Family charters are critical for sustained success

A family charter helps owner-managed businesses navigate challenges such as conflict and succession issues, writes Siobhán Maguire.

By defining clear roles, responsibilities, and guidelines, a family constitution or charter can prevent confusion and conflict, ensuring family members work towards a shared vision that will keep the company running successfully.

That’s according to Alan Murray, partner, tax, at Forvis Mazars, one of Ireland’s industry leaders in audit and accounting, tax, financial advisory and consulting services. 

“Let’s take the example of a large family company that is predominantly owned by family members who have shares in an extremely valuable cash rich company,” says Murray. 

“How do they make sure that the company is run efficiently and effectively? They need to have some set of rules in place like a family constitution or family charter which is an internal document between family members as to how things are run. 

“In a lot of situations it is dictated by common sense because you cannot have one shareholder of that company, who is also a family member, expecting to be able to take from its cash reserves because their name may be above the door unless of course all shareholders are happy with this.”

 Murray said in his experience he has always found it best for family members embarking on a business together to sit down and agree on how they will interact with one another and run the company from its inception.

“If you have a successful company that you want to use as your personal bank, that’s entirely up to you as the owner, but if you have a large successful company that is still privately owned by family members and that company has a lot of cash, there has to be internal governance how it is run in terms of the family shareholding and how to deal with family members in the course of running that business,” he adds.

“You are entitled to money or a dividend if the family business has a distribution policy, but one shareholder cannot go in and start taking out money under their own volition because that may damage the cash flow of the company, and possibly cause issues with  the other stakeholders in the business.”

Maintaining a harmonious and professional environment that promotes cooperation and trust among family members is an essential part of any charter or constitution. It provides a roadmap for sustainability by outlining succession plans, ownership structures, and expectations for future generations. Without such instructions, problems can arise, says Murray.

“Typically where you see issues creep in is where adult children join a family business which has been successfully run by their parents and managed by those parents until the business passes on to those children,” he explains. 

“When shares are passed on to those children who then pass on those shares to another generation, their children or wider family members, a certain dilution of the company takes place making it even more essential to have a charter in place to ensure that every shareholder is aware of the company’s governance, principles, and guidelines.”

Murray adds that is where the importance of a “right of first refusal” comes to the fore, where existing shareholders in a corporation have the right to purchase shares from an existing shareholder before they can be offered to others. 

“If I want to sell my shares, I can’t sell them to a stranger. I have to sell them to family members or offer them to family members and that discussion is essential early on in any family-owned business,” he says. 

“Sometimes, these things only arise when, say, extended family members get involved and the shareholding profile becomes diluted, and if there’s no constitution in place at that time it can become a problem.”

Murray says having those tough conversations and getting an agreement from all parties is key to maintaining the success of any family-run company.

“You’re bringing everything into the open and you’re sitting with family members who are getting on fine and everything is amicable, but it is still important to say to these people that problems may arise and you must be prepared for that,” he comments. 

“If a parent passes on and a child is left with equity and looks at the balance sheet of the company and sees there’s €100m in cash on the balance sheet, they have to know that they may not be able to get their hands on that money. That money is essential to the business running on a sustainable and professional basis and protecting employees and other stakeholders.

“So there are things that need to be ironed out and made clear in any company constitution like if I own shares, who am I entitled to give those shares to? If I die, do I pass them to my children or are there restrictions in place on passing them to non-family members? You have to get in front of all this and make sure there is proper succession planning in place to ensure the business  will continue to operate successfully.”

Published in the Business Post on Sunday, 23 February 2025.