A fundamentally private affair can hardly be constrained within a “corporate” mentality, yet there are echoes within the corporate governance debate that resound with powerful familiarity in the ears of leading family members who care greatly about reputation, integrity and honourable behaviour.
Governance – whether in terms of the latest catch phrase of the corporate variety, or considered more broadly, in terms of the set of standards and values you choose to live by – could also be thought of in terms of a set of disciplines.
Discipline tends to arrive in three forms: self, market and regulatory disciplines.
Traditionally, one might think of religion as an ideal example of these three blending together to become so totally integrated into a person’s way of life and his belief system that values are an indivisible part of that individual’s thinking and his society’s thinking. There is no beginning or end, simply a continuum of belief, a shared outlook. An integration of secular and non-secular law, personal behaviours, social habits and religious values.
Today, in the West, fewer people hold that kind of religious belief, the Reformation
in the Christian Church firmly separated Church and State and in the 500 years since, many people now see religious values as a largely optional and external set of rules that one might join up to or might not.
Many commentators observe that as fewer people accept the guidance of religious values, fewer people ever consider whether they “should” do something – they only consider whether they “can.”
Yet we all know an issue might well be strictly legal but could be unethical, dangerous, ill-advised or downright reckless.
Regulators have been quick in the past 30 years or so to step into the void of ethical behaviour that tends to beset various industries and professions – particularly financial services. We have seen how organisations like the US Securities and Exchange Commission, UK Financial Services Authority and many other jurisdictional regulatory authorities have churned out ever increasing rules-based regimes, hoping against hope to stem bad behaviour, but failing to notice the outgoing tide of ever ebbing ethical values in business.
Once little water was left to float ethical practice, we saw that awful grounding of the great ships of commerce, the banks, stuck on sand bars or wrecked on reefs which more prudent sailors and captains would have avoided. We have all heard Warren Buffet’s famous quote “When the tide goes out, you find out who was swimming with no clothes” but the events were really worse than embarrassment of isolated swimmers. The global financial crisis was caused by captains who drove whole ships, cargoes and communities of people onto the rocks – many have drowned.
So we now see flaws in two of the disciplines which have been major elements of life and business life – self discipline appears reduced in many cultures and regulatory discipline appears not to have entirely worked.
Market discipline is very directly relevant to corporate structures as their reputation for being a good organisation to deal with, is critical to their success.
Typically, market discipline affects listed companies whose ratings and share prices drive their access to capital, together with its price, and their fundamental capacity to fulfil corporate objectives and purpose.
However, the key question is to think where a Family Office might sit in this picture?
Family Offices are not listed on Stock Exchanges; access to capital is often not
a primary requirement – so where do the pressures of market discipline apply?
But does this mean a Family Office need not worry about any form of discipline?
Can it operate without regard to the mores or values of others – does being outside the regulatory net mean it is outside the accountability net? If there are no external sources of discipline (other than the criminal law framework and risk of civil litigation) why bother to behave at all?
Maybe because power without responsibility is a distasteful thing. Maybe because being bad with no regard for others is just something that makes us feel bad about ourselves.
So perhaps, whether a Family Office thinks of itself as smart, sharp, lean, mean and outside the regulatory net, or thinks of itself as a prudent and conscientious member of the social and financial community - it actually needs internal disciplines to protect it against others – and
of course those “others” might be outsiders or indeed insiders.
The traditional remit for a financial services regulator is that they are supposed to focus their efforts on “protecting the public from loss arising from fraud, dishonesty, mismanagement, insolvency or incompetence” and in more recent years the words “and contribute to
the fight against financial crime and terrorist financing” have been added.
Image swopping the word “public” for the words “Our Family Office” – the result is a phrase most families would be very glad to see contained within the operating consciousness of their management board: “Protecting our Family Office from loss arising from fraud, dishonesty, mismanagement, insolvency or incompetence and contributing to the fight against financial crime and terrorist financing”
Many of the most successful and forward thinking Family Offices are voluntarily choosing to adapt the regulator’s standards to their own risks and apply them with a view to protecting their investments and their reputation.
A good example centres on the money laundering area - Family Offices are not required to comply with the requirements imposed on financial services businesses - e.g. carry out a risk assessment, train staff, vet counterparties and monitor relationships. Yet how wise to do so in a Family Office environment where the very last thing you want to find is that your head of finance/accountant is the nephew of a politically exposed person and is washing the proceeds of another’s corruption through your structures. Just try telling someone you did not notice £15 million going through a few subsidiary structures.
The safest place to hide is in a crowd. A smart money launderer might well choose a Family Office to wash the funds through. All he needs to find is a gullible person who does the banking and persuade them to pay some money in, the same amount out – and who will notice? It’s easy to find such a person. These things happen frequently.
Thinking about governance, values and forms of self, market or regulatory discipline is well worth some time.
Strengthening internal disciplines and creating a self imposed culture of behaving with propriety and self control are even more relevant for Family Offices as they can be vulnerable to penetration from insiders or outsiders who want to exploit the lack of defences prevalent within the organisation.
