Family Constitution: The Blueprint for Multi-Generational Business Success

Family Businesses in India play a leading role in the socio-economic development of the country. Approximately 85% of Indian businesses are family-operated and they contribute more than 75% of the national GDP [1] functioning as key drivers of the nation’s economy.

Studying the family business landscape in India, reveals unique challenges faced by these enterprises. The transition of leadership from one generation to the next is a major expectation in family businesses. However, maintaining business continuity across multiple generations is a major challenge and a rare phenomenon. In India, we commonly hear the saying - “Grandfather builds, Father manages, and Grandson sells the business”. This phrase describes the “Third-Generation Curse”— a well documented phenomenon globally according to which almost 90% of family businesses fail to make it to the third generation [2]. The failure of the family business to sustain across multiple generations can be attributed to several reasons -

???? Lack of effective communication between family members and across generations often results in misunderstandings and disagreements.

???? Absence of a proper succession plan leads to confusion in leadership and can create disputes over control and ownership.

???? Blurred lines between family and business affairs makes it difficult to distinguish between personal and professional roles which can cause operational inefficiencies.

???? Weak governance structures fail to establish formal systems for decision making and delineate roles and responsibilities of family members.

Research indicates that only 19% Indian Family businesses have established conflict resolution mechanisms and only 63% Indian Family businesses have formal governance structures in place [3].

Family businesses are complex, given the nature of the personal relationships on which they are built. The same relationships that allow the business to act and adapt quickly can also slow down its decisions and hold it back. So how can family businesses ensure their continuity to subsequent generations and build a legacy?

The strategic solution lies in creating a Family Constitution.

Woodson and Marshall in the The Family Office book define the family constitution as “: A statement of the principles that outline the family commitment to the core values, vision, and mission of the business” [4].

The constitution is a comprehensive document tailored to meet the specific needs of a family that articulates the family's core values, vision, and governance framework. The constitution is like a bible guiding the family’s decisions and binding the different generations together.

It helps the family to -

???? Codify family’s core values and principles

???? Define the long term objectives of the family

???? Builds a bridge between business and family matters : offers sound governance framework between family members and company’s management

Many Indian multi generational families with legacy businesses have adopted constitutions to establish governance structures for their businesses including the Burman’s (Dabur), GMR group, Murugappa group, etc.

A well-crafted family constitution typically includes -

???? Statement of Family Values - Articulates the core principles that guide decision-making

???? Vision and Mission - Defines the long-term objectives and purpose of the family enterprise

???? Governance Structure - Establishes leadership bodies within the family like Family Councils and Assemblies to facilitate decision-making

???? Guidelines for Involvement - Sets criteria for family members' roles within the business.

???? Succession Plan - Outlines procedures for leadership and ownership transitions

???? Conflict Resolution Mechanism - Provides frameworks to resolve disputes within the family amicable

???? Communication Protocol - Ensures transparent and effective information flow among members

???? Compensation Policies - Details remuneration structures for family members involved in the business.

Adopting a family constitution offers several benefits to a family business including -

???? Enhances investor confidence by demonstrating a long-term commitment to stability, especially where the business is listed.

???? Builds a lasting legacy by providing a roadmap for sustaining the family enterprise across generations.

???? Unites the family by aligning family members with shared values and goals.

???? Mitigates family conflicts by establishing clear guidelines to mitigate potential disputes.

???? Ensures preparedness for unforeseen events by establishing clear governance, ensuring smooth leadership transitions, crisis management protocols, and legal frameworks to protect the business from disruptions.

Christina Wing, Harvard Business School professor and founder of Wingspan Legacy Partners notes - “Less than half of family businesses will survive generational transfer. While sometimes this is due to operating company issues, in many cases it is because of conflict within the family. Many families create and adopt a family constitution to proactively mitigate these issues when they appear, and to serve as a reference to successfully manage conflict.”[5]

Let's explore an case study of how adopting a family constitution helped an Indian legacy business achieve multi generational success -

The Dabur Group, one of the largest FMCG companies in India was established in 1884 by the Burman Family. The fifth generation of the family is currently involved in managing the global conglomerate. In 1997, Dabur had grown exponentially and the Burman family realized a need to restructure the company leadership and governance. They consulted with McKinsey & Co to evaluate their business and help them devise a growth strategy. The consultancy recommended the Burman’s to professionalize the business for which the family members would have to give up executive roles in the company. The family mutually agreed to bring in outside professionals to manage the daily business operations and decided to assume the roles limited to the company board thus separating ownership and management of the business. During this pivotal transition phase, they laid down new rules and policies for the family’s involvement in the business through a family constitution. Anand Burman, the former chairman of Dabur commented on how a constitution helped align all the Burman family members on the same page and alleviate their concerns regarding the transition “As part of the process and to keep the flock together, we created a family constitution and a family council. The constitution has guidelines with respect to our responsibilities towards the various businesses that we have” [6]. The Burman family’s constitution includes a succession plan for the next generation, a guide for dispute resolution, detailed communication framework, compensation rules for family members involved in the business, and details of their family council. Implementing a constitution early on created a structured governance system for the family and helped the Dabur business grow steadily to a market cap of approximately $10.6 Billion today. It also kept the Burman family together and enabled systems and processes to groom and nurture the next generations to take the business forward.

In conclusion, a family constitution is an essential tool for family businesses. Adopting a constitution and implementing the policies dictated in the constitution will help the family business establish clear roles, expectations, and communication strategies. If you want to break the “Third Generation Curse” - sustain a successful multi generational family business and build a lasting family legacy a family constitution is the first step you must take.

We at Right Horizons work with eminent lawyers and tax practitioners to help create customized family constitutions for our UHNI and Family office clients and support them in their journey of building a strong family legacy.

Email us at [email protected] or [email protected], and we’ll be happy to assist you.

References

[1] Goyal, A., & Mukherjee, C. (2024, August 2). Five differentiators of outperforming family-owned businesses in India. McKinsey & Company. https://www.mckinsey.com/featured-insights/future-of-asia/five-differentiators-of-outperforming-family-owned-businesses-in-india

[2] How real is the third-generation curse, and how can financial advisors tackle it? (n.d.). CFA Institute. https://www.cfainstitute.org/insights/articles/third-generation-wealth-curse-advisor-solutions#:~:text=And%20it's%20an%20oft%2Dquoted,swelling%20(see%20Figure%201)

[3] PricewaterhouseCoopers. (n.d.). Family Businesses in India: 11th Family Business Survey 2023 India Report. PwC. https://www.pwc.in/services/entrepreneurial-and-private-business/11th-family-business-survey-2023-india-report.html

[4] Woodson, W. I., & Marshall, E. V. (2021). The family office: A Comprehensive Guide for Advisers, Practitioners, and Students. Columbia University Press.

[5] Note on Family Constitutions - Technical Note - Faculty & Research - Harvard Business School. (n.d.). https://www.hbs.edu/faculty/Pages/item.aspx?num=64767

[6] Burman, A. (2012, November 26). How Dabur's Burmans Segregated Family and Business. Forbes India. https://www.forbesindia.com/article/my-learnings/how-daburs-burmans-segregated-family-and-business/34203/1

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