For a family with multiple homes in multiple locations, an operating business and more, the complexity and number of obligations are significantly more difficult to manage. And all too often, family wealth is lost due to a lack of harmony, misaligned priorities, lack of communication and poor preparation.
Governance is a word often misunderstood by families and family offices but it is essential for a long-lasting family legacy. Strong governance establishes a process for decision-making and conformity within a multi-generational family to promote communication and strengthen unity, helping to preserve wealth and solidarity for future generations.
Understanding and preserving all forms of family wealth
Managing and preserving family wealth encompasses more than just monetary considerations. In fact, every family possesses five forms of wealth: human capital, financial capital, intellectual capital, social capital, and ethical capital.
Effective governance practices address all of these areas. They can help heirs embrace their family identity and become thoughtful and competent stewards to enhance the family legacy going forward. Through this, they can inherit much more than just financial capital and pass that on to the next generation as well.
Governance of the family, by the family, for the family
Governance provides a process for making decisions, implementing those decisions and communicating effectively. Most importantly, these practices help maintain family harmony by providing stability to the family wealth enterprise and facilitating the transition of wealth to future generations.
Strong governance practices
Although high-net-worth families and individuals increasingly recognize the importance of instituting formal governance structures, doing so presents a complex task. A family office not only manages the family assets, it can also provide the framework for efficient and harmonious interactions among family members regarding a myriad matters.
Even when a family office does have a governance structure in place, it is often focused primarily on the investment strategy. Without comprehensive governance, the family legacy is jeopardized and could be lost altogether.
Keys to successful governance: The three C’s
Governance that helps align all parties can be summarized by the three C’s: consensus, communication and consistency.
– Consensus: Agree on the family’s vision and shared values, including about charitable causes that are important to the family.
– Communication: Gain buy-in from all stakeholders, encourage their participation and reassure them through a regular schedule of communication.
– Consistency: Follow through on consensus and communication, put those shared values into practice and ensure decision-making adheres to the family’s mission.
The overlapping involvement of family, business and ownership
Whenever family and money coincide, things can become complicated very quickly. Without effective governance structures, serious problems can arise that cause a breakdown in communication and misalignment of priorities.
The family enterprise has three circles of involvement: family, business and ownership.
Clearly defined policies and processes for governance, in line with the formal mission statement, can reduce the potential for conflict. And when family conflicts do intrude, seeking counsel from trusted non-family advisors can also help lend objectivity to the process and encourage amicable resolution, which preserves harmony.
No decision gets made in isolation, and it’s important to remember the interrelation of the family enterprise. Formalized policies to address such matters around ownership and liquidity can take all relevant issues into consideration. This provides appropriate safeguards that benefit the whole family.
Communication and the family council
Typically, a family council is made up of several key members and serves as the chief decision-making body. It should be representative of the various branches of the family while still small enough to remain adaptable to varying conditions. There should also be mechanisms for reviewing the governing body itself to assess how membership is determined and whether any changes or updates may be required.
With a clear mission statement and a core decision-making body in place, communication practices can be standardized and implemented. The families should also consider whether children can participate in portions of the family meeting to help equip heirs to be stewards of family wealth in the future.
Preparing your heirs and theirs
To maintain generational wealth, the importance of formal succession planning cannot be overlooked as a part of effective governance. Senior family members must lay the groundwork for transferring control of the family assets and, if applicable, the business operations as well.
All too often, the delicate work of educating heirs does not get prioritized, to the detriment of all involved. If a crisis occurs, it could be too late to impart critical knowledge in an effective manner. Addressing these issues proactively helps build muscle memory for younger family members and future generations about how to steward wealth and occupy a leadership role in the family.
Within a framework of governance that embodies consensus, communication and consistency, formal training for the next generation helps limit risk and ensure future transitional success.
Paving the way forward
By increasing family member engagement and aligning priorities, a governance program that matures as the family evolves will help protect wealth and prevent family discord, as well as help pave the way for continued family and business success. Through this, a family can share a future of cherished memories and togetherness.
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