Family governance is an often-neglected framework that shapes a family’s collective vision and purpose for the future.
While investment returns might seem like the most obvious manifestation of this vision, the governance structure determines the long-term achievement of these investment returns, increasing a family’s chances of beating the statistical odds that most of the wealth created by the family’s founder will be destroyed by the second or third generation.
As governance best-practices are generally universal in nature, we offer critical questions that must be addressed and normative guidelines meant to facilitate a holistic consideration of the topic.
1\. Do we have a formal, agreed-upon governance structure in place?
We have found that wealthy families often default to a model that concentrates decision-making authority in the family member(s) principally responsible for the creation of the wealth.
It is common for families to delegate wealth management to a single intermediary, such as a private bank, and assume that this alleviates the need for a formal governance structure. However, regardless of the wealth management approach, a family requires a well-defined governance framework rooted in a collective choice that all members understand and support. This choice is typically encapsulated in a “Family Constitution,” a dynamic document encompassing:
• Governance structure
• Membership criteria (e.g., bloodline descendants only or inclusive of spouses)
• Member rights and responsibilities
• Compensation and distribution policies (equal distribution or recognition for leadership roles)
• Next-generation education
• Succession and transition strategies
• Exit mechanisms, including rules for payouts and NAV discounts
Even a basic constitution is superior to ad hoc decision-making, ensuring oversight and transparency for all decisions.
2\. Do all family members understand and support this structure?
Bringing the entire family together for discussions on managing family wealth can be as challenging as a holiday reunion. However, such a gathering is essential. A lack of trust and communication among family members is a leading cause of intergenerational wealth dissipation. The Family Constitution may need multiple iterations before approval and endorsement by all family members. Regular meetings should foster trust, align values, clarify the mission, and outline future plans.
3\. Do we have the right mix of committees to address current and future challenges?
Proper governance necessitates the delegation of responsibilities, typically achieved through domain-specific committees. These committees should address investments, risk management, compensation, audits and oversight, finance, and human resources. Ensure committees consist of diverse, skilled members, and consider involving external experts in advisory roles. Establishing an education committee helps future leaders understand family values and prepare for leadership roles.
4\. Do our family vision and mission reflect the current and future environment?
Transition from a transaction-focused culture to a culture of planning that anticipates and embraces changes in family dynamics and market conditions. Explore future scenarios to broaden perspectives and discuss strategies to navigate and adapt to them. Consider the impact of emerging technologies like artificial intelligence on investments, operations, HR, and budget.
5\. Does our governance structure address privacy and data security?
Digitalization brings both opportunities and risks, notably cybersecurity threats. Mitigate these risks with a governance structure that includes explicit cybersecurity policies, covering personal devices, email screening, software usage, endpoint protection, and data access. At least annually educate all members and staff on these protocols and consider hiring dedicated cybersecurity resources. Regularly vet service providers’ cybersecurity measures as most breaches occur through trusted third parties.
6\. Are we properly educating the next generation of owners and leaders?
To ensure continuity across generations, prepare future leaders to uphold the family’s legacy. Educate them on family history, values, ownership responsibilities, and leadership skills. Formalize this process through an education committee and engage in activities such as sending future leaders to business schools and organizing global scouting trips for investment opportunities.
In Ernest Hemingway’s 1926 novel, The Sun Also Rises, a character asks the protagonist, Mike Campbell, “How did you go bankrupt?” Campbell replies, “Two ways. Gradually and then suddenly.”
While governance cannot ensure that a family will avoid Campbell’s fate, it does provide a framework for transparent oversight of the family’s wealth and a system of checks and balances that limits the opportunities for imprudent decisions and family misunderstandings.
