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The family charter: a guiding tool for your family business

deminor NXT > News > The family charter: a guiding tool for your family business

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Belgium has more than 1 million SMEs, of which more than 75% are family businesses. Moreover, 76% of the best performing companies in Belgium are family businesses. Deminor research shows that family businesses have excellent operational performance, less debt and tend to grow larger.

The unique drive of passing on from generation to generation what one has built up or received, plays an important role in this.

This makes family businesses more stable, but also more vulnerable. One downside is the extra emotional dimension that comes into play, which means there are more divergent interests at stake. As a result, we see conflicts arising within family businesses and emotions running up high. In some cases, the situation is kept completely quiet without entering into constructive discussions.

To avoid such situations and to turn the family character into an asset rather than seeing it as a stumbling block, a family charter can be the tool of choice to provide a balanced structure in the family versus family business relationship. Does this mean that the charter should be seen as a magic conflict solver? Of course, there are also pitfalls, which we will discuss further in this article.

 

Positioning and content of the family charter

A family charter is an agreement between the family shareholders of a company which lays down rules for the present and future generations. The rules apply both between the family members themselves and with respect to the family business and its various dimensions.

Although the family charter is basically framed within the family dimension, there are several interfaces with ownership and the company itself. In fact, the overlap with these dimensions is often very large. Thus, the charter will regulate the relations between the various dimensions surrounding the family business. That’s why a good balance between the different interests is essential.

In non-family businesses or in family businesses where non-family shareholders are also involved, the internal relationships can additionally be set out in a shareholder agreement.

A family charter can cover a wide variety of topics. Both traditions and the organisation of the future can be included. Common themes in family charters are the family mission, vision and values, ownership and control, governance of the family business, dividend policy, generational shifts and succession rules, organisation of a family forum or council, careers within the family business and remuneration policy or conflict management.

A checklist of frequently asked questions on these themes can serve as a starting point.

 

Drawing up and implementation of the family charter

The process associated with the drawing up of a family charter is at least as important as the final outcome. It gives the family a sense of having accomplished something important together, discussing issues that are otherwise never thoroughly addressed. It is a phased process, often one of trial and error which works towards unity and a sense of involvement for all family members. Even non-active family shareholders must have sufficient knowledge to support the family business in the long term.

With the aim of ensuring the involvement of all family members and providing an objective measure where necessary, an external partner is often called in to guide the process. In any case, the process is a matter of customization, in which several steps must be followed. To be more specific:

Step 1 Thorough analysis and overview of the existing structure and organs, the written and oral agreements, and the customs within the family business.
Step 2 Compilation of a questionnaire and topics to be discussed based on a customised checklist.
Step 3 Individual and/or collective discussions with the family shareholders.
Step 4 Reaching a consensus on the issues at hand.
Step 5 Drawing up and signing of the family charter.

Once everything is on paper, the work isn’t done yet. The implementation remains mainly dependent on the commitment and discipline of the family members themselves.

The family charter will only be known between the members who sign the document. This enhances the discretion that many family businesses value so highly.

 

The family charter pitfallss

We note that in practice only a small minority of 10% of family businesses have a family charter. Also, the final implementation is sometimes delayed. The reason is often a conflict-avoiding mentality, in which people do not dare to be vulnerable, a common phenomenon within family businesses. We see that certain topics are not discussed because of their sensitivity. In addition, the use of ready-made family charters, which have not been preceded by a thorough process, is strongly discouraged. Both the creation and implementation of the charter take time and form a process in which every step is important.

Of course, it is also very important to draw up the family charter before conflicts or generational changes arise. When tensions already exist within the family, they cannot be resolved by writing a family charter: the charter mainly has a conflict-avoiding function, not a conflict-resolving function.

However, the pitfalls mentioned above are not insurmountable. Starting the process in time and finding the appropriate guidance using a people-orientated approach can help overcome these challenges with the aim of allowing the family to achieve something great together.

Would you like more information about drawing up a family charter? Feel free to contact Lien Verhasselt for an informal conversation

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