Family Constitution For Sustainability In Family Businesses
In Turkey, approximately 90% of the national income is produced by family businesses. The share of family businesses in the global economy is also very high. The ratio of family businesses to all companies is 99%, 90%, 80%, 70%, in Italy, in the United States, in Germany and in the UK, respectively. In this regard, it can be said that family businesses shape the economies of developed countries and the global socio-economic structure.
It is a known fact that family businesses can survive for generations when they are managed correctly. For instance, the construction company Kongo Gumi, founded by the Kongo family in Japan in 578, has survived for 49 generations. To give an example from our country, Vefa Bozacısı was founded by Hacı Sadık in 1870 and has been standing for 4 generations. Various large companies such as Koç, Sabancı, Ülker, Zorlu, Eczacıbaşı, and Nurus are among the other family businesses that have contributed significantly to our country's economy for several generations.
On the other hand, the fact that there are a lot more unsuccessful examples than the successful ones mentioned above should make everyone think about the management of the family businesses. According to various published statistics, about 30% of the family businesses turn into second-generation businesses in Turkey, approximately 10% are passed down successfully to a third generation, and around 2-4% to a fourth generation. It is well-known that some family businesses have been in a deadlock due to the conflicts arising from family dynamics for years, and even some cases have been brought to the court.
Although the 'family' element in family businesses sometimes provide an advantage compared to other companies, it often turns into a disadvantage if the businesses are not managed properly. To mention briefly about these advantages and disadvantages; we can say that one of the most positive features of family businesses is the resilience that they can show against the crises that may occur frequently in commercial life. An Asian-focused study has shown that family businesses have better financial performance than other companies in case of an economic crisis. (Özkul, 2016: 12). Likewise, it has been determined that the family business employees have a higher loyalty rate and less bureaucracy than other companies. On the other hand, the biggest disadvantages of family businesses emerge mainly as the reflection of family dynamics on work, nepotism, the inability of the old generations to delegate authority, and the insufficient performance of the new generations or their unwillingness to involved only with the family business. However, it has also been highlighted in certain studies that problems in the intergenerational delegation of family businesses in Turkey and conflicts arising within the family are seen as natural. (Özkul, 2016: 12).
So, how do we lengthen the life of our family businesses?
It is now a well-known fact that the secret of the sustainability of companies in the century we live in is the institutionalization of the companies. However, 'institutionalization' scares entrepreneurs, especially business owners, and the institutionalization of the family business is met with reluctance due to the perception that the influence and management powers of family members (particularly the first generation) on the company may decrease or even be lost, and the management of the business may be left entirely to professionals. On the contrary, institutionalization does not necessarily mean that business owners withdraw from work and lose their control over the business but rather, it can be defined as the product of efforts shown to ensure that family businesses can operate in a healthy and successful way, and to provide the next generation with a well-functioning business system.
First generations in family businesses tend to refrain from sharing authority and responsibilities with professionals and even with next generations of the family, due to perception that their strategies that has led to significant gains over the years will always be successful. What is more, even if they share authority and responsibilities to a certain extent, it is frequently seen in practice that the framework of this sharing is not made permanently and sustainably in accordance with family and company dynamics.
As a matter of fact, it is by no means unachievable to prevent potential problems that may occur within the family and the company on the way to institutionalization, or to easily resolve such problems if and when they arise. On the contrary, establishing the right communication channels in a correct framework which should depend on well-regulated solution methods that the parties understand and agree on is quite feasible. Hereby, the main aim is to organize the "predictable consequences of potential problems" in a written and systematic way.
At this point, the family constitution comprises a set of rules which includes arrangements to create an organizational structure suitable for family dynamics, to establish effective communication channels, to ensure an efficient delegation of authority and responsibility, and to make operational processes controllable, by getting support from professionals. In other words, the family constitution includes the rules to be followed during the transfer of the family business to the next generation, the management principles, how and with what majority strategic decisions will be taken, how and at what intervals the dividend payments will take place, under what conditions the next generations can work in the family business, rights and responsibilities of family members in the family businesses, the status of spouses, and how and at what intervals the family constitution will be reviewed. To exemplify, various criteria can be brought according depending on the nature of the job, such as working in other companies for a certain period or learning a foreign language before future generations start working in the family business.
Just as every family has a different cultural structure, every family business also has its own dynamics. In the process of creating the family constitution, the family orientation has a great impact and the family constitution should be prepared in line with the dynamics, size and goals of the family. Therefore, every family constitution needs to be formulated separately in such a way that it is tailer made for the family business to which it will be applied. In this context, getting support from non-family professionals in the process of structuring, drafting, and negotiating the family constitution is of great importance in terms of the legality and applicability of the family constitution. In the process of creating the family constitution, these constitutions are not usually signed due to the inability to reach an agreement among family members, or the rules and regulations that are not suitable for family dynamics are put into effect before some family members come to the terms with it. Unfortunately, it would not be possible for a family constitution put into force in this way to be successful. In addition, in order to ensure the legality of the family constitution; the articles related to the decision-making mechanisms to be included in the family constitution shall be regulated in accordance with the mandatory rules in the Turkish Commercial Code No. 6102.
İnci Holding is a good example of the sustainable success of family companies that have written and implemented a family constitution. İnci Holding started to work on the family constitution in 1995, created the first family constitution in 1998, delegated the chairmanship of the board of directors to the second generation, in 2003. Later on, with the participation of the third generation in 2007, a shareholders' agreement binding for all shareholders in the company, regardless of whether they are family members or not, has been signed in 2007. Thus, the company finalized the harmonization process of the family constitution with Turkish Commercial Code, which was amended in 2012.
It is not so difficult to prevent family businesses, which were established with years of effort, from being terminated due to decease or retirement of the founder or the first generation. Neither is to increase the profitability and brand value of the company, to leave a well-functioning system to future generations and to avoid or simply resolve potential conflicts between family members.
In short, a family constitution is a must for a sustainable company and family members who want to feel safe and peaceful…