20 May 2008

Family Governance - An Overview


Patricia Milner
Partner | UK

Introduction

When considering the dynamic evolution of a successful Family and how best to ensure that the present generation’s ideals and enjoyment of their wealth are effectively transferred to, and maintained by, the next generation, one of the key areas which needs to be addressed is the Family’s Governance.

Governance is more than the physical and legal structures put in place to hold a Family’s wealth (such as Family companies and trusts).  It is a Family’s Code of Practice, a set of rules and systems by which a Family and all of its members, their fiduciaries and advisors can interact and work together to drive forward the Family’s vision and philosophy whilst maximising returns and preserving the Family’s asset base.

What does governance do?

Governance (in the form of a Family creed or Family constitution) gives a Family its own unique, articulated vision and sets down guiding principles which defines the roles of the Family members. Typically, such a governance document might include the following:

  • Setting out the core Family values which all members of the Family should follow so as to ensure that the Family identity is not eroded or lost;
  • Providing a mechanism for decision making amongst the Family;
  • Providing guidance as to distribution policy, so that each Family member knows what they can expect to receive;
  • Setting out a Family’s investment policy and the policy as regards administration of assets;
  • Providing a way in which younger Family members are given responsibility for matters within the Family structure thereby allowing them to feel included;
  • Providing for a mechanism whereby there is a smooth transition between one generation and the next;
  • Providing an educational framework for the younger Family members to develop within;
  • Providing a prescribed mechanism for dispute resolution between members of the Family; and
  • Providing a means for articulating a Family’s philanthropic vision and putting this into effect.
  • The Family governance document will deal with the different groups of players within the Family structure and will define roles and guidelines under which they should operate. These groups include the Family members, the fiduciaries (such as trustees) who control the Family assets, the Family’s advisors and any Family Office.

How is governance put in place?

Frequently the sale of a Family business or other major assets is the trigger point for a Family to come together and discuss governance between themselves as suddenly the Family finds itself in a significantly different financial situation often with liquid assets. In many cases, the creation of a system of Family governance will be intertwined with the development of a Family Office, which will then play an integral role in the system of governance introduced.

When a Family is considering a governance system or structure it is important to realise that it cannot be imposed on the Family but that it must be developed by the Family members themselves. This will take time as the Family members will need to agree what their core values are, how they think the Family should be governed and the other issues referred to above. It is never clear at the start of such a discussion what the final form of governance will be but what is clear is that no two families will have the same final document.

A trusted adviser can play a key role in facilitating discussions between Family members and helping the Family develop and put a governance structure in place. A good facilitator will ensure that the process continues to move forward and develop whilst allowing the Family members time and space in which (often for the first time) to articulate their vision for the Family and their beliefs, thereby ensuring that any final governance document really does reflect the Family’s own thoughts. It is well established that a system of governance will only function properly if it is developed, understood and, most importantly of all, accepted by all of the Family members.

Following the creation of any such system of governance, there should be a forum for the Family members to have an ongoing dialogue as to the governance of the Family and to ensure that the guidelines and policies set out in the governing document are followed. Such a forum can also provide a means of educating the next generation of Family members and introducing them to the governance of the Family so that the next generation also understands and accept the Family’s values and governance system.

Once established a governance system needs to be reviewed at regular intervals over the years to enable the changing nature of the Family circumstances to be reflected.

By having a system of governance in place, the Family members are more likely to see themselves as stewards of a Family’s fortune and wealth and work together to preserve and grow this for the collective good of the Family.

What happens when there is no governance in place?

The risk to a wealthy Family of not adopting a governance structure is that decisions on Family, investment and succession issues are made on an ad hoc, unfocussed and non-cohesive basis.  Without a strategic long term vision and focus, the unity and strength of a Family and the advantages associated with this for the present and future generations will be lost.  A lack of governance leads not only to the Family’s wealth and human capital not being optimised but in many cases to these being eroded and wasted.  A governance structure is akin to an insurance policy to be relied on in times of stress and change, both expected and unexpected, such as untimely deaths, divorces and unforeseen situations of conflict.

Category: Article