With the proliferation of family offices in Singapore, more questions on effective family governance have been raised. In this article, we will explore 10 key potential benefits of putting in place a family constitution, as well as the key questions to ask when designing said family constitution.

There are several compelling (and inter-connected) reasons for high-net-worth families to put in place a family constitution, particularly when they have substantial family businesses or significant wealth to manage. The primary goals of a family constitution are often to prevent conflicts, preserve unity, and provide a framework for effective governance. Main reasons why families create a family constitution include:

1. Prevention of conflicts – Family conflicts may arise due to differences in financial expectations, decision-making, and distribution of wealth. A family constitution sets out clear guidelines and procedures for addressing potential disputes, helping to prevent conflicts before they escalate, and may provide for alternative dispute resolution options to deal with such disputes.
2. Preservation of unity – As the common Chinese saying goes, unity breeds prosperity. High-net-worth families recognize the importance of maintaining family cohesion and unity across generations and borders. A family constitution promotes open communication, shared values, and a sense of purpose, fostering stronger family bonds.
3. Address family business dynamics – In cases where the family owns a business, a family constitution can help define roles, responsibilities, and processes for decision-making. This ensures a smoother transition of leadership and helps family members working in the business collaborate more effectively.
4. Wealth management – Managing substantial wealth can be challenging and may involve complex financial decisions. A family constitution provides a framework for managing investments, estate planning, and charitable activities, ensuring the family’s financial goals align across generations.
5. Succession planning – A family constitution can define a clear plan for succession, ensuring a smooth transition of leadership within the family business(es) or ownership of other assets. This reduces uncertainty and minimizes disruptions during leadership changes.
6. Accountability – By setting expectations for family members’ roles and contributions, a family constitution promotes accountability and discourages entitlement. This is particularly important when family members have varying degrees of involvement in the family’s financial affairs. In the context of the family constitution, establishing roles of leadership is important not just for business purposes, but also to ensure the constitution is followed and respected.
7. Facilitation of communication – A family constitution encourages open communication and regular family meetings. It provides a structured platform for discussing financial matters, sharing insights, and addressing concerns.
8. Management of continued growth and navigation of complexities – As wealth and family dynamics evolve, complexity increases. A family constitution helps manage this complexity by providing a clear roadmap for decision-making and governance.
9. Preservation of family values – The patriarchs or matriarchs of high-net-worth families often hold specific values, traditions, and charitable goals that they wish to impart to their descendants. A family constitution ensures that these values are expressed to the family clearly, and are therefore upheld, providing guidance for financial decisions and philanthropic activities for generations to come.
10. Creation of legacy – A family constitution allows families to create a lasting legacy which can span generations. It helps articulate the family’s story, values, and aspirations, which can in turn help to foster unity and prevent conflicts as mentioned earlier.

How, then, do families start crafting their constitution? Creating a family constitution is a complex and important process that involves addressing various aspects of family governance, wealth management, and inter-generational communication. We set out some key considerations and questions to ask to get the process started.

Questions to raise and issues to consider when planning a family constitution include:

1. Purpose and Vision –
   1. What are the family's values, goals, and long-term vision for wealth preservation and transfer?
   2. What are the key objectives of creating a family constitution?
2. Governance Structure –
   1. How will decision-making processes be structured within the family?
   2. What roles will family members play in governance? How will they be defined and communicated? Will there be one or two persons identified as the main stewards (i.e., leaders) of the family legacy, or otherwise?
3. Family Participation –
   1. Who will be involved in the constitution-building process?
   2. How will you ensure representation from different generations and branches of the family?
4. Wealth Management –
   1. What are the family's policies and guidelines for managing the family's wealth, investments, and assets?
   2. How will considerations related to risk management, diversification, and investment strategies be addressed?
5. Education and Communication –
   1. How will family members be informed and educated about the family constitution and financial matters? To what extent does each family member need to be involved in each aspect of the family’s matters?
   2. What channels and platforms will be used for effective communication among family members?
6. Succession Planning –
   1. How will the family address leadership and ownership transitions across generations?
   2. What mechanisms will be put in place to ensure a smooth transition of family roles and responsibilities?
7. Conflict Resolution –
   1. How will conflicts and disputes that may arise within the family be handled?
   2. What processes will be established to resolve conflicts in a fair and constructive manner?
8. Philanthropy and Social Impact –
   1. How will the family approach philanthropy and giving back to the community?
   2. What guidelines or principles will guide the family's philanthropic efforts?
9. Financial Education –
   1. How will the family promote financial literacy and responsible money management among family members?
   2. What resources or programs will be available to support ongoing financial education?
10. Regular Review –
    1. How often will the family constitution be reviewed and updated?
    2. What process will be followed to make amendments based on changing circumstances?
11. Professional Advisors –
    1. What role will professional advisors (legal, financial, estate planning) play in developing and implementing the family constitution?
    2. Which professional services do the family require and which advisors to choose? Will there be a framework on the services required and selection of professionals?
    3. How to ensure that their expertise integrated effectively?

For families with substantial family business(es), they would want to also address issues relating to their family business. The additional questions to raise and issues to consider include:

1. Business Governance
   1. How is the family business currently governed? What roles do family members play in decision-making and management?
   2. How can the family constitution align with, or enhance, the existing governance structure of the business?
2. Family Participation in Business Roles
   1. How will the family constitution define roles and responsibilities for family members within the family business?
3. Family vs Business Interests
   1. How can the family constitution balance the interests of the family as a whole with the needs of the business for growth and profitability?
   2. What mechanisms can be put in place to address potential conflicts between family members' interests and the business's best interests?
4. Entry and Exit Procedures
   1. How will family members enter the business, if desired, and what criteria will be set for their involvement?
   2. How will the family constitution address family members' exits from the business, whether due to retirement, changes in career paths, or other reasons?
5. Professional Management
   1. If there are non-family members in management roles, how will their roles and responsibilities be defined within the family constitution?
   2. How can the family constitution ensure a balance between family members and professional managers?
6. Compensation and Equity
   1. How will family members' compensation within the business be determined and aligned with market standards?
   2. How will equity ownership be managed, and how will the family constitution address equity distribution and ownership changes?
7. Conflict Resolution – Business context
   1. What mechanisms will be established in the family constitution to address conflicts that may arise within the business?
   2. How can the constitution facilitate effective communication and resolution of disagreements to prevent disruptions to business operations?
8. Business Growth and Strategy
   1. How will the family constitution support the business's growth and strategic objectives?
   2. How can the family constitution accommodate changes in the business landscape and market conditions?
9. Legacy and Values
   1. How can the family constitution help preserve the legacy, values, and culture of the family business across generations?
   2. What provisions can be included to ensure that the family business's mission aligns with the family's broader values?
10. Privacy and Confidentiality
    1. How will you address the confidentiality of family financial information and discussions?
    2. What policies will be in place to protect sensitive family matters?

Creating a family constitution requires open and honest communication, and the process may take time to fully develop. We have set out a broad overview of the key questions to raise and issues to consider. However, do note that each family is unique, and the family constitution should be tailored to their specific values, dynamics, and circumstances. Collaborating with experienced professionals in family governance and wealth management can be invaluable in navigating this process effectively.

The Dentons Rodyk team has assisted many wealthy and prominent families in their wealth and succession planning, and are able to guide families on the creation, review, and maintenance of their family constitution. Do reach out to our key contacts should you have any questions relating to family constitutions.