ABSTRACT
Family companies are the most common corporation structure, in Turkey. The first issue that comes into mind is institutionalization while taking into consideration the family companies. First and one of the most significant steps that should be followed up during the institutionalization process is the creation of family constitutions. Family constitutions regulate some other matters that are crucial for continuity and development of the company such as relationships among the family members and participation in company management. However, it should be noted that this process does not develop easily and some problems may arise in its implementation.
I. INTRODUCTION
Especially in jurisdictions in which regulations are inadequate or not sufficient enough regarding the protection of shareholders, shareholding structure of established companies are mostly in the form of concentrated ownership with larger share groups. Generally these type of companies have the characteristic of family companies1.
Along with different descriptions concerning family companies in the literature, one of the conditions that makes up a company a family company is that the main units of the company has to be controlled by family members. Although in some companies some professional personnel for some positions such as general manager are employed, family members composes the ultimate decision making mechanism2. It is possible to argue that such situation arises from the reason that companies cannot completely meet the requirements of institutionalization.
As companies have developed, it is not possible for family members to control and lead all operations of the company. Moreover, , together with changes in generations, conflicts may arise between the family members. Along with the release of the effective power (generally, company founder) from the company or in other words with the separation of power, conflicts can be experienced among the family members due to the lack of experience or command of practices and therefore many family companies dissolve in the second generation3.
Additionally , companies have to comply with developing market requirements and improve themselves in in order to be able to maintain their existence and compete in the market, particularly in which the capital constantly changes. The necessity of complying with the changes and developments make institutionalization for family companies obligatory4.
II. WHY FAMILY COMPANIES HAVE BEEN PREFERRED?
A. Development and Characteristics of Family Companies
According to research conducted, creating opportunities for future generations, immortalizing family and family legacy, providing financial independence to family members and building wealth are other reasons for establishment of family companies5.
Family companies have strong advantages against other companies due to their fast decision making mechanism6. On the other hand, institutionalization has more importance for family companies comparing to other companies, however, it is not always possible for family owned businesses to complete the required transactions in the manner of institutionalization which is a long and difficult process. For this reason, the vast majority, approximately seventy percent (%70) of family companies go out of business in second generation. Only less than ten percent (%10) maintains its existence in the fourth generation7.
In fact, not only family companies but also other companies face with the problem of institutionalization. Institutionalization has the meaning of having the repeating actions and habits or rules to be followed as the standards. Institutionalization which has vital importance for companies; is the process of companies to have rules, standards, procedures regardless of people and to develop an effective organizational structure by updating the standards of these rules in accordance with developments and thereby to impersonate a distinctive identity different from other businesses8.
B. Structure in Turkish Companies
The vast majority of companies in our country are in the form of family companies. Companies have to satisfy the requests and expectations of market in order to be able to maintain their existence in highly competitive markets. For this purpose, companies supposed to form active organization and applicable standards within their development process. Institutionalization is considered as a way out for family companies in order to be able to involve in developments, to operate both in local and global market and to transfer their existence to other generations9.
Although the economic importance and height of their number of the family companies in Turkey as well in the world, life span of family companies cannot be very long and it is not always possible to transfer the business to second or third generation10.
In Turkey neither in the old version of the Turkish Commercial Code nor the Turkish Commercial Code (TCO) in force provides a definition of family companies. However, as in world economy, family companies have a high importance in respect of economic value, number and added-value in Turkey’s economy. As a matter of fact, nearly 95 percent of the companies in Turkey are family companies, which is above the world average of 65-80 percent11.
III. INSTITUTIONALIZATION IN FAMILY COMPANIES
Institutionalization processes vary greatly between family owned businesses and other companies. As stated above, institutionalization in family companies and the establishment of family constitutions which is one of the first and most basic processes to be carried out in this direction, have a great proposition. However, transitioning to a specific systematic in family companies is often more difficult and take longer time comparing to other companies12. Institutionalization regardless of the subject, brings certain rules in terms of the relationships within the company and certain rules regarding the processes within the company. Therefore, it requires appropriate rules to be set up which are applicable to all processes of the company’s operation and to be complied by everyone. As stated earlier, preparation of family constitution in family companies is the first step that has to be completed to be able to achieve institutionalization. In fact, family constitution is an important step which aims to bring formalization to the operation and to enable the shareholders to meet on the same ground13.
Institutionalization can be defined as the management of a company within the framework of certain principles and values in the direction of certain purposes and goals. These purposes and goals are so influential that existing managers feel obliged to act in accordance with the principles and rules established toward these purposes14. Moreover, as these principles and rules become common practices and transfers from generation to generation, companies can achieve development.
Institutionalization in family companies should be embrace in two different dimensions. The first one is “institutionalization of the company”, in other words, formation of an organizational structure suitable for the purposes; having a written form of job and mission descriptions; achieving a professional management by separation of authority and responsibilities. Second dimension is that institutionalization of family relationships. Basically, what is meant by the institutionalization of family relations is the preparation of a family constitution, determining management relations, increasing communication by creating family council and preparing shareholders agreement15. Having these regulations in written form as much as possible, in other words in the form of a family constitution, is important for the application of these principles and rules and for the transfer of these principles and rules to future generations16.
IV. FAMILY CONSTITUTIONS
A. Purposes
There are differences between generations in terms of age groups and education level. Furthermore, it is possible to say that the level of education of family members increases in the coming generations and they tend to take an active initiative in implementing new methods of management and financing17. The achievement of aforementioned initiatives can only be possible through institutionalization.
Institutionalization of family and institutionalization of family companies do not always have the same meaning. Institutionalization of family companies is related to operation of the company and its sustainability. However, institutionalization of family is coupled with determining a structure which arranges the relationship of family members with the company in writing. The fundamental steps of institutionalization, which states that the system should be based on a model rather than a person in companies, can be summarized as follows; establishment of business constitution, achieving professionalism, having effective organization structure, transfer of authority, empowerment, establishment of management understanding, establishment of decisionmaking mechanism and establishment of effective communication system18.
B. Scope
While drafting family constitutions, even if not in writing, all principles, rules, habits and values which dominate the company should be taken into account for each company, separately. In this way, even though the family constitutions of different companies have similar scopes, their context will differentiate and a more effective mechanism for each company will be created19. As a matter of fact, especially the structure unique to company, organization of the administration and especially the responsibilities of the family members to each other are regulated with family constitutions20.
In this direction, Atilla defines family constitutions as follows21:
“Generally, it is possible to state that the family constitutions as set of written rules stating how the interaction between family and company should be. In other words, family constitution is a written source which consists of rules regarding the institutionalization of family relations in line with organizational goals, management of the company in order to ensure the continuity of the company and how to resolve potential problems in these regards.”
The family constitution includes the following missions: values, principles, roles and goals of the family that will guide the family in terms of the management of the company and decisions to be taken by the family. The family constitution includes the principles regarding the family’s property ownership, administrative power of the shareholders who are also family members, requirements of being shareholder, share transfer and distribution of legacy, family council, duties and responsibilities related to the management of the family, succession plan22.
While preparing the family constitutions, explanation of the individuals’ roles and responsibilities and authorities clearly in company’s management structure should be the first thing to be done. Apart from this, another significant issue is the determination of the transfer methods to the future generations and creating at least the general structure of aforementioned process23. Another matter is family councils. Members of family councils should be designated carefully and the most respectable family members not for the company management but for family togetherness should have seats in the family council. Purpose of this council is to make all family members knowledgeable with the company and provide platforms which may ensure maintenance of family togetherness in social environments.
Family constitutions can never stand before the law. First of all, this document is set of principles prepared in good faith in order to extend the life cycle of the company. Connection of rules which are articulated under the family constitutions with the company’s articles of association is a common applicable method in order to ensure the legality and sanction power of the rules under the family constitutions.
The regulations under the family constitution can be classified under three headings. These are;
(i) Regulations regarding the family,
(ii) Regulations regarding the company and
(iii) Regulations regarding the constitution.
Regulations regarding the family mostly contain matters such as family relations, fundamental values, and social responsibility. Regulations regarding the company cover topics such as management style, stocks and stocks’ intergenerational transfer, investment decisions and professional management principles. Regulations regarding the constitution are more about purposes, scope and constitutional amendments24.
C. Legal Nature
The family constitutions aiming to maintain the existing family members and those who join the family by birth or through marriage, to organize the relations between themselves and with third persons and to regulate the relation of each family member with the company are not subject to any requirement as to form under the Turkish law. Family constitutions can be executed in any way so that parties would agree within the framework of freedom of contract under the Turkish Code of Obligations. In other words, family constitutions are one of the atypical contracts in the Turkish Law25. However, it is recommended that the family constitutions should be in a written form with the signatures of all family members who agree on this constitution, in order to ease implementation, prevent conflicts that may arise and have a role as an evidence in case of a possible judicial process26.
In case of violation of the principles set forth in the family constitution and acts contrary to these rules, the sanctions due to the breach of the family constitution, shall also be articulated under the family constitution27.
Another important point concerning family constitution is that the family constitution binds only the family members who have undersigned the constitution, which means that it will not bind third parties or those who have not signed the constitution28. Since the company is not a party to the family constitution, any execution or lawsuit cannot be initiated against the company due to the breach of contract29. However, in case of a breach of the contract, the undersigned family members will be entitled to claim compensation and penalty from the breaching family member/shareholder, if it is agreed under the contract.
For this purpose, if it is desired that the provisions of the family constitution shall binding on the shareholders of the company, these provisions should be articulated in detail under the shareholders Agreement to be executed by and between the shareholders, which is also an atypical contract. Moreover, if provisions under the family constitution and the shareholders agreement are desired to be binding on the company, they shall be incorporated to the articles of association of the company to extend permitted under the Turkish Commercial Code30.
Following the decision regarding the preparation of the family constitution while drafting the family constitution, it is important to have meetings with the family members, the shareholders of the company who are not family members, managers, members of the board of directors and employees, hereby to collect information about the company and its structure. Even though there is no provision regarding the persons who are able to prepare a family constitution, it is recommended that the family constitution should be prepared by a professional team with no family ties due to the possibility that the shareholders of the family companies may not be objective even if they are competent in such matter31.
V. CONCLUSION
Despite the fact that family constitutions are not regulated in legislation, they have a high importance in practice. Family companies have a significant role in the widespread corporate structuring both in Turkey and in the world. Therefore, sustainability and productivity of family companies have a great importance for both themselves and their economy. In this regard, institutionalization and preparation of family constitutions as a first step of institutionalization become a current issue. As stated above, even though various problems may occur regarding the binding effect and application of the familyconstitutions, these problems can be overcomed to the certain extend by the regulations made in practice.
BIBLIOGRAPHY
Asuman Sönmez, “Kurumsal Yönetim İlkelerinin Türkiye’de Aile İşletmelerine Uygulanabilirliği” , Maliye Finans Yazıları, No.92, Temmuz 2011
İclal Atilla, “Aile şirketlerinde Kurumsallaşma ve Kurumsal Yönetim Uygulamaları”, Türkmen Kitapevi, İstanbul, 2016
İrfan Yazıcıoğlu ve Hakan Koç, “Aile İşletmelerinin Kurumsallaşma Düzeylerinin Belirlenmesine Yönelik Karşılaştırmalı Bir Araştırma” , 2009, Selçuk Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, Vol.2
Meltem Onay Özkaya ve Canan Muter Şengül, “Aile Şirketlerinde Kurumsallaşma ve İkinci Kuşağın “Kurumsallaşma” Konusuna Bakış Açısı”, 2006, D.E.Ü.İ.İ.B.F. Dergisi Vol.21 No:1
Lerzan Nalbantoğlu,” Aile Anayasası”, Family Business Review, 2011
Rafeal La Porta, Florencio Lopez -De-Silanes and Andrei Shleifer, “Corporate Ownership Around the World” April 1999,The Journal of Finance, Vol. Liv No.2
Soner Altaş, Türk Ticaret Kanuna Göre Anonim Şirketler Karşılaştırmalı, Açıklamalı, Örnekli, 4th Edition, Seçkin Hukuk, Ankara 2013
FOOTNOTE
1 Rafeal La Porta, Florencio Lopez -De-Silanes and Andrei Shleifer, “Corporate Ownership Around the World” April 1999,The Journal of Finance, Vol. Liv No.2, p.511.
2 İrfan Yazıcıoğlu ve Hakan Koç, “Aile İşletmelerinin Kurumsallaşma Düzeylerinin Belirlenmesine Yönelik Karşılaştırmalı Bir Araştırma”, 2009, Selçuk Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, Vol.21, p.498
3 Yazıcıoğlu/Koç, p.498.
4 Yazıcıoğlu/Koç, p.498.
5 Meltem Onay Özkaya ve Canan Muter Şengül, “Aile Şirketlerinde Kurumsallaşma ve İkinci Kuşağın “Kurumsallaşma” Konusuna Bakış Açısı”, 2006, D.E.Ü.İ.İ.B.F. Dergisi Vol.21 No.1, by tranfer p.109, Vera ve Dean, 2005, p.321; Ward, 1987, p.145.
6 Özkaya/Şengül p.110.
7 Yazıcıoğlu/Koç, p.497.
8 Soner Altaş, Türk Ticaret Kanuna Göre Anonim Şirketler Karşılaştırmalı, Açıklamalı, Örnekli, 4. Baskı, Seçkin Hukuk, Ankara 2013, p.378.
9 Yazıcıoğlu/Koç, p.497.
10 Asuman Sönmez, “Kurumsal Yönetim İlkelerinin Türkiye’de Aile İşletmelerine Uygulanabilirliği”,Maliye Finans Yazıları, 2011, p.92, p.68. 11 Sönmez, p.68.
12 Özkaya/Şengül, p.110.
13 Yazıcıoğlu/Koç, p.499. 14 Yazıcıoğlu/Koç, p.500.
15 Özkaya/Şengül, p.123. 16 Altaş, p.379.
17 Özkaya/Şengül, p.123.
18 Yazıcıoğlu/Koç, p.500. 19 Altaş, p.378.
20 İclal Atilla, “ Aile şirketlerinde Kurumsallaşma ve Kurumsal Yönetim Uygulamaları ”, Türkmen Kitapevi, İstanbul, 2016, p.106.
21 Atilla, p.106.
22 Altaş, s.378.
23 Altaş, s.379.
24 Atilla, s.115.
25 Altaş, s.378.
26 Altaş, s.379.
27 Lerzan Nalbantoğlu,” Aile Anayasası”, Family Business Review, 2011, s.15.
28 Altaş, s.378.
29 Nalbantoğlu, s. 15.
30 Nalbantoğlu, s.15.
31 Attila, s.111.
