth potential. Strong relationships to local market leaders of the industry ensure a sound foundation through which is integrated with its global network.

The Group is internally managed and combines business management and strategy with investment and development skills in an integrated approach. At Cayman, we strive for service excellence by providing our clients with tailormade services for their businesses.

We go beyond the traditional role of consultants and advisors and are committed to putting our clients at the heart of our business, developing, and maintaining long standing relationships based on trust, value sharing and legacy building together with business development, growth, and protection.

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To better understand how to expand internationally, contact us to develop a customised model for your organisation, which is scalable and agile.

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131 Jan Hofmeyr Road, Westville, 3629, KZN
Phone: +27 31 274 7400/ +27 31 274 7408
E-mail: mho@caymanassetmanagers.com
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