Strategic Governance for Family Offices: Why Do It and How to Approach It

Amelia Renkert-Thomas, Co-founder of family business consultancy Withers Consulting Group, outlines the need for governance and the different approaches family offices can take to it, in partnership with the Family Office Association.

Governance, at its most basic, is a system for decision making. Every organisation, from single family offices to multinational businesses, needs some level of governance.

For a family office, effective governance has the following benefits:
– It promotes the shared purpose of the family and helps the office to achieve the family’s vision of success while acting in accordance with the family’s values;
– It can be scaled up or down in line with the complexity of the family, the assets, the clients and the services;
– It creates accountability and so ensures that the family office abides by relevant laws and regulations;
– The governance structure helps to manage risk and complexity while promoting efficient decision-making and transparency;
– The structure operates as designed even in times of extreme stress and conflict.

Many single family offices work effectively with natural governance, where informal decisions are made as and when they are needed. A family office without formal structures, written policies and procedures for making decisions does not lack governance. It simply uses the system of “the way we do things around here”.

Other family offices, particularly those which are more complex or change in a way that makes decision-making more difficult, require a more formal method to ensure that they operate effectively. The respective rights and responsibilities of three separate and distinct groups will need to be clarified. Each will see the family office from a different perspective, having its own needs and objectives:

– Clients look for the family office to provide appropriate investments and/or financial, reporting, tax and admin services. They are concerned about return on investment, timeliness, accuracy, compliance, privacy and risk management. Clients want to make sure that the cost of delivering these services is reasonable and fairly allocated among the various clients
– Members of the management group, who run the family office on a day-to-day basis, have much the same interests as other senior executives. They seek appropriate compensation with upside bonus potential, a safe, efficient and comfortable working environment, the right staff, equipment, third-party relationships and the budget to accomplish the work, the right balance of responsibility and authority, and opportunities for job and personal advancement

– Family members expect the family office to provide services in a way which supports, not hinders, the family’s shared purpose and promoted family legacy and values. They want the family office to make their lives simpler and to enable them to reach their own individual goals

There are simply not enough resources in family offices to satisfy all the wants and needs of each group. As a result, conflict at some stage or other is highly likely.

It doesn’t have to be damaging, though. The different perspectives, needs and objectives of each group can create the energy that, properly harnessed, will make the single family office more successful. The point is to design a decision-making or governance system that will promote optimal intra-group or inter-group decision-making to resolve conflicts effectively and achieve the strategic objectives of the family office.

Natural governance
Natural governance can be efficient and effective, particularly when a small group with common background, values and objectives work together. It is particularly common in smaller family offices where a charismatic individual founded the venture and controls it. But as the family grows and its structures become more complex, it can be very difficult to maintain a natural governance system. New employees, spouses and next gen family members don’t have the background, experience or tacit knowledge to understand ‘the way we do things around here’.

While nimble and adaptable, natural governance can be prone to catastrophic failure when circumstances change. Generally speaking, natural governance will fall short and a more formal governance system will be needed when a larger, more diverse group seeks to exercise joint control and decision-making over the family office. This situation typically arises as the family and the family office grow more complex over time.

Formal governance
Designing a more effective governance system for family offices is a four-step process:
1. Understand the Shared Purpose of the family
The Shared Purpose of a family is a combination of the family’s vision for the future, it’s plans for achieving that vision, and the individual life aspirations of family members, all shaped by the family’s values. No two families have the same Shared Purpose, hence the saying “If you’ve seen one family office, you’ve seen one family office”.

2. Understand the complexity of the family office
The more complex the family office, the more important formal governance will be. This is because the nuanced and unspoken rules that make up a natural governance system, will tend break down as multiple decision-makers try to make complex interlocking decisions. Decisions such as ‘how much liquidity should be maintained at all times?’ implicate management, clients and family; to be made effectively, will require balancing the short and long-term needs and interests of all three groups.

3. Determine appropriate governance structures and policies that suit the shared purpose and complexity
Governance structures and practices need to be formal enough to allow the family office, clients and family to make effective decisions about the assets being managed, but not so formal that decision-making bogs down. Generally, the more complex the family and its assets are, the more structure will be necessary.

4. Implement the new system, including feedback systems to ensure organised accountability
In an effort to design better governance, more than one single family office has adopted a handful of so-called ‘best practices’, written them up in a manual and thrown the manual on a shelf. Those family offices that follow this path are often surprised when conflict resurfaces and everyone in the system reverts to their old patterns instead of following the practices in the manual. ‘Best practices’ are a good starting point, but they are rarely specific or targeted enough to handle the particular circumstances that a family office finds itself in. If instead, family, clients and management have worked together to design a governance system that will fit the family’s Shared Purpose and the complexity of the family office system, the odds of success will increase.

For appropriately situated families seeking greater control and co-ordination over the management of their affairs, a family office can be a valuable tool. However, establishing a family office is only the first step of what should be viewed as an ongoing process, rather than a permanent fix. Much as you would never expect a ten-year-old child to fit into the shoes he wore when he was five, governance that was sufficient in a family office’s earlier years, can’t be expected to function effectively as it evolves and becomes more complex.

Reassessing the suitability of the family office’s governance over time, based on its ability to satisfy a family’s shared purpose and degree of complexity, is key to ensuring that a family office’s benefits are optimised. Designing effective governance requires an understanding of each family’s unique and changing circumstances, and a departure from the notion that ‘best practices’ are always best.