This article is more than 24 months old and is now archived. This article has not been updated to reflect any changes to the law.


Family constitutions: are you afraid to start?

By now it's a widely circulated fact that nearly 90% of Australian family businesses don't survive into the third generation. It's a really big problem, and no problem that large has a simple solution. But that doesn't mean your family business can't take a few simple steps to protect itself from falling apart when it's time for the grandkids to lead. David Harland, Managing Director of FINH

Let's classify family business failure into two groups. The first is business failure, which every business must deal with in their own way. The second group is family failure, which is a unique problem for family businesses. If you really want to put your company on equal footing over the long term, you need to be able to handle family problems before they hit crisis mode. To accomplish this, I've long argued for a written family constitution.

Family constitutions intimidate some people, but they shouldn't. All a family constitution really does is clarify family values and create better rules for working together. I think it's well worth every family business member's time to learn about family constitutions.

If, after learning more about family constitutions, you are still afraid to start, consider this: the very process of building your own unique constitution will likely bring people together, strengthen family bonds, and create more emotional investment in the business.

The benefits of a formal, written family constitution

I've recently outlined six good reasons to write a family constitution, but I'll focus on a few more here.

Begin with one of the most obvious and easiest to overlook: the constitution is written and formal.

There's an old Chinese proverb, "the palest ink is better than the best memory." This is one of the unofficial themes of the Family Legacy Asia, a pro-family constitution advocacy group based just North of Hong Kong. The benefits of written rules are obvious for governments, schools, and even recreational sports leagues. Those same benefits can apply to families.

A family constitution creates rules and boundaries for family members. This isn't a gimmick; the rules are intentionally created during a sober moment, before emotions run high, so everyone can agree on fairness and process.

The idea is to create a strong, unifying bond based on love and emotional acceptance, then codify it in a document for making decisions and resolving conflicts. A lot of family issues fester because members don't have a safe, understandable way to discuss them.

A family constitution helps identify difficulties so they can be conquered. Every year, the KPMG and Family Business Australia survey family businesses. Every year, those surveys reveal that "balancing family and business issues" are a top concern, yet only a small minority of family businesses use a constitution.

Most importantly, a family constitution lets a family express and share its own values. Sharing values and teaching them to children is a highly underappreciated aspect of building a lasting family business model. Those values will inform the leadership structure, succession, community involvement, and long-term goals.

Get it right the first time: use an outside facilitator

Each family constitution should contain certain rules, or themes, for successful implementation. This creates a problem or two. First, whomever negotiates and writes the family constitution should know what they're doing. That person probably needs strong interpersonal skills and some kind of arbitration experience. Second, even if a family member possesses such skills, there might be budding conflicts of interest. It's difficult to trust the impartiality of interested parties.

Of course, a family could write a constitution and amend it over time using trial-and-error. This approach isn't very efficient, though, and leaves plenty of room for conflict or emotional hang ups. The better solution is to use a trusted outsider. Ideally, this should be an expert whose credentials aren't questioned by the whole group and who can ensure the process is open-minded and accessible for everyone involved.

Only you and your family can decide if it's worth creating a family constitution. The first step, though, is to learn about what a family constitution is and how it can help ensure long lasting, multi-generational success.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics.

Order Cleardocs document packages


Lawyer in Profile

Leigh Baring
Leigh Baring
+61 3 9258 3673

Qualifications: LLB (Hons), BEc (Hons), Monash University

Leigh is a Partner in Maddocks Tax and Structuring team. Leigh has extensive experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

Leigh regularly provides advice on:

  • structuring of businesses and transactions,
  • mergers and acquisitions,
  • corporate reorganisations and distributions,
  • sale of businesses,
  • demergers,
  • capital raisings,
  • joint ventures and property developments,
  • international tax (both inbound and outbound), and
  • succession planning and liquidations.

His advice covers both direct and indirect tax considerations.

Throughout his career, Leigh has been at the forefront in developing tax-effective corporate, trust and superannuation structures.

Read Our Latest Articles