Did you know that, in the absence of effective family governance, many families are unable to preserve their wealth past the third generation? It can be extremely challenging to manage a family’s business and wealth without proper guidance.
Family governance provides the framework a family uses to decide where they are going, allocate power, determine how they will make decisions and plan for succession. But a family governance shouldn’t be just a policy to be followed, it should be an agreement that engages all members of the family and transmits a sense of purpose to each of the stakeholders. Here are some tips to help you create an effective family governance plan.
Develop a Mission Statement
The first step to creating an effective family governance plan is to develop a mission statement. The statement should clearly outline the family’s values, which will dictate the policies and decisions of the family. A helpful exercise to come up with the family’s mission statement is to have each member write a personal statement. These can then be used to find areas where family members align, revealing what is most important to the group. The result should be a cohesive vision that will guide the family for generations to come.
Create a Family Council
A critical component of the family governance plan is the family council, the governing body charged with making decisions on behalf of the estate. The council will draft and revise any policies regarding the family, it’s vision and mission, as well as policies concerning compensation, inheritance and charitable gifting. When dealing with multi-generational wealth transfer, an elected family council can help ensure that everyone’s voices are represented. The governance plan should dictate that a family meeting is held where the council will meet to discuss related business with the family.
Establish Decision Making and Voting Rights
It is important to establish clear decision making and voting rights within the council. If you have a smaller family, it’s OK to make collective decisions if your family dynamics allow for it. Larger families, however, may want to implement a majority vote system. Typically voting is reserved for the top tiers of the family tree. The parents should have the right to vote (in addition to veto power), with children and their spouses holding advisory votes. As the family grows and younger generations become involved, new voters can enter the fray.
Set Up a Family Office
Once you have your mission statement and family council, your next move should be setting up a family office. A family office is a private wealth management advisory firm that helps affluent families manage their finances and investments. The family council will oversee the family office and all of its activities. There are two types of family offices — the single family office (SFO) and the multi-family office (MFO). With SFOs, the family is the sole owner of the organization and uses its services exclusively for itself. MFOs, however, offer their services to other families outside of their own, often through philanthropic efforts.
The particulars of your family governance plan will depend on your family’s preferences and goals. If you’re not sure which route to take, discuss your options with an adviser who can provide family wealth education to get started.