I. Introduction: The Crisis of the Third Generation
There is an old adage found in nearly every culture: "Shirtsleeves to shirtsleeves in three generations." (In Japan: Rice paddies to rice paddies; in Italy: Stables to stables). Statistics show that 70% of wealthy families lose their fortune by the second generation, and 90% by the third.
Most families assume this failure is due to bad investment advice or high taxes. In reality, a landmark study by Williams & Preisser found that 60% of wealth failure is due to a breakdown of communication and trust within the family. Family Governance is the practice of creating rules, roles, and rituals to prevent this collapse.
II. What is a Family Constitution?
A Family Constitution (or "Family Charter") is a formal, written document that outlines the family’s mission, values, and the rules for how they manage their collective assets.
Unlike a Trust, which is a legal contract, a Constitution is a moral contract. It is the "North Star" that guides the family board when the law is silent. It transforms a group of relatives into a Legacy Team.
III. The Core Components of a Constitution
A 1,000-word authoritative constitution usually covers five key areas:
1. The Mission and Values Statement
This defines why the family stays together. It moves the focus from "How much money do we have?" to "What do we stand for?"
Example: "We value education, entrepreneurship, and philanthropy over consumption and leisure."
2. Policies on Distributions (The "Anti-Entitlement" Rules)
The Constitution defines how family members access wealth. This is where you codify the "Matching Rule" or "Merit-Based" distributions.
It answers: Can a 22-year-old buy a Ferrari with trust money? (Usually: No). Does the trust pay for a Master's degree? (Usually: Yes).
3. The Family Bank (Venture Policy)
Instead of giving "handouts," many families use the Constitution to create an internal bank. Family members can pitch business ideas to the "Family Board" to receive low-interest loans. This treats the next generation as entrepreneurs, not dependents.
4. Governance and Conflict Resolution
How are decisions made? Is it a democracy, or does the founder have a "Golden Vote"?
The Family Council: A formal body that meets 1-2 times a year to discuss family health and education (The "Soft" side).
The Family Board: The group that manages the Holding Company and investments (The "Hard" side).
5. Entry and Exit Policies
This section handles the "in-laws and out-laws." It covers requirements for prenuptial agreements and the process for a family member who wants to "opt-out" of the collective wealth to go their own way.
IV. The "Three-Circle Model" of Governance
To understand governance, you must understand that every family member sits in one of three overlapping circles:
The Family Circle: Everyone related by blood or marriage (Focus: Harmony).
The Ownership Circle: Those who own shares in the Trust/Holding Company (Focus: Equity).
The Management Circle: Those who actually work in the family business (Focus: Performance).
Governance fails when these circles get blurred—for example, when a family member feels they deserve a high-paying job in the company just because they are "in the family circle," regardless of their performance.
V. The Rituals of Governance: Family Assemblies
A constitution is useless if it sits in a drawer. High-performing dynasties use Rituals to keep the software running.
The Annual Retreat: A 3-day meeting where the family reviews the "State of the Union."
The Education Series: Younger members (ages 14-21) are taught the basics of the family’s history, financial literacy, and the "Steward’s Oath."
Philanthropic Projects: The family votes together on where to donate 10% of the year's profits. This builds the "muscle" of collective decision-making.
VI. Why "Social Capital" is the Secret Sauce
In the Medici case study, we saw that the bank failed when the heirs stopped caring about the bank's reputation. A Family Constitution protects Social Capital—the family's name and standing in the community.
By codifying a code of conduct (e.g., "No public flaunting of wealth," "Mandatory community service"), the family ensures that the actions of one "black sheep" do not destroy the opportunities for the rest of the lineage.
VII. The Legal "Teeth": Integrating with the Trust
While the Constitution is a moral document, it gains "teeth" when the Trust references it.
The Strategy: The Trust document can state that "The Trustee shall consider the guidelines set forth in the [Family Name] Constitution when determining discretionary distributions."
This allows the family to change the rules of the constitution as the world changes, without having to perform an expensive and difficult "Trust Decanting" (legal rewrite).
VIII. Checklist for Drafting Your Governance
The "Why" Test: Ask every family member over age 12: "Why should we stay together as a financial unit?"
The "Entrepreneur" Rule: Define the difference between a "gift" and a "loan."
The "Pre-Nup" Clause: Make it a family-wide requirement so that no one individual feels "singled out" when they get engaged.
The Dispute Resolution: Appoint a "Family Ombudsman" or a neutral third-party mediator to handle disagreements before they reach a courtroom.
Conclusion
Wealth without governance is a disaster waiting to happen. The legal structures of your "Fortress" protect you from the outside world, but Family Governance protects you from the inside. By drafting a Family Constitution, you are moving from a "Parent-Child" relationship to a "Partner-Steward" relationship.
Internal Encyclopedia Links:
See: The Three-Generation Curse: Why Wealth Disappears
See: Merit-Based Distributions: Killing the Trust-Fund Mindset
See: Trust Decanting: How to Update an "Irrevocable" Plan
Related to: The Ultimate Guide Part 4: The Human Element