Governance, Flexibility, and the Family Office

October 3, 2020

Of the many complexities for wealthy families, a clear one is that there is wealth to be divided, to provide income and capital, and ideally it must sustain generation after generation. Therefore, it is essential that families have a strong but flexible governance.

One of the many challenges wealthy families face as time goes on is that the family grows. One day it’s no longer the patriarch or matriarch and their direct descendants reliant on the family business and fortune, but grandchildren, great grandchildren, ex-spouses and, in companies that were originally founded by more than one family member, the family tree can be extremely complex. It’s not an unusual situation.

I saw a lovely quote, who I’m afraid I can’t attribute to anyone, which said “families are like branches on a tree. We grow in different directions but our roots remain as one”. However, perhaps one should also heed the words of Swiss poet Johann Kaspar Lavater who said “never say you know a man until you’ve divided an inheritance with him”. Of the many complexities for wealthy families, a clear one is that there is wealth to be divided, to provide income and capital, and ideally it must sustain generation after generation. Therefore, it is essential that families have a strong but flexible governance.

Families are like branches on a tree. We grow in different directions but our roots remain as one.

The term governance has been around for time immemorial. I’ve been recruiting for the wealth management industry since 2007 and it was as hot a topic then as it is now, but it’s often not very well defined. The online business dictionary defines it as “The establishment of policies, and continuous monitoring of their proper implementation, by the members of the governing body of an organization. It includes mechanisms required to balance the powers of the members (with the associated accountability), and their primary duty of enhancing the prosperity and viability of the organisation”. It’s a good definition, but in many ways governance is easier in larger organisations, in the context of a workplace, who might have stock market or regulatory responsibilities. A family office represents something far more complex, emotional, and something requiring far greater soft skills; a family.

For me governance in the context of a family office must clearly set out the family’s values and long term aims. It must clearly state the following (which isn’t an exhaustive list):

How decisions are made in the context of these values and aims
How checks and balances are implemented
How wealth transfer will be managed
How disputes are to be resolved

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In the current climate, things are happening at a frightening pace. We’ve gone from calm waters, to recession, to a record recovery of sorts in a very short space of time. The structures of decision making within the family office need to be flexible enough to react in a speedy manner to these significant changes. This can be particularly complex in very large multi-generational families with differing needs and attitudes to risk.

family office governance flexibility Whilst ensuring family income needs are met, the current environment presents families of significant wealth and entrepreneurial talent with the opportunity to acquire assets at a favourable price. The ability to identify, appraise, and execute on these opportunities is a key feature of a successful family office. This could involve changing the re-balancing of an investment portfolio, investing in real assets, or both, and this needs to be done with high levels of agility.

It is easy to see an argument for recessions and recoveries to happen at greater speed in a world of social media and 24 hour news, and perhaps the warp speed of COVID will be the new normal in terms of market re-pricing assets. However, these opportunities could pass families by who don’t have the correct governance and decision making processes in place. It won’t be the last opportunity investors have to make significant long term gains and if families feel their procedures are too bureaucratic, and their aims aren’t aligned correctly, they should take time to reflect on how these procedures could be improved for the future.

For many families who are used to meeting at regular board meetings in person, this may also mean they need to make significant changes to existing processes. With family members unable to travel without quarantine restrictions, it shines a light on the need for families to have access to high quality, secure, technology, which enables the office to function without disruption. Moving forwards, families will also need well documented procedures for business continuity taking into account a wide range of factors and this could increase the trend for larger families to have offices in a variety of jurisdictions to support local family members.

We feel in the post COVID world we will continue to see a growth in family offices globally. Times will change, structures will be different, but the ongoing challenge of family governance will remain.

For more information on Fram and how we may help you, please don’t hesitate to contact me in the strictest of confidence on +44 (0)1525 864 372 or email [email protected]