MANAGEMENT AND CORPORATISATION OF FAMILY COMPANIES
1.INTRODUCTION
1.1.A Basic Overview of Family Businesses

Although the family has a great place in society, family companies are also a concept that we frequently hear in the literature today and have gained a serious place in commercial life. Family companies, which are generally preferred due to considerations such as emotional attachment within the family, trust in family members, transfer from generation to generation, and indeed have some advantages, are also the addressee of many problems today. In this context, while issues such as loyalty, continuity of knowledge and trust/ pride can be defined as the advantages of family businesses, they also contain weaknesses such as complexity, lack of institutionalisation and discipline, and misunderstanding the differences between ownership, management and execution.

Family businesses are not only seen as commercial enterprises but also have a social dimension. It is possible to say that the point of sustainability stands in a more delicate balance in family businesses, which differ from other companies with this feature. Conflicts between family members, failure to ensure institutionalisation due to the family structure, and generational conflicts are obstacles to sustainability. For all these reasons, institutionalisation becomes even more essential in family businesses. The family constitution appears as a solution tool at this point.

2.FAMILY CONSTITUTION
2.1. Concept and Legal Nature

A family constitution is a set of written principles and rules that aim to regulate the interactions of family members with the business in order to ensure the sustainability of the family business in a way that will create value. Without regulating the interactions between the family and the business, the sustainability of the business cannot be ensured in a way to create value. It is of utmost importance to establish a family constitution in order to adopt an effective and ideal solution method, especially in resolving conflicts that may arise between family members due to commercial functioning.

“It is seen that the family council and the family constitution are a source of inspiration for the solution of many topics such as sustainability, conflict management, regulation of intergenerational communication, proper formation of organisational culture and structure, and acquisition of professionalism.”

In addition, the family constitution introduces rules for the participation of new generations in business management and prevents arbitrary behaviours and confusion that may arise in this sense. This is because healthy and non-constructive interactions of the family with the business in the commercial functioning will prevent the fulfilment of the requirements of professional life, and this arbitrariness is prevented by the family constitution. The family constitution, which prevents the conflict caused by the priority problem between the family and the business, actually serves as a guide in determining the conditions of business and family coexistence in the most basic sense.

The family constitution is a document that has the power to bring family businesses to these goals. It derives this power from its understanding of the family business as a whole with all its subsystems. In this context, there are certain objectives and justifications underlying the realisation of the family constitution. The family constitution is a strong commitment to keep the family’s ownership together and to carry the business into the future. It supports business growth, geographical expansion, product diversification and a complex business subsystem.

It puts the family business on a solid footing and builds trust for non-family managers and business partners. It moulds the expectations of the next generation for their role in the business. At the same time, it preserves the integrity of the family and ownership subsystem as it expands and becomes more complex with the addition of new shareholders and family members. It prevents conflicts by overcoming unnecessary misunderstandings and keeps the family together and ensures that the operation proceeds smoothly. In this context, the family constitution, prepared with the right guidance, defines the purpose, principles and values of the family, the long-term strategic goals of the family business, and clarifies issues related to labour relations, administrative issues, responsibilities, legal rights and ownership structure.

It includes written principles and rules that outline the boundaries of the family’s relations with the business, protecting both the peace of mind of the family and the identity of the business, and includes succession planning for the healthy transfer of the business to future generations and thus plans the future of the business.

The family constitution is a contract prepared and signed by the family members and includes issues related to the business and is essentially a debt contract. However, it is not one of the typical contracts in the Code of Obligations (“Code”) and is based on the principle of freedom of contract. According to this principle, the parties may make decisions and regulate certain matters with their free will at the points where freedom of contract is foreseen, except for exceptions. Within the limits stipulated in the law, the contract may not be contrary to morality, public order, personal rights or its subject matter may not be impossible. There are various types of contracts in our law.

In the light of these explanations, the family constitution is not subject to the formal requirements of the Code of Obligations. However, it is binding between the signatories. At this point, it should be especially noted that the family constitution does not require the signature of all family members and is not a binding document for the members who do not sign it. However, it has the quality to affect the whole enterprise due to the provisions it contains.

2.2.Elements of the Family Constitution

The family constitution must include issues such as family vision, mission, objectives, share ratios, training of family members, wage evaluations, criteria to be valid in the selection of management, reasons for promotion. In addition, the family council is the place where the issues that form the basis of the family constitution, from who will manage the business in the future to the financial expectations of the relatives within the company, are decided. In this sense, the family council should be in integrity with the family constitution in order to act as a guide in the formation and implementation of the family constitution and to carry the values to future generations.

Determining the main values, principles and philosophies that hold the family together, determining the point that the family wants to reach in the future regarding itself and its business operation is one of the important elements that need to be clarified when creating a family constitution.

Some criteria that can be taken into consideration in this process and which are important to be included in family constitutions can be found in a general framework. For example

Determining the strategic commercial targets that can shed light on the agreed family values and goals, and the growth rate of the company and the family on a yearly basis,
Carrying out studies on which policy can be followed in processes such as growth or stagnation that the company may enter into and communicating the principles determined to the family members,
Determining the criteria for recruitment, evaluation and remuneration of family members within the company,
Drawing the road map of the consultancy processes to be implemented in order to incorporate future generations into the company and to carry out the operation,
Determining retirement ages for managers who are part of the family,
Determining the share and place of company income in meeting needs such as holidays, health or education within the scope of personal investments,
Determining policies to transfer family history to future generations,
The existence of certain evaluation criteria for the involvement of family members in management activities,
Determining the sanctions that can be applied in case of breach of the family constitution and framing a disciplinary procedure,
Development of different applications within the scope of marriage / divorce relations between family members,
Determination of basic principles in terms of shareholders’ interests and profit distribution,
Preparation of the policy to be followed against family members who leave the family business and establish their own companies,
Planning the acquisition of company shares by family members,
Determining the road map to be followed in case of changes in the family constitution will play a major role in the creation of the family constitution.
2.3. Amending the Articles of the Family Constitution

The family constitution is not regulated in any legislation. In this respect, it is necessary to reach some answers on the enforcement and amendment of the articles of the family constitution by analogy. The family constitution is similar to the shareholders’ agreement at many points. In this respect, it may be possible to benefit from the literature of the shareholders’ agreement.

Since the family constitution does not depend on the form of validity, it can be established with the mutual and appropriate declarations of the parties and even with the implied will of the parties. However, the parties to the family constitution may, if they wish, stipulate a form requirement in accordance with the Turkish Code of Obligations. In terms of the law of obligations, a family constitution that is agreed to be made in writing will probably be valid with the signature of the family members.

Another point to be discussed in this respect is the amendments to be made to the family constitution. After the articles of a family constitution are published, certain conditions are required for amendments to be made. As is known, the amendment of the articles of association is subject to form pursuant to Article 408 f.2 of the Turkish Commercial Code. In this article, it is mentioned that a General Assembly resolution is required for the amendment of the articles of association. Furthermore, Article 421 of the TCC regulates and obliges the meeting and decision quorums required for the general assembly resolutions on the amendment of the articles of association. In addition, Article 455 of the TCC stipulates the obligation of registration in the trade registry after the adoption of this resolution. From this point of view, since the family constitution may be amended in accordance with the general provisions of the TCO, it should be accepted that the approval of all family members who are parties will be required for the amendment.

2.4. The Role of the Family Constitution in the Sustainability of Family Businesses

In general, the principles and principles related to management in enterprises can also be considered valid for family businesses. However, due to some characteristics of family businesses, the management issue also shows some unique changes. For this reason, the functioning within the family and family psychology are of great importance.

The most important obstacles to the professionalisation and continuity of family businesses are the reluctance of the business owner to transfer the management and the fact that the criterion of being a family member comes before merit and competence in the selection of management staff. At this point, ownership and management should be separated at the right time.

With the growth of family businesses, family businesses may disintegrate due to reasons such as the inability of the founders of the company to control all the business and transactions as in the beginning, conflicts within the family due to the identification of the family institution with the company, the reluctant attitude of the next generation towards management, and the lack of control of family members over the work done. As can be seen, failure to achieve consensus within the family may have a direct impact on the management and stability of the company.

In order to preserve the existence of family businesses, professional management is required. At this point, it is necessary to organise some rules for the protection of the company’s existence by family members and to make these rules binding. The family constitution is an important threshold for the smooth and professional management and continuity of family businesses.

2.5.Family Constitution and the Place of Future Generations within the Company & Sanction

As mentioned under the heading of the elements of the family constitution, there are various determinations and determinations about shareholders, heirs and the next generation within the scope of family constitutions. At this point, it is useful to evaluate these groups of people together when creating family constitutions of family businesses. In family businesses, it can often be seen that future generations are often excluded, especially due to family ties, and therefore disputes that may arise within the family remain unanswered at the point of future generations. However, it is obvious that one of the most basic functions of family constitutions is to bring some regulations at the point of passing the existing company to new generations and to ensure that the transfer from generation to generation is carried out smoothly and within the framework of rules. In other words, the family constitution is in essence the family’s goal/mission statement for both current and future generations.

In this context, the family constitution may include the scope of powers and responsibilities of family members who are or will be involved in management through shareholding, succession and inheritance, the transfer of powers and responsibilities between generations, the qualifications that family members should have in order to work in management or any other position within the company, the education of future generations and the investments required for this.

Considering that family constitutions can be prepared company-specific, family constitutions may also include training plans for the development of the qualifications and skills of future generations who will take part in the management of the company, and activity plans for gaining internal/external experience in the management and functioning of the company. It is important to include such rules in order for family companies to survive and institutionalise.

2.6.Legal Bindingness of the Family Constitution and Sanctions in Case of Violation

The family constitution is a text that can be enacted as an atypical contract accepted by the family members and in case of breach, certain sanctions can be regulated. In this respect, the sanctions that may be imposed in case of non-compliance with the provisions of the family constitution may be determined according to the dynamics of the families themselves. In short, the family constitution may include legally binding provisions for the family member shareholder and other family members in relation to future matters.

It may also be possible to regulate a complementary provision stipulating that a contractual penalty sanction will be applied in case of non-compliance with the matters regulated by the family constitution. Since each family company subject to the family constitution may have different needs and priorities, the relevant provisions may be regulated in order to support each other or different points stipulated in the constitution. In this respect, the purposes for which these rights are enshrined will differ for each family business and family, and therefore the penalty to be included in each family constitution may be a different penalty to meet these needs.

It should be recognised that the rules and policies of the constitution should be binding on family members. In this respect, the doctrinal proposals arising from the need to ensure continuous monitoring of compliance with the constitution should be taken into account, especially in the event that the previous generation is no longer alive and an existing clause is not complied with by the next generation. These can be listed as penalty clauses to be determined in the family constitution or sanctions regarding the exercise of voting rights and limitation of share transfers. In addition, some penal sanctions may be in question based on the loyalty obligations of family members towards the company.

3. EXECUTION OF FAMILY CONSTITUTION PROCESSES WITH CONSULTANCY SERVICES

Family businesses are usually established by family members and therefore may have a closed appearance. However, as the company grows, it is not possible for the founder to meet all the needs of the company. For this reason, with the increase in the needs of the company, a number of professionals are needed and thus the need to develop a “corporate” structure arises.

This institutionalisation initiates the process of including non-family members in the company. In some cases, the fear of institutionalisation and trust problems prevent working with a consultant when drafting the family constitution.

So, what are the advantages of working with a consultant firm when writing a family constitution? It should be taken into consideration that the framework may be narrowed in terms of the formation of many different visions and ideas within the company due to the fact that the people within a family company are in a “family integrity”. In this respect, including different ideas in the management of the company, working with a consultant while drafting a family constitution will enable the company to develop its vision, make strategic decisions and take steps towards institutionalisation. Including people with different expertise and/or perspectives within the company will facilitate the institutionalisation of family businesses and facilitate business processes in the future.

While creating the family constitution, the consultant can easily identify and define the current situation of the company, and even with the help of consultancy companies, the company can be audited from several different aspects and can add a different dimension to the family constitution with risk analysis. The consultant can add different perspectives to the company as a third eye and at the same time, since he/she is not a family member, he/she can act as a referee as an impartial person. In this respect, applying to an external professional support both in the Board of Directors and in the formation of the family council and in the family constitution processes can make a great contribution to family businesses both in the short and long term.

4.CONCLUSION

A family constitution is one of the keys to sustainability in today’s ecosystem, where the family structure has moved into commercial life and occupies a large place in the sector. When we take a look at the statistics, it is seen that only three out of every ten family businesses can be transferred to the next generation, and the average life expectancy of family businesses worldwide is known to be twenty-four years. It is an inevitable fact in family businesses that major problems arise in the processes of transfer and continuity from generation to generation. Therefore, having a family constitution will provide a great convenience in eliminating the elements that threaten the continuity of the business by preventing most of the potential family conflicts. In order for the family constitution to be put into practice and to be implemented in a healthy manner, it will be important that the internal support, audit and documentation in the business are of a quality to support the implementation.

Best regards,

GRC|LEGAL