Family governance: what it is and why it matters
Effective governance can help keep families united around common goals and safeguard their legacy.
Authors
The Vanderbilts, the DuPonts, the Guccis. These are just some of the well-known families that have lost fortunes or businesses through conflict, bad investment decisions or extravagant spending. Some have recovered their wealth or achieved success in other ways; others have not been as fortunate. There is no fail-safe method to prevent these unhappy outcomes, but there are simple steps that families can take to reduce the risk. Putting in place sensible governance arrangements is one of the most straightforward and effective. In fact, the importance of a robust, well-structured governance framework cannot be overstated.
What is family governance?
Family governance encompasses the structures and processes designed to keep a family on course. It should extend beyond the family office and reflect the family’s broadest needs. This will require discussion of the big questions that shape the family’s long-term strategy. What does it see as the purpose of its wealth? How does it approach succession? Governance arrangements may involve committees such as a family council or an advisory board (see below). At a minimum, they should involve documented policies and procedures that describe the family’s decision-making process and set out what is expected of the family office or other stewards of wealth.
Given the risks to family wealth, it might be assumed that most wealthy families have already adopted such arrangements. But surveys of family offices indicate that many have not. Recent data1 suggests that just over 60% of families with family offices don’t have broader governance arrangements in place. Within the narrower context of the family office, the picture is slightly better. But even here, approximately 40% don’t have formalised governance structures in place.
In our view, both are crucial. Governance arrangements can help keep families united and engaged, while making sure their assets are structured and managed in the most appropriate way. Within the family office, effective governance raises professional standards and reduces operational risk.
Keeping the family and its assets aligned
A family’s long-term objectives will shape both its governance framework and its strategy. For example, if significant wealth has already been distributed to individual family members, a family may decide to leave remaining assets to charity. The strategies that it adopts would probably look very different from those of a family seeking to build wealth for future generations.
Good governance involves ongoing evaluation and review. Specific individuals or committees should be responsible for ensuring that the family’s strategy is being properly implemented. It will also ensure there is effective communication, providing transparency for family members and increasing trust in the stewardship of family assets. As well as reporting, the communications strategy could include educational and training events.
An effective governance framework will include periodic review of a family’s arrangements. Families change: the sale of a business, relocation, bereavement and the next generation’s evolving attitudes are just some factors that may require a change in strategy. External developments may likewise require new approaches. Many services that family offices have traditionally undertaken themselves can now be very effectively outsourced. New opportunities and challenges, such as impact investment and cybercrime, will also need to be considered.
Key elements of a governance framework
Not all families will need everything that we have outlined below, but this covers some of the governance features that we increasingly see clients adopt.
A family council represents the family and oversees its interests. It should be limited in size, but ideally include representation from different branches and generations. Members should have a mix of relevant skills and experience.
There is a risk that family councils become ossified if older generations are reluctant to cede control. An interesting solution that we have seen one family adopt is a mandatory retirement age. This requirement has been written into the family council’s governing document.
All organisations need checks and balances, but it’s especially important in a family context, when we may not be at our most objective. An advisory board is often set up to augment family leadership. It should comprise individuals with a range of skills and experience who can bring additional expertise, objectivity and professional oversight to the table.
There may be a tendency to populate an advisory board with “yes” men or women, especially if they are long-standing advisers. To counter this, one family has told us that they actively review how often advisory board members challenge or vote against proposals from the family council. Those who are too pliant are removed. Again, this process is written into the body’s governing document.
There are two key written documents that may play an important role in a family’s governance framework.
The family charter is a record of the family’s vision, values and policies. It can be wide-ranging and cover very personal topics; the purpose of wealth, family ownership criteria, thoughts on careers and marriage and what happens in the case of dispute. While encouraging discussion about such topics is the key benefit of a family charter, there are clear advantages to putting decisions down in writing. Setting out expectations in advance can also help avoid conflict further down the line.
An operating manual should provide a written summary of all interests and procedures. Importantly, it should be regularly updated and reviewed. We have seen how helpful such a document can be in terms of minimising disruption following a bereavement or mitigating key person risk.
Thinking about tomorrow’s challenges
Advising a happy family to put in place formal governance arrangements can feel like telling them to carry an umbrella on a sunny day. However, it does not come from a place of pessimism. It is rather a recognition of the fact that families grow and can become very complex over time. There may be dozens of individual members, living in different parts of the world, involved to varying degrees and with very different interests and requirements. It is almost inevitable that, at some point, there will be scope for disagreement over how family assets are managed.
Putting in place an effective governance framework takes effort and intentionality. It should be considered as an ongoing journey, requiring adaptation along the way. Nevertheless, the investment of time is worthwhile. Good governance helps families manage both internal and external risks. It also helps to keep them united around common goals and provides them with the best chance of protecting and growing wealth for future generations.
1 Source: KPMG – The 2023 Global Family Office Compensation Benchmark Report.
Subscreva o nosso conteúdo
Visite o nosso centro de preferências e escolha que informação deseja receber por parte da Schroders.
Authors
Topics