The practice of family governance seeks to offer a solution to these vexed questions and a methodology for drawing accountability and decision-making together to the benefit of the family’s wealth.
In considering the assets of rich families and issues of passing them down through the generations, it must be stressed that the biggest destroyer of family wealth is neither taxation nor investment performance. It is family conflict.
The near universal truth, studies generally place around the 90% mark, is that very few fortunes survive the third generation. If there is a pattern amongst those few who are successful, it is surely worth examining. Two clear themes do emerge: effective ‘family governance’ and consideration of the family capital more broadly than just its financial assets (what James E. Hughes, a pioneer in this area, describes as additionally human, social and intellectual capital).
The emotional aspects of families need to be considered. This cannot be over-emphasised. Families are a collection of singular humans. Personal characteristics on both sides of the emotional ‘balance sheet’ (intrigue and inclusion, jealousy and joyfulness, greed and giving) are often writ very large in the arena of the rich. Increasingly, a private or family office (FO) is the province within which family governance is practised. Where an operating company or family business is retained, a family is well advised to have their private office separate and distinct. In Australia the FO of Richard Owens (R.O.I. Pty Ltd.), is deliberately a physically distinct building from the business.
There are some parallels between a multi-client family office (MFO) with the collective business issues that relate to corporate governance and the single family office (SFO). The latter is more concerned with family governance in its provision of impartial and conflict-free advice to a sole family.
Some MFOs, usually the co-operative MFOs rather than commercial MFOs, successfully preserve the feel of an SFO. However, in general terms there is often a distinction in the multi and single client models between the corporate and the personal, the collective and the individual.
Thus an MFO will need to embrace corporate governance practices to a far greater extent than an SFO, especially if it serves a financial, rather than business owning family. But family governance should be no less professional.
There are important parallels with the collective sphere of business and the rather more established principles of corporate governance. There are many lessons families and their private offices can learn from business and corporate governance that will improve their family governance. Chief amongst these is the role of teambuilding, together with a known and accepted procedure for making collective decisions and addressing succession planning of business leaders. Mayer Amschel Rothschild required his five sons (the origin of the five arrows) to establish a bank in the leading financial centres of the day, also charging them to inform him, and each other, of any news that might be significant to the markets. This collective and team-based spirit lives on
in the family meetings of his descendents today, where even the travel of less fortunate members is subsidised for them to attend.
The value of a wide group being present is fully recognised. Succession planning in the FO context must also include senior staff, as much as preparing for the death of the oldest generation. The four usual motivations for establishing a private office are control, confidentiality, consolidation and conflict-free advice. Family governance should be part of this advice offering, but what are its actual component parts and their tools of application?
BNY Mellon’s family governance expert, Thomas C. Rogerson, describes a five-stage process to healthy family governance in which healthy governance is actually the fifth degree and represents the culmination of four earlier stages of: education, communications, values and philanthropy.
Before this process can start, a family must accept that the usual dissipation of family wealth is a stark problem and that governance techniques form a powerful element of its solution. Establishing an ordered and constructive procedure is the most challenging transition to make. Human sensitivities and secrecy may combine with delicacy of feelings to make this very difficult indeed. However, this should not act as a deterrent, nor be surprising; the problem is a grave and enduring one. There are many human endeavours where the operation of seeking a result is beneficial in itself even if the sought for goal is elusive. A painter might never attain an ambition be able to draw like Michelangelo or Ingres but in the process may become a highly proficient draughtsman. In a similar way, seeking more effective family governance will be worthwhile in itself.
The five-stages mentioned above are one method of articulating family governance but must be firmly rooted in practical application and example. A well-conceived structure is nothing without the appropriate tools. Education might begin rather obviously with learning about basic financial and market workings then move to successor councils and children’s committees. The Hewlett family involve the next generation in the bracket of 9-19 years old in a junior committee that is based around philanthropic activity through their foundation. Peer group networking for opinion and experience sharing is an important and growing occurrence, as well as media training and even skills testing. Communications need to be guided by regular family meetings that emphasise the opportunity for all members to contribute regardless of business experience. They might be anchored by agreeing on a family and individual mission statement, leading to the next stage of Values, with perhaps a family creed or constitution. The de Wendel family from Lorraine established a family charter in 1872 that is still functioning (and acknowledged the role of in-laws and women as early as the 18th Century).
Family governance can be very powerful in preserving donor intent in the sense of acting as a vehicle to transmit core values. The Iveagh Will Trust of 1927 expressed philanthropic intent that was a continuation of the ideals of the Guinness Trust, which thrives today as The Guinness Partnership providing affordable housing. On this theme, an appreciation of what a family’s history and endeavours stand for can be emotive and cohering and should include the ethical dimension. This will often include Philanthropy, which is a tremendously significant subject in its own right and another area where the practice is as beneficial to the giver as to the receiver. Philanthropy can also be a powerful tool for younger family members to learn about the consequences of decision-making, the value of money and in the process deliver a lasting unifying effect.
The final stage of healthy family governance is enacting the earlier stages described and continuing to do so. The core concept of governance is about defining roles and responsibilities between individuals in a way that embraces personal character and skills whilst enhancing unity. This structure of leadership and accountability must be the precursor to engaged and informed decision-making that is transparent, objective and long-sighted but which also is adaptive and able to evolve. Governance is a function of control and stewardship but this should be in a way that includes all family participants and assigns roles and responsibilities to each one. This could include a consideration of creating checks and balances between different elements within the family. Policies and procedures need to be clearly defined and communicated and have credibility and acceptance within the family. The best practical financial readiness comes from the conceptual plane of shared values and mission, from which the function of effective communication is the vital hinge to execution. Similarly, it is evident in the corporate sphere that well governed companies simply perform better.
A key role of the FO is that of a manager of risk in general and counter-party risk in particular. Following this the biggest risk is family conflict and thus potential counterparties become other family members. The ‘so what?’ is therefore that effective family governance seeks to be a solution to this overarching issue. Disunity is the greatest risk but equally unity is the greatest goal.
Beliefs, leadership and education matter because they are part of the potential mortar that enables human beings to be built into an effective family unit. This reflects the fact that governance is a tool as well as a concept but in essence is concerned with the process for making collective decisions with measurable consequences. This is a potent force for harmonized deliberation. Disharmony, from which conflict is a likely extension, is the biggest threat to a family’s wealth. Whether a family wishes to conserve, consume or contribute, where is the wealth-owner who does not wish this decision to be theirs?
