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Family Constitution (Case Study 2: The Carjaval Group)

Provided by IFC Corporate Governance

Definition: The family constitution is also referred to as “Family Creed”, “Family Protocol”, “Statement of Family Principles”, “Family Rules and Values”, “Family Rules and Regulations”, and “Family Strategic Plan”. The Family constitution is a statement of the principles that outline the family commitment to core values, vision, and mission of the business.[1] The constitution also defines the roles, compositions, and powers of key governance bodies of the business: family members/shareholders, management, and board of directors. In addition, the family constitution defines the relationships among the governance bodies and how family members can meaningfully participate in the governance of their business.[2]

The family constitution is a living document that evolves as the family and its business continue to evolve. As a consequence, it is necessary to regularly update the constitution in order to reflect any changes in the family and/or the business.

Components: The form and content of family constitutions differ from one family business to another depending on the size of the family, its stage of development, and the degree of involvement of family members in the business. However, a typical family constitution will cover the following elements:

- Family values, mission statement, and vision.

- Family institutions, including the family assembly, the family council, the education committee, the family office, etc.

- Board of directors (and board of advisors if one exists).

- Senior management.

-  Authority, responsibility, and relationship among the family, the board, and the senior management.

- Policies regarding important family issues such as family members’ employment, transfer of shares, CEO succession, etc.

Although most family companies don’t have a formal constitution, they usually have an informal set of rules and customs that determine the rights, obligations, and expectations of family members and other governance bodies of the business. As the family increases in size, it becomes crucial to develop a written and formal constitution that is shared among the governance bodies and all family members of the business.

CASE STUDY 2 - The Carvajal Group
Family Protocol - Table of Contents

The Carvajal Group is a leading privately-owned Colombian multinational company with businesses in 19 countries, primarily in Latin America. The Carvajal Group operates in 12 different sectors, the largest of which are: paper manufacturing and conversion; school and office supplies; telephone directories; publishing and editing; and plastic and paper packaging.

The Carvajal Group was founded in 1904 in Cali, Colombia, by Manuel Carvajal Valencia who established a printing company called La Imprenta Comercial. Over time, the company expanded into other businesses and regions to become one of Latin America’s most respected multinational firms.

IFC’s two investments in the Carvajal Group, in 2004 and 2006, had a purpose of supporting the Group in its strategic and modernization plans. The most recent IFC investment in the Carvajal Group is related to the revamping and modernization of the Group’s information systems. IFC has also provided advice to the Carvajal Group in the area of corporate governance.

Table of Contents of the Family Protocol of The Carvajal Group[1]

 A. Objective of the Family Protocol

            1. Integrity of the Carvajal Company

            2. Unity of the Carvajal Family

B. Family Institutions

            1. Family Assembly

                        a. Objective of the Family Assembly

                        b. Functions of the Family Assembly

            2. Family Council

                        a. Objective of the Family Council

                        b. Composition of the Family Council

                        c. Functions of the Family Council

                        d. Decisions of the Family Council

                        e. Frequency of Meetings of the Family Council

3. Council for the Development of Family Members Working in the Company

                        a. Objective of the Development Council

                        b. Composition of the Development Council

                        c. Functions of the Development Council

C. The Carvajal Family Foundation (Charity Institution)

            1. Objective of the Family Foundation

            2. Board of the Family Foundation

            3. President of the Family Foundation

D. Institutions of the Company

1. Shareholders Meeting

                        a. Objective of the Shareholders Meeting

                        b. Decisions of the Shareholders Meeting

            2. Board of Directors

                        a. Objective of the Board of Directors

                        b. Composition of the Board of Directors

                        c. Chairman of the Board of Directors

E. Management of the Company

1. CEO of the Company

                        a. Appointment of the CEO of the Company

F. Shareholding Policies

1. Sale of Shares

                        a. Right of First Refusal

                        b. Conditions of Sale

            2. Liens on Shares

            3. Issuances of Shares

            4. Reserve Fund

                        a. Objective of the Reserve Fund

                        b. Board of Directors of the Reserve Fund

            5. Conflicts of Interest

                        a. Investment in Other Companies

b. Transactions with the Company

c. Other Activities

G. Employment of Family Members

            1. Entrance

            2. Responsibilities

            3. Remuneration

            4. Evaluation for Development

            5. Retirement

H. Social Dividend (Subsidies for Family Members)

            1. Objective of the Social Dividend

            2. Components of the Social Dividend

            3. Regulation of the Social Dividend

I. Family Activities

1. Social Meetings

            2. Informative Meetings

            3. Communication

            4. History of the Company

J. Relations with the Public

K. Overseer of the Family Protocol

1. Objective of the Overseer

            2. Appointment of the Overseer

            3. Functions of the Overseer

L. Secretary of the Family Council

1. Objective of the Secretary of the Family Council

            2. Appointment of the Secretary of the Family Council

            3. Functions of the Secretary of the Family Council

M. Resolution of Conflicts

N. Updating of the Family Protocol

O. Definitions

[1] Adapted and summarized from the 2002 version of the Family Protocol of The Carvajal Group.

[1] These principles can range from basic (when the family is still at its founder(s) stage) to detailed and more specific as the family gets larger.

[2] Fred Neubauer and Alden G.Lank, The Family Business: its Governance for Sustainability (Routledge New York, 1998); Daniela Montemerlo and John Ward, The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business (Family Enterprise Publishers, 2005); Craig Aronoff, Joseph Astrachan, and John Ward, Developing Family Business Policies: Your Guide to the Future (Family Enterprise Publishers, 1998).

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