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Five Steps for Establishing Family Governance

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Following a process for family governance can help your family align on a vision and make good decisions.

At its essence, family governance is how families make decisions together. This straightforward concept, however, can be challenging to navigate in practice. The well-known business adage “shirtsleeves to shirtsleeves in three generations” portrays a cautionary tale of generational wealth transfers failing by the third generation. However, behavioral research has called into question the accuracy of this premise, finding that building collaboration, transparency and trust through strong family governance is an effective strategy for preparing heirs for the responsibilities of protecting and growing wealth.  

The Path to Engagement

Strong family governance borrows from corporate governance best practices – aligning strategies with goals, defining roles and responsibilities, emphasizing accountability and establishing risk management protocols. But for families, underlying these practices is the need to build communication channels, create a culture of trust and transparency, and form a cohesive family vision.

While each family will develop its own tactical approach, in our experience productive family governance is built by following the five overarching steps discussed below.

1

Reflect

The purpose of this step is to determine your vision for your family, your value and what you want your wealth to do. Successful generational wealth transfer requires active participation by all, and this is often best accomplished by widening the path to engagement beyond financial topics. We, therefore, encourage families to take a step back from a strictly financial focus and, instead, reflect on what types of activities they prefer to do together and which they prefer to do separately. By doing so, they often uncover both financial and non-financial activities that provide opportunities for engagement across a wide range of skill sets, talents and financial acumen.

Family members such as life partners and grandchildren, who might be excluded from strictly financial discussions, often provide a fresh, additive perspective to such discussions. And this is also a critical time to consider the diverse perspectives of your family – not only of the circumstances and events that shape generational views, but communication styles. For instance, traditionalists and baby boomers are often accustomed to a top-down approach, which millennials are unlikely to embrace. Accustomed to easily accessing and verifying data, they will likely only feel comfortable if they understand the reasons behind the decisions and are included in the decision-making process.

2

Share

When senior generations consider discussing family wealth management, they are often immediately wary of disclosing assets to younger generations. As discussed in Overcoming Common Obstacles to Financial Education, these concerns are not without merit. Instead of immediately delving into detailed financial discussions, begin with broad, inclusive conversations about the purpose of wealth that encourage family members to voice stories and concerns. Narrow the focus over time in tandem with financial education so that by the time the disclosure event happens, everyone is ready.

Example:

The senior generation of a family had read all the right books, given the advice careful consideration and documented their family history and personal perspectives on wealth in an impressive 70-plus page document.

They neglected to share the work with their college-age daughters. It had never felt like the right time to discuss the thoughts and ideas they had put so much effort into recording. We helped them carve out time and begin sharing their work in a digestible way, tied to actionable financial education with tangible takeaways.

3

Align

This step centers on creating a shared vision around common values. As your family members have reflected and shared, it is unlikely that they have come to complete agreement on what success looks like – yet it is likely that you have nonetheless discovered common ground. Build consensus on your shared vision and ensure your family’s values are represented across your wealth plan, investment portfolio and family engagement. We have found that when families align on a vision for the future, they have often also uncovered a binding purpose for wealth today.

Example:

A wealth generator attributed his success to a set of guiding principles. He carefully bullet-pointed these principles and emailed them to his children. But the email was met with little enthusiasm. He had reflected and shared, but had not been able to establish common ground.

A family meeting was arranged, with each family member coming prepared to ask questions – for instance, regarding how the wealth was created, or why a principle was important. This created a dialogue in which family members were able to build consensus around a subset of principles that resonated with the group. These were ultimately adopted through a shared vision statement that took everyone’s perspectives into account.

4

Engage

While there is no single right way to engage across generations, we have found that lectures or overly prescriptive initiatives tend to fail. Conversely, inclusive initiatives such as encouraging the next generation’s participation in philanthropic vehicles or a committee structure that provides meaningful opportunities for decision-making are far more successful. Such activities can range in formality, from planning family vacations to complex family office structures. Be creative, and make this step your own.

Example:

A seventh-generation family is governed by a complex private trust company structure supported by a board and several committees. The committees not only administer the fiduciary responsibilities and invest assets; the family also has a retreat planning committee and an enrichment committee focused on group learning experiences. They even have an “uncomfortable question committee,” where anyone can ask an anonymous question.

This family has effectively broadened the path to engagement to include a wide range of participants, with younger generations preparing for the future through experiential learning. As the head of the family likes to say, they are being trained whether they know it or not.

5

Reassess

A family vision is a journey, not a destination – and families evolve with each new generation. They grow in numbers, expand geographically and have diverse talents and viewpoints. In order to maintain a cohesive vision and effective governance, you will need to determine a cadence for discussions and incorporating new perspectives.

Example:

A family had relied on the same decision-making system for three generations. They held quarterly meetings, welcomed input and were maintaining – in the view of the senior generation – full transparency. A longstanding tradition held that all family members were welcome to come to the family office headquarters and examine their hardcopy statements at any time.

The family, however, grew to be geographically diverse, and the office was no longer convenient for many of them. The definition of transparency had evolved. The family had reflected, shared, aligned and engaged – but they had not reassessed. The current generation’s expectation was to have electronic access to these documents. This family would benefit from members of each generation reflecting on their needs so that they can begin to align on vision.

Reassessing is an important feedback loop. As your family evolves, so will your decision-making process. Whether you eventually determine it needs a tune-up or a complete overhaul, the good news is you are now prepared with everything you need to refresh it. You have already been through it all before.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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