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Family constitutions – the glue that holds families together?

December 30, 2021

reading time: 6 minutes

by Tilmann Schaal, LGT

Why a family constitution, charter, code or pact is particularly important for entrepreneurial families.

In our series “Three questions for...”, LGT expert Benjamin Vetterli explains why a family constitution, charter, code or pact is particularly important for entrepreneurial families.

Many large dynasties have a family constitution that sets out important guidelines on how certain family-related matters and values are handled – the Princely Family of Liechtenstein is one of them.

Benjamin Vetterli knows just how important this is for high-net-worth families. But according to the LGT expert, many families nevertheless find it difficult to take that step and create their own family constitution. In the latest interview in our “Three questions for...” series, we explore why.

1. Money, death, who has a say, values, membership, ... these are all topics that come up when a family constitution is being created. How do you, as an outsider, manage to convince family members to establish such a set of family rules – and at the same time steer clear of the conflicts that can arise when these topics are discussed? Is that not somewhat of a minefield?

It is indeed, quite simply because there are a lot of emotions involved. But a family almost inevitably needs the support of an independent, neutral third party, particularly when it comes to getting the process going:

Succession is a key element of many family constitutions, especially among entrepreneurial families. Generally speaking, it should be the older generation to address this topic with the family; at least according to the literature and experts on the subject.

In practice, however, many parents find it difficult to start this discussion. Often, it’s because they don’t want to push their children to take on a specific role, while others are reluctant to hand their leadership role over to the younger generation. In contrast, the next generation is very eager to talk about succession and the other aspects contained in a family constitution. They want to plan their lives and know, for example, who will take over the family business. However, openly voicing this legitimate question is often not easy for them.

This leaves families in a stalemate: both parties want to talk about the issue, but no one brings it up. That’s why many families are grateful for outside help.

When you begin the process, it’s important to break the ice. For example, we start with a short list of questions to determine how the family sees the current situation. We ask to what extent a succession plan is in place and whether the family has identified any common values ... It’s interesting to note that the older generation often answers many of these questions affirmatively. The children, on the other hand, usually answer only a few questions with yes. This discrepancy is an eye-opener for many family members and fuels initial discussions.

"It is often the traditional head of the family and business who is left alone with their questions about how the family and company should be organized."

One thing I see frequently during this phase is that it is in fact often the traditional head of the family and business who is left alone with their questions about how the family and company should be organized. That’s why LGT provides them with opportunities to talk to others who are in a similar situation. This can be a round table or the LGT Family Forum – a seminar on family governance. This framework facilitates an open exchange and, based on the feedback we’ve received, is very enriching.

It’s important that when starting the process of creating a family constitution, the rules for the way forward are established by all of the family members and that everyone remains involved. In a first step, all of the family members are asked about their understanding of the current situation and the family’s needs and goals in individual discussions. The results are anonymized and consolidated into an overall picture. They show the needs of the family and the direction in which it wants to develop.

2. What are the next steps in creating a family constitution once this foundation has been laid?

One of the keys to success is to talk about shared values. They are the basis of everything. Some of the questions that can be discussed in this regard can include: What do we stand for? What is our strategy, what is our vision? What direction do we want to take as a family in the future? 

The questions about passing on values are especially important for the older generation. Even more so if the children didn’t know the grandparents or great-grandparents who founded the family business. Or to put it another way: it’s particularly important for the younger generation to be familiar with the values of the founding generation in order to identify with the family and the family business.  

What is a family constitution?

The idea that not just nations, but families and their businesses can also be built on a constitution, is particularly widespread in the US, the UK and Germany.

In the US, the term constitution has a very positive connotation, and thus positively impacts the level of acceptance and use of family constitutions. To people in German-speaking countries, on the other hand, it tends to sound formal and big, meaning that terms such as family charter or pact are often used as alternatives.

However, regardless of what it is called, it is crucial that a family constitution sets out the family values with which everyone identifies Although not legally binding, it represents an important agreement within the family and can have implications for legal arrangements such as marriage and inheritance contracts, shareholder agreements and the establishment of corporate structures.

Not all the contents of a family constitution need to be put in writing, a fact that is demonstrated by LGT’s owner family. The Princely Family of Liechtenstein has had a house law for several centuries, but many things are also passed on to the next generation orally. For example, even the youngest generation, represented by the grandchildren, is taught a lot about the history of the family, the values that are important to the family and its experiences over the centuries.

During this open exchange, contentious issues can come to light. We try to address these one by one in order to find agreement on each point. This is an iterative process that requires a lot of time. But it’s worth taking that time in order to develop a set of common values and goals. This is the basis upon which a family constitution is built. The document will only stand the test if everyone supports it.

3. A family constitution is not legally binding. Why is it nevertheless important for high-net-worth families and especially for entrepreneurial families?

Ideally, when drafting their family constitution, the family will find common ground that they can then draw on in the future. By involving everyone, including the next generation, it is by nature much more viable than a legal document that seeks to govern every eventuality and can still be challenged in court. 

Since the assets in these families are usually largely tied up in the business, it’s often not possible to treat all the children equally in the event of succession. If this was discussed within the framework of the family constitution and everyone was able to share their views, individual family members tend to be more willing to forego a certain share of the wealth. This is another aspect that underscores the benefits of creating a family constitution. 

The House Law of the Princely Family von und zu Liechtenstein

House laws such as family contracts, house contracts and family statutes have existed in Europe since the beginning of the 14th century. The first House Law of the von und zu Liechtenstein family was the succession agreement of Nikolsburg dated 3 March 1504.

The first more comprehensive document in the sense of a family constitution was the succession agreement of 29 September 1606, which summarized rules contained in various other documents. For example, it redefined succession and ensured clarity with regard to assets. The family’s current House Law also dates back to this agreement. It was last updated in 1993.

Further information on the House Law can be found on the website of the Princely House.

In order for a family constitution to last over time, it should be able to evolve; it should be possible for each generation to review and adapt the shared values at its core to changing circumstances and society. This makes it a good basis for concrete, legally binding documents, such as contracts and corporate structures.

Involving the next generation makes the family constitution adaptable. For example, I have advised families where the business was traditionally handed down to the eldest son. However, discussions with the children revealed that the daughters were also interested in assuming responsibility. As a result, a new arrangement was introduced into the family constitution.

Each generation has to find new, viable solutions for their specific situation. In traditionally patriarchal countries like Italy, a shift in societal values is currently underway. One reflection of this is that companies that were traditionally run by the eldest son alone, such as Barilla or Antinori, are now very successfully jointly managed by several siblings. However, which rules are included in the family constitution to govern such matters ultimately depends on the specific circumstances in the family.

Family governance at LGT

Providing advice about family constitutions is part of our range of family governance services. For more information, please visit the dedicated Family Governance website.

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