Family Governance - a Key to Sustaining Wealth

As a multi-family office, we work a lot with family governance.  Family governance is a catch all for helping organize the planning, management and decision-making structure for the family’s business and estate related entities.  This includes the appropriate succession, education and involvement planning process for future generations.

Governance is the soft side of the total financial solution that we provide to clients.  It takes experience and it takes patience.  Lots of patience!
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The diagram below represents the three independent and overlapping parts to this process.

The critical difference in the family governance process vs. the corporate governance process in most public companies is the involvement of the family.  Yes, I know there is usually a founder in most public companies, but over time their interests usually decline, and nepotism is not tolerated.

With the typical family, nepotism is to be encouraged and we are dealing not just with the business of governing entities, but the past bias and experiences that the family brings with them to the process.

Let’s say Dad encouraged his sons to be very competitive towards each other growing up.  Dad has now passed on but the two sons, as part of the management and governance of the family entities, continue to undermine and one up the other due to this learned behavior.  This creates dysfunction in the governing process and lengthens the time and effort of the advisor to get something done that moves the family towards its desired goals.

The Key to The Process
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We believe the key to the process are strong family vision, mission and value statements that are reinforced across generations by the current family leaders.  This strong set of family statements then is the basis for everything the family does going forward.

In the Christian faith, we many times ask ourselves “what would Jesus do?”  In the family context everything and every decision that is made should fit within the family vision, mission and values statements.  This means how businesses are run, estates are planned, the types of giving that is done and how future generations are educated within the family unit.
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This single purpose allows the family to stay agile.  Staying agile is the ability to rapidly adjust to change by adapting from an initial stable state.  In English, this means the family must be an adaptable unit that uses the family statements to traverse an ever-changing world and family dynamic.

In the diagram above, we see most families tend to use a top down structure in their family communication and governance (left).  However, to maintain agility, a better structure might be one where family leaders direct and are involved giving and receiving feedback from those family members involved in teams within the family structure.

Some of these teams may have more formals structures such as the defined management for a family business and others may have a more informal structure, such as that of a family council that involves generations currently not involved in more formal structures.

The key to maintaining an agile family is communications.

Communication and Education

For the family to effectively overcome the “shirtsleeves to shirtsleeves in three generations” curse that tends to affect 70%+ of all families, communications and education are a must.  Effective communications can be as simple as a monthly conference call or a bi-annual family meeting.

We believe what we bring to the table is the ability to help direct and facilitate these meetings so that everyone is heard, business is accomplished and there is a framework in place to encourage each successive generation to be a part of the governance process.

Ideally within this process is an environment where younger generations are encouraged and nurtured towards a time where they take the mantle of leadership.  We see all too often, however, that the family instead tends to criticize those younger generations for their lack of knowledge or experience without laying out a path for them to gain the very experience they lack.  This further creates family conflict and dysfunction, which hurts the family’s ability to stay agile, and thereby, perpetuate its wealth and its mission/vision past the third or fourth generation.

This is an area where a family council can help involve these younger generations while encouraging an ongoing dialogue with Generation one or two elders.  I have also seen where Generation three and four have been involved on investment committees or even allocated a part of an annual foundation gift to start to involve them in the family’s business.

Conclusion

Building an effective family governance forum is an evolving process.  By definition, family governance entails embracing a broad range of perspectives, multiple generations and people who have other things going on in their lives.  It can be difficult to maintain the momentum.  

Family members who work in the business and are used to more direct and efficient process can find this process frustrating.  The process of building a family business governance system requires patience, perseverance in the short-term.  It also required agility, open communications and creativity.
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Most families find the long-term result of a stronger family and aligned systems produces a rewarding outcome for both the family and its enterprises.  The most successful of these families see their wealth and family ideals perpetuated well past the third generation.