There is a saying in most countries for wealth to be dissipated in three generations; clogs to clogs, paddy fields to paddy fields and rags to rags – but there are enough exceptions to this general rule which proves this need not be.
In the early 1990’s I asked myself how a family can preserve wealth beyond the third generation. I started my research looking at how businesses thrive and started with corporate governance. I studied the Cadbury Report of Corporate Governance, the Greenbury Report of Corporate Governance, and the Combined Code of Corporate Governance. They pointed to processes, relations, roles and responsibilities and I wondered whether these principles could be applied to family owned wealth – I coined the process ‘Family Governance’ which is widely used today.
But what does Family Governance entail?...
Corporate Governance looks closely at the parties involved in managing and running a business organisation. It first identifies who they are and then looks closer at the rights and responsibilities of each paying close attention to where there could be conflict.
To give an example shareholders may want the business to pay out dividends, whereas senior management may wish to increase their remuneration, bonuses, improve their office environment and pile up business expenses. Then there could be a tension between the original family shareholders and the investor shareholders. The family may wish to put their own members on the board and look to the long term of the business whereas the investor shareholders may be looking for an exit in five or so years with a floatation or sale.
Once the parties have been identified together with their roles and responsibilities it is then important to formulate chains of accountability and monitoring. It is an essential ingredient of good corporate governance that every participant knows what is expected of them, and then that person is held to account. There is an expression which I refer to in my book ‘Reimagining the role of the Private Client Professional’ – post lockdown – which is you ‘respect what you inspect’.
Family Governance has many similarities with corporate governance, in that it deals with asset ownership, succession and decision making, but it is then overlaid with emotion.
Sibling rivalry, bitter disputes between former spouses and favouritism, are often where putting assets into a trust can be a benefit.
The family assets in trust are held by trustees who are obliged by law – to act in the interests of all the beneficiaries and if the family is in dispute the trustees need to act in a way which is best for all of them. This can be of particular interest when dealing with a family business owned by a trustee and one side wish to preserve the business to benefit future generations and the other side just wants to take their share and go.
This can lead to some very difficult emotional family issues, especially where one or more family members are competent in business and others are not. How can the trustees be fair to all family members?
It is in connection with this sort of situation where the services of our Podcast Professional of the week, Franco Lombardo are so important. Very often, in my experience the emotional baggage which clings to a greater or lesser experience of most families cannot be openly discussed because the family members do not feel ‘safe’ in discussing emotional issues with each other.
When the founder dies, or succession plans are being made to deal with such an event, the impact on the family is huge. Not only are they dealing with a bereavement but there is also a shift of power, which some may find difficult to accept and can give rise to some deeply held resentments and difficulties which can work to derail everything
Franco talks in his podcast about family members’ relationship with money. I have seen this all too often some family members cover up their feelings of inadequacy at not having business acumen by demanding their share – in cash to compensate, but if they succeed in making their demands it could ruin the business saddling it with debt which it cannot afford
This process I call from ‘dictatorship’ – when the founder is alive - to ‘democracy’ – to get the business and family on an even keel after the death of the founder without killing the golden goose.
From my experience this traumatic event needs to be addressed before the founder becomes ill or incapacitated and, in many cases, needs to involve the skills of numerous experts, such as Franco who is a member of Caroline’s Club. It may seem very expensive and possibly excessive, to engage so many professionals to put in place processes and mechanism but nothing can be as damaging or expensive as litigation following the death of a founder when the family goes to war armed with emotional resentment and baggage.
Better a stitch in time than nine.
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