Family businesses are acutely aware of the dangers they face. Most family-owned businesses are “rich for three generations,” with the succession of power, the dispersion of wealth and control, and the collapse of a budding corporate dynasty.
More family-run businesses are working on the development of “Family Fundamental Law,” which can also be called a charter or agreement, to ensure that businesses development will thrive and their businesses grow. The expressions in the Basic Law set out a family’s values, strategic objectives, and governance models.
The Fundamental Law of Family Business is Not a New Thing – The Mitsui merchant family in Japan drafted a book in 1722 – but its scope of use has expanded, especially in the past 10 years. The financial crisis has brought controversies surrounding the direction of asset allocation and enterprise development, helping to increase the popularity of such basic laws. Other factors that have spurred the growth of such basic laws include fluctuating oil prices, political turmoil and the outflow of domestic wealth in China and India.
“The family law is very helpful in this regard since the family’s goal is to pass on a family business or family wealth handed down from generation to generation.” Bernard Rennell, head of family governance at HSBC Private Bank, Say.
A PwC survey of 2,800 family-owned businesses found that the percentage of family-owned businesses that the owners of the business have drawn up a business development blueprint for basic laws ranges from 63% in Finland to 4% in Japan. In India, this is 36%, Germany 9%, the United States 18%, Britain 14%, and China 8%.
Holders of families Holders of the Basic Law include GM Rao GMR Group, an infrastructure and manufacturing company founded in India; Carvajal, a multinational corporation headquartered in Colombia that publishes and packs; Dachser, a German logistics company; ).
In 2005, the Chinese Dawangwu family passed a basic law on family businesses. Earlier, Dawuwu, founder of the Dafu Farming and Animal Husbandry Group, was jailed for six months in prison because of plans to borrow from farmers were found guilty of misusing public funds. This experience taught him the need for a business development governance system to ensure the company’s viability. Generally speaking, the basic law of a family business elaborates on a family’s values and vision, the criteria for selecting business leaders, and the rights and responsibilities of family members who participate and do not participate in business operations. However, the basic law of different family businesses is not the same in detail.
“There’s really no uniform length, form, or content for the Fundamental Laws of the family business that is entirely tailored to each family,” said Mustafa Hussain, the partner at Taylor Wessing. , Who drafted the Basic Law for many families in the Middle East and Asia. According to different situations, the length of these Basic Laws ranges from 6 pages to 30 pages.
In addition to the statement of purpose, Hussein said the most important items are those designed to ensure the unity of all members of the family. “Keeping the unity of wealth and family members avoids the consequences of being rich for three generations,” he said.
Some terms are often ad hoc to the needs of the business. For example, the Schurter family, which owns a Swiss electronics component company, promises to generate 1% of its revenue each year for innovation. The basic law of India’s GMR Group defines the car model that each family member is entitled to.
The basic laws governing family businesses are generally not legally binding, but they must also be elaborated to suit the shareholders’ agreement and take into account the organizational structures of enterprises, foundations, and trusts. Lunner said it is important to ensure the legal effectiveness of the decision-making process.
For consultants, lawyers and wealth managers, the family law is an expanding area. Families often involve consultants to deal with discussions about the development of a basic law that could trigger controversy over changes in control and wealth.
However, once an agreement is reached, the Basic Law helps to avert conflicts. “They tend to follow written rules and in the future, when a family member wants to buy or leave without knowing what to do with it, he can go back to the Basic Law,” Hussein said.
The advisors encourage the basic laws of all families to keep pace with the times. The William Jackson Food Group in the United Kingdom enacted a basic law in the mid-1990s and every 5 years thereafter. The group, founded in 1851, is still owned by the descendants of the company’s founders.
“The larger the size of the organization you work with, the greater the challenge.” We need to have a highly structured governance system, “said Nicholas Interred, the great founder of the group, Nicholas Oughtred told EY that the latter is writing a family business report.
Elizabeth Bagger, executive director of the British Family Business Association (IFB), said more of the first- and second-generation families are adopting the Basic Law. In her view, the benefits of such basic laws can be good, but what may need to be avoided may be “too rigid and normative.” The use of the Basic Law can not guarantee the avoidance of conflicts.
“You still have to negotiate and you still have to get in. Communication is also a key factor, and good business development governance and communication are important,” says Barghorne.