Ensuring Continuity of Family Vision & Values in the Family Enterprise


1. Family Business Philosophy

Every family has their own vision, values, and business philosophy. However, putting this vision and philosophy into practice in the family business can pose challenges. How can an enterprising family guarantee that their vision for the business has legal force to guide corporate decision-making? Further, how can a family ensure that their values and philosophy are carried through successive generations who continue the family business?

Even in family enterprises with robust governance structures, succession of the family business is still prone to failure. But why is this? Often, succession falters not due to inadequate planning, but due to misalignment among family enterprise members on critical aspects such as values, policies, and vision.

Fortunately, there are many tools available that family members can use to put their business philosophy and values into writing. Some of these tools include a family vision or mission statement, a family charter or constitution, and a family shareholders’ agreement. This article provides an overview of each of these documents, sets out the differences between them, and outlines how businessowners can take advantage of vision statements, charters, and shareholders’ agreements to ensure success and continuity of the family business.

2. Family Values, Vision, and Mission Statements

Family businesses benefit from having clearly defined values, mission, or vision statements. Creating and adhering to a family vision statement lays the groundwork for nurturing a family business from its core principles outward, by establishing the family’s desired philosophy for the business and creating a sense of purpose and alignment among family members. These statements can also contribute to the success and sustainability of a family business in future generations by shaping its culture, decision-making processes, and relationships with stakeholders.

A vision, mission or values statement will usually address overarching philosophical questions like, “what values do we want our business to promote?,” “what are the goals of our family business?” or “what does our business stand for?”. As such, a well-crafted family business statement serves as a vital tool for fostering unity and addressing communication challenges within a family business. Especially in times of conflict, referring to the vision statement helps in resolving disputes by providing a shared philosophical framework.

3. Family Charters or Constitutions

Family members that are involved in the success of a family business often use family charters to set out how the business is to operate. While family charters are not legally binding, they are still helpful in outlining how family members are to steer the business through periods of struggle and growth.

Some key elements of a family charter are:

  1. Mission statement, vision, core values, and codes of conduct: As discussed in the previous section, these overarching values statements provide a foundation that family members can turn to when major decisions or conflicts arise.
  2. Parties and governance: It is important to consider whether the family charter applies only to the immediate members of the family running the business, or any spouses and grandchildren as well. The family charter will appoint leaders and assign each family member a role.
  3. Organizational chart: The organizational chart portrays the “hierarchy” of the business, including any parent companies or subsidiaries, as well as the shareholders.
  4. Assets and liabilities: A family charter may contain information around how assets are held, who liabilities are owed to, when assets may be transferred, and how liabilities may be discharged.
  5. Key legal agreements: The family charter may refer to relevant legal agreements. These may be typical business agreements, like shareholders’ agreements or loan agreements, or more “personal” agreements, like wills or separation agreements.
  6. Decision-making and dispute resolution procedures: There may be requirements for family members to confer when major decisions are to be made. Family members may also be required to partake in negotiation or mediation when conflicts arise. Following a set protocol ensures the needs of the business are prioritized.
  7. Succession: The family charter should lay out a succession plan. It will also describe what happens upon the death, disability, exit, or retirement of any family members that are active participants in the business.

4. Family Shareholders’ Agreement

However, neither family vision statements nor charters have the force of law, meaning that, while they provide valuable guidance, they cannot technically govern corporate decision-making. One way of solving this problem is by incorporating aspects of your family vision statement or charter into a family shareholders’ agreement. This will guarantee that the important information contained in your family’s vision statement or charter is communicated to the board of directors and ensure the board will consider the family’s values and philosophy in their management of the business. While directors always have a fiduciary obligation to make decisions that are in the best interests of the corporation, they can still consider the interests of stakeholders in the business, including members of the family enterprise and their vision and values.

A shareholders’ agreement is a binding contract among the shareholders of a business that goes beyond its articles and constating documents. It establishes ownership rights, responsibilities, and business operation guidelines. In family businesses, it governs relationships among family members who own shares, covering share ownership and director appointments, and setting out processes for transfer of shares in the context of major family events like death, disability, or divorce. A shareholders’ agreement differs from the business’s Articles of Incorporation, the latter being a document lodged with the corporate registry detailing fundamental aspects like the board of directors’ composition and the types and quantity of shares of the company. Unlike corporate Articles, a shareholders’ agreement is flexible and straightforward to modify.

Some key elements of a shareholders’ agreement in the family business context include:

  1. Governance: The shareholders’ agreement will describe the composition of the board of directors and the process for filling any board vacancies.
  2. Voting: The shareholders’ agreement will refer to any majority, unanimous, or super-majority voting requirements. A unanimous or super-majority requirement may apply to significant actions, like the sale of all the assets of the family business.
  3. Restrictions on share transfers: These could include, for example, a right of first offer whereby a shareholder must offer to sell their shares to other shareholders before making any offer to third parties. The shareholders’ agreement may permit certain transfers outright, such as the disposition of shares to a family trust.
  4. Deadlock and Dispute resolution: A shareholders’ agreement may require shareholders to partake in certain dispute resolution procedures, like arbitration, when conflict arises. In more extreme cases, the shareholders’ agreement may require the business to be wound up and any profits from the sale of its assets to be distributed to the shareholders.
  5. Business disruption: The shareholders’ agreement may address what is to happen in the case of disability, death, mental incompetence, and retirement of shareholders. Buy-out options may also apply.
  6. Succession: The shareholders’ agreement may include a process by which a family business is to transfer from one generation to the next. It will also define the specific events that trigger the succession plan.

5. Conclusion

While there is overlap between documents like a family vision statement, family charter and family shareholders’ agreement, each serves a distinct purpose. A primary difference between these documents is that a shareholders’ agreement is legally binding, whereas a family charter or vision statement is typically only morally binding. However, one way to bridge the gap between these two types of documents is by referentially incorporating aspects of a family vision statement or charter into the shareholders’ agreement, as this article has discussed.

The employees, executives, and shareholders of a family business also rely on each document differently. For example, family members may be deeply involved in the development of a family charter or vision statement, whereas officers and senior management may only be consulted on it. In contrast, the officers play an active role in drafting a shareholders’ agreement, while the family members might simply sign on to it.

It is important to note that where conflicts exist between these documents, the shareholders’ agreement will prevail. This can be especially crucial where a family charter or vision statement contemplates one course of action in a dispute, whereas a shareholders’ agreement describes another. However, careful drafting of these documents together as a cohesive framework can help to ensure that no conflicts occur. Despite differences between these three documents, family members can take advantage of all of them to ensure strength and continuity of the family business. All three documents, when drafted correctly, complement one another, and provide a fulsome framework that a new generation can rely on when they take over the business.

If you have any questions about family charters, vision statements, or shareholders’ agreements, or are looking for guidance around succession planning, please reach out to a member of our Family Office or Private Company Mergers & Acquisitions groups.