Creating wealth is somewhat like building a fleet of sailboats. When wealth creators first set out, it's typical for them to buy and paint the boat, provision it, scrape the hull, hoist the sails, and keep a firm hand on the tiller, all the while scanning the horizon for dicey weather. As they succeed and add to their flotillas, it becomes necessary for them to bring on more hands, yet the creators continue to make decisions about each boat. At some point, however, it's possible that every boat is taking on water, and the founder of the fleet is unable to plug all the holes. Now it's time for the redistribution of responsibilities. The creator is still heavily involved, but others are assuming duties in which they have particular expertise.
As a family business expands, especially into the second generation, the wealth creator still tends to make major decisions on behalf of the family while he or she is in good health and able to do so. This centralization of power and control is natural and based on the founder's role in establishing the family's wealth. The wealth creator defines other family members' rights and responsibilities, even as the family grows in shared wealth and the number of people who have an ownership interest. The wealth creator may informally delegate some responsibilities, but as the wealth grows, so do the risks in neglecting to put structure into the roles and responsibilities for each family.
If informality rules the family enterprise, the risks include a faulty succession plan, poor decision making, and confusion about a number of factors.
A less‐than‐adequate succession plan will hamper and may even destroy the business itself. A recent PWC survey covering 2,400 business decision makers in more than forty countries found that only 16 percent had an agreed‐upon and written succession plan in place, although more than 80 percent had conflict resolution procedures in place.1 It stands to reason, however, that conflict can best be avoided by having the succession plan drawn up, talked about, and accepted by the business and the family. Resolving issues up front is far better than trying to tie up a tangle of loose ends after the retirement, incapacity, or death of the founder.
Decisions are affected by communication, and poor communication can result in bad decisions. Without a well‐defined communication process, the conversations between and among family members who are active in the business and those who are not, between family members and nonfamily employees, and between generations of the family can resemble the old game of Telephone; that is, the messages may be garbled, incomplete, and tinged with self‐interest. That's a blueprint for slipshod decision making.
For example, family members who work in the business are more conversant with information as it becomes available simply because of their positions in daily operations. Those who are owners but not employees typically must wait for information to trickle down, perhaps by attending a family meeting or reading a quarterly email. They may feel excluded and as if they are second‐class members of the family, which can lead to disharmony and alienation.
In addition, they may be more deliberate in processing the data and making decisions simply because they are removed from the day‐to‐day life of the family business. This perceived slowness can be irritating to the family members in the business, who want to make choices quickly and efficiently.
If not addressed in advance, these issues will become harder to resolve as the wealth creator reduces his or her role in the oversight of the family business or wealth management.
Each family member has one or more roles with regard to the assets held in common. These positions can include owner, employee, manager, board or committee member, leader, trustee, or beneficiary. Each role has varying levels of rights, accountabilities, and responsibilities, and sometimes the roles conflict. For example, if those who work in the family business see expansion as a primary value, the board of directors may take action to enhance that value by acquiring a competitor.
However, those who are not part of the business but count on income from its operations may be surprised, chagrined, or even horrified or furious to hear that their portion of the wealth will be reduced or not disbursed at all for a twelve‐month period because of the costs related to the acquisition. If the facts have not been communicated adequately, a rift is in the making. A systemized structure becomes necessary to balance interests and rights. The best way to organize these functions is by devising some form of family governance.
The term family governance can sound off‐putting, rigid, bureaucratic, and even a little pretentious. However, the purpose of family governance is to create an organizational structure that encompasses the family's vision and mission, roles and rights, and provides the necessary guidelines and tools to manage the shared resources most effectively. It allows for centralized decision making while offering both transparency and accountability to every member of the family. As Lisa Gray says, “Effective governance is a set of processes and systems which have been carefully designed by leadership based on input from the family and voluntarily adopted by all family members to … serve the family and to protect [and] foster the family's authentic wealth.”2
Optimal family governance:
Families are complicated entities, and different members have various needs, some of which are illustrated in the following table:
|Strong relationships||Appreciation and cash distributions||Clear direction from owners|
|Responsible, empowered individuals||Financial reports and information||Understanding of long‐term strategic vision|
|Education and development opportunities||Nonfinancial business information||Opportunity to create and implement plans to meet strategic vision|
|Family and business reputation||Information about strategic plans; business reputation||Compensation that is competitive and rewarding|
|Sense of family, values, and history||Community legacy||Appreciation for achievement|
|Understanding of potential roles, both inside and outside the business||Long‐term exit/legacy plans||Opportunities for advancement|
|Nonfinancial business information||Opportunity to help shape legacy||Independence; respect for boundaries|
|Retirement benefits for former employees||Retirement benefits for former employees||Retirement benefits for former employees|
Given these various and sometimes divergent needs, governance brings clarity. Without a governance structure, extended families that are growing sometimes fall into the trap of slap‐dash functioning. The decision‐making processes may become haphazard, even sloppy, and this lack of order can result in missed opportunities, poor communication, and great frustration among family members, owners, and managers. That confusion can ultimately lead to hostility and family breakdown.
Sometimes, families don't understand their need for governance until a crisis occurs and they must scurry about, trying to jerry‐rig some sort of plan out of parts and pieces. When that doesn't work well—or at all—they get down to the business of creating a process and putting it into action. Within the governance framework, the family operates more efficiently and effectively as an organization. With a guiding plan in place, they can make decisions more quickly, seize wealth‐enhancing opportunities, and devise clear expectations of themselves and others, all of which greatly reduces the risk of conflict.
Governance can include a family constitution, bylaws, boards, employment and investment policies, and expectations around family meetings and reporting of information. Whatever structures are put in place, the constitution makes it easier for family members to understand their places and functions within the wealth enterprise.
This important document also can be called a family creed, protocol, or charter, but whatever the term, the constitution sets out the family's commitment to the vision and mission statements they previously drafted and to the roles and responsibilities family members will assume, either within the family business or in managing the assets if a liquidity event has resulted in sudden wealth for the family as a whole. Administratively, it articulates how the vision and values will play out in the daily life of the family—for example, how they will make investment decisions, choose new initiatives to support, or develop their philanthropic outreach, to mention only a few. The constitution may do the following:
The bylaws to the family constitution highlight how the constitution will function. They govern the powers, duties, and rights of directors and management, as well as the procedures and rules for shareholder meetings and voting rights. They also set up the communication channels and establish procedures for conflict resolution within the business and family.
Families are unique, and family constitutions should reflect that uniqueness. Although a template constitution may be useful in discussing the issues that surround the creation of the actual document, the constitution itself should not be something ripped out of a book and applied wholesale to decisions as important as these. No template can take into account the family dynamics—that is, the myriad feelings and interests of a wide‐ranging, multiple‐unit family.
Drafting the constitution should not be delegated solely to the advisors or family office, either. They may be skilled at what they do, but not have the vision to anticipate or mediate the types of intrafamily conflicts that sometimes arise when the topics are money and fairness. Of course, the advisors should be invited to contribute their expertise, professional insights, and support to the process, but the hard work of crafting the constitution falls to the family. It is in that hard work that the family forges its identity and builds its unity. In fact, the documents—the vision and mission statement and the constitution and bylaws—while important, are not really the point. The effort is. “Without the hard work required to educate the family members and to enable them to offer valuable, thoughtful input, any seeming benefit gained by the creation of these documents may be short‐lived.”3
The constitution consolidates into one entity all those who deal with the family wealth: the family itself, the family office if one exists, representatives of wealth advisory and legal firms, and individual advisors, if any, so that everyone works together cohesively in the family's interests. By putting everyone on the same page, rather than at cross‐purposes, it often is possible for the family to sidestep the types of disputes and disruptions that destroy harmony and consensus.
The family constitution can govern nearly any eventuality the family wishes to consider: succession planning if the business is still owned by the family or considerations about if and when the business should be sold; how responsibilities will be divided; and how the next generation will be selected and educated for leadership roles. It also can cover potentially difficult situations such as death or disability of a key member or the divorce, remarriage, and subsequent change in family structure (through the addition of stepchildren) of any member.
Most important to the success of the constitution may be the portions dealing with the resolution of disputes among family members. Not all families are well‐attuned to one another, and if bad blood exists in the first generation, the animosity may rear its head again in subsequent generations, causing discord among brothers, sisters, and cousins. However, if the family can work through disagreements by themselves according to the provisions of the family constitution, it may be possible for them to avoid ugly, public litigation.
It's vital that the family constitution be a written document. Memory is fallible and subject to bias, so having everything that has been agreed upon committed to paper or other media prevents useless, petty debates that gum up the efficiency of the family enterprise.
Working on something of value to everyone can bring family members closer, even if they are scattered across the country and have come together only for this purpose. Because sharing is crucial to the success of the endeavor, cousins who barely know one another may find they have much in common and become excited about being the next generation to act out the family compact.
Intergenerational conversations can bring new ideas to the fore, and the older family members may be energized by the younger and be more willing to pass the torch at the appropriate time. Because everyone is encouraged to be part of the discussion, trust is built even if the interchanges are sometimes heated.
The conversations leading to the final documents may not be all peaches and cream. Some things are hard to think about, let alone raise publicly. It may make attendees nervous to talk about what happens after the death of the wealth creator if he or she is sitting in the room with the rest of the clan. It's unpleasant to consider which family members might need someone else to manage their affairs in the event that their aging brings incapacity. It can be touchy to talk about the care requirements of a child with special needs or to consider what to do about the uncle with the substance abuse problem. Nearly every family has these kinds of “third‐rail” predicaments, and often it's best to once again call upon a specially trained facilitator who can help dial back the emotion and keep the conversation moving.
Whatever the family circumstances might be, agreements based on openness, honesty, cooperation, and compromise, all wrapped around the core of family values, vision, and mission, give the family legacy a much greater chance of survival from generation to generation than if the process is left to chance and casual conversation.
Although based on a family's unchangeable truths, the family constitution is a living document that can be amended as conditions change. For example, if the family drew up the constitution while still involved in a family business, the document probably will need considerable alteration if the business is sold and wealth pours in.
Once the organizational/family structure provided by the business disappears, the family constitution may become the tent pole around which the family gathers, so it's important that the document be up to date and reflective of where the group is now. At one time, the major constitutional issues might have included such topics as the conditions under which family members were to be hired by the business, but if the business is gone, the new focus might be on how to invest and use the wealth gained by the sale so the family legacy is best perpetuated.
Additionally, as generations rise and fall and life conditions change, what was important to the wealth creators 100 years ago may be far less so to their successors. Although the values the family members have articulated tend to remain constant, the ways in which they enact those values may shift. At that point, some aspects of the constitution may be revisited and altered to reflect the times in which the family finds itself.
However, even though an amendment policy is part of the constitution, the founding document never should be amended on a whim or because one family member suddenly becomes huffy about a particular bone of contention. Amendments are generally to be reserved for substantive items about which the majority of the family members are in agreement.
While a constitution often is concerned with the rights of those who are governed by it, it's also useful to enumerate the responsibilities that attend the rights. For example, with the right of having a vote at family meetings comes the responsibility to attend as many of them as possible and to be prepared to participate by reading documents and policies sent in advance of the gathering. With the right to be considered for a leadership role within the family comes the responsibility to work constructively and cooperatively with other members of the group. With the right to be compensated for work done in behalf of the family comes the responsibility not to shirk the duties and to keep on top of opportunities that will benefit all and ensure the increase of the family wealth and the continuation of the legacy.
The writing of the constitution generally includes a provision for ways in which the family conducts its daily interactions. The family assembly and family council are two such methods.
The family assembly is a forum to which all family members are invited to discuss business and family issues. During the founder's stage of the business, the family assembly may take the form of an informal family meeting, which, like the first‐generation Rockefellers' philanthropic discussions, may take place around the breakfast table. The duties of the family assembly include:
As the family expands, these meetings usually become more formal in nature and allow the members to communicate values, generate new business ideas, and prepare the next generation of the family business leaders. If the business has passed out of the family's hands, the family assembly still may continue to meet to learn about external influences such as changes to the tax code and macroeconomic conditions that might affect the family's wealth management plans. There may be discussion about investment strategies or philanthropic options.
Some family meetings may feature presentations on subjects such as conflict resolution or preparing children to become good stewards of money and other resources. In short, well‐orchestrated family meetings lasting a couple of days can cover a range of topics and be of great value to attendees.
However, between these all‐hands meetings, decisions must be made and actions taken to keep the family moving in the direction set by the constitution and bylaws. When families become too large and unwieldy to manage these tasks, they may designate a group of family members to deal with issues and opportunities requiring quick responses. This group—the family council—helps to interpret the foundational documents and carries out other duties that arise in managing a large, complex, multigenerational unit.
The underlying purpose of the council is to promote a sense of cohesiveness and unity across generations while also developing the family's policies, direction, human capital, and intellectual capital in an effort to create a sense of accountability, stewardship, and leadership.
The council is the primary link between the family, the board, and senior management of the business. Some of their duties include the following:
They also may be responsible for establishing and communicating important family policies regarding decision making, confidentiality, conduct, risk management (including insurance coverages, estate planning, prenuptial agreements, and traditional and social media policies), and communication planning.
In short, the council is a busy working group that handles day‐to‐day details; speaks with the advisors; communicates with the larger group of relatives; and acts as the canary in the coal mine, sensing potential conflicts and helping to defuse them before they become battlegrounds.
The makeup of the family council probably is contained in the constitution and is the result of careful consideration of a variety of questions, including:
Generally, the council includes representatives of each branch of the family and several generations, but how they are selected and the roles they fill are determined by individual families. Terms of office are prescribed and duties are carefully laid out.
It goes without saying that those who serve on the family council must be loyal, faithful stewards of the family's assets and legacy. Their duties may be comprehensive (based largely on whether the family is still active in the family business), but almost always include:
Of course, if the family is still engaged in its primary business, members of the family council have a major role to play in communication between the family and the board of directors and management.
Those in positions of authority in the family council must be strong, vigorous leaders, but not iron‐fisted dictators. Their job is to assist the family in making the best decisions about their wealth and legacy, to listen carefully, to answer questions, and to lead and participate willingly in discussion, not to impose their will on the rest of the family.
As has been indicated in several of this book's earlier case studies, the patriarchal style of top‐down governance, implemented solely by the wealth creator and perhaps a few trusted advisors, almost never succeeds. Why would it? Family members have little voice, feel disrespected, and have no particular desire to participate in a structure that doesn't allow for real engagement. They don't learn much about the family business because decisions are made by the wealth creator with only token input from other members of the family. Family members often throw up their hands and disengage completely from both the rest of the family and the family business. Disengagement can lead to disaster as the family struggles to uphold its stated values and mission in the face of authoritarian management.
Lisa Gray mentions other ways that families may choose to govern themselves: majority rule, for one, in which each family member has a vote. She indicates that this style may appear to be most fair, but may fall prey to factionalism, as family members form cliques who vote together, leaving the minority members feeling excluded. As Gray says, “Pure democracies with no checks and balances can breed anarchy; a flat governance structure ruled by majority vote can have the same effect in families.”4
Gray appears to favor the representative democracy model, saying, “[This form] … that has checks and balances of authority is effective for current generations and also offers the greatest flexibility to accommodate transitions the family experiences from generation to generation.”5
Indeed, this last form of governance seems to be the one most recommended by those who deal with families with significant resources and results in the formation of family assemblies and councils that hear the voices of the family and represent those voices in decision making.
No matter how carefully a family plans its operations and writes its policies, if the deliberations and decision are not well‐communicated, the door is left open for misunderstandings that can result in discord. A good communication plan should do the following:
The plan should incorporate a variety of communication methods, including a family email group or website, newsletters, surveys, conference calls, meetings, educational opportunities and workshops, and voting or proxy materials. All these outreach activities are useful in encouraging input from every family member who wishes to participate. Older members may prefer print communications while younger ones almost always wish to receive information electronically.
Insofar as possible, communication among family members should be judgment free, which can be a hard standard to adhere to when several generations are involved. With today's longer life spans, even a relatively small family can have three or four generations with widely varying worldviews represented at family meetings. Sometimes these divergent family representatives can come to surprising consensus around specific issues. For example, both traditionalists (those who probably created the family wealth and still may be very robust and active in their seventies and eighties) and Millennials (those between the ages of eighteen and thirty‐three) believe in harnessing the power of teamwork.
On the other hand, traditionalists have respect for leaders while Millennials are more likely to demand that leaders respect them and their ideas. For traditionalists, frequent job change might have been viewed as instability, while Millennials expect to change jobs—and entire careers—several times during their lives.
Older wealth creators may have viewed long hours in the office as dues to be paid for advancement, reward, and a place at the table. Younger family members, however, may feel they are at work 24 hours a day because their constant use of communications devices keeps them in touch wherever they are. They may see a traditional office environment as a confining space that saps creativity. They think they should be rewarded for the quality of their work, not the quantity of time they've spent in the office. With all the technology they have at their fingertips, they believe they can answer a question or solve a problem while watching their kids' soccer games just as easily as they can sitting at a desk in a cubicle farm. A balanced life is far more important to them than it was to earlier generations.
Generational differences regarding the nature of work, life balance, tolerance for risk, and a variety of other factors can make family communication difficult. Although these differences are simply alternative ways of looking at the same set of facts, if family members see them as misguided, antiquated, selfish, entitled, or just plain wrong, and the language between generations reflects these biases, the stage is set for disputes and unnecessary arguments. Families threatened with fracture should seek refuge in their common values and look for areas of agreement and perhaps some professional facilitation.
The most powerful governance models give voice and some sort of voting participation to every member of the family except children. The adults' voices are heard at family assemblies, and their votes may elect the family council or other advisory bodies and may be sought on matters of policy and procedures. While the model may not be a pure democracy with each family member voting on every single issue, the representative style prescribed by many family constitutions, combined with a strong communication plan, can make every family member feel heard and included.
It is the number‐one responsibility of every family member to be committed to the vision and mission statements, the family constitution, and all other documents that underlie the family's future and legacy. As John Ward, PhD, said, “An ownership group that speaks with one voice liberates management to focus on the business…. Responsibility includes respecting the limits of ownership's roles, understanding the business and providing leadership for the governance process.”6 This is equally true if a liquidity event has occurred and the family has made the transition from family‐owned business to financial family. At that point, there must be coherence in policies and procedures that “create[s] a sense of mutual purpose … in managing the areas that remain.”7
James Hughes mentioned that “the ability of siblings and cousins to work together is critical to long‐term wealth preservation.”8 It's reasonable to assume, then, that these siblings and cousins must be consistently exposed to the guiding documents and be part of extensive conversations over time that clearly articulate the family's values and planning for the future. “If any generation fails to reaffirm … the family's social compact, the ability of later generations to resurrect [it] will … be greatly diminished,”9 Hughes added.
Right from the beginning and throughout generational shifts, the foundational documents should be set alongside real‐world behavior to see if the family is continuing to act in a way that reflects what it started out to do. Although times and attitudes change, the values should be immutable, and if the family is not living up to its own mission, it's time for someone—possibly the family council—to pull on the reins and redirect the rest of the clan. If the family adheres to the agreed‐upon of values during a particular set of circumstances but abandons them in the face of difficulties or unexpected events, discord is almost a given, and the family legacy may be on its last legs.
As we've seen in the stories of well‐known families and in the case studies in this book, even the best preparation may not be enough to forestall disagreements, so often protracted and bitter. Before family members haul one another into court, however, there may be another way to resolve or even prevent family disintegration.
Anchorage, Alaska, judge magistrate Suzanne Cole shares the following insight on the importance of problem solving:
In the sidebars are two case studies Cole supplied that demonstrate how to use mediation principles to help move a family forward.
Some members feel a strong pull toward the family business; they are heavily involved in the history and tradition surrounding it, and they want to remain connected to it for generations or until it is sold.
However, not all family owners wish to be actively embroiled in the family enterprise, especially as it grows and operations become more intricate and sophisticated. They may have very different interests. Cynthia, for example, is a college professor who doesn't care to be involved in the day‐to‐day operations of her grandfather and father's furniture empire. As a third‐generation member of the family, she doesn't choose to serve on the family council, but she wants to be informed about decisions that are made by the council and the company's board of directors. Although she is interested in the direction the company will take, she is an inactive owner of the family enterprise.
On the other hand, Cynthia's son Adam has an MBA, has worked in marketing in the family business for several years, and has made valuable suggestions about new product lines and channels of distribution. He can't imagine not being on the family council, where he feels it is his duty to serve as liaison between the board of directors and the family and to have significant input into decisions that affect both the business and those who benefit from it.
Adam is well‐positioned to take over the company after his grandfather retires, and he has proven himself to be so talented that his grandfather is thinking about skipping a generation and leaving the business in his grandson's capable hands within a few years. Even if the enterprise were to be sold, Adam would maintain his place on the family council and be a leading and valuable member of the wealth management group. He is truly an active family/business member.
Neither of these positions is intrinsically wrong or right. Inactive is not a pejorative term. It means simply that the family member's focus is elsewhere—perhaps in a profession, another type of business, or an all‐consuming avocation. It's important for the future of the family for each member to be explicit about what roles and responsibilities he or she feels comfortable assuming as the business grows or the business of family becomes more complex. It should be made clear that each member's level of participation is a choice. No family owners should be made to feel less valuable because they choose to step back from responsibilities for which they may feel unprepared or ill‐equipped. Not everyone is able to succeed in business, and family members may find their vocation—what writer and theologian Frederick Buechner referred to as the meeting between a person's “deep gladness and the world's deep need”—somewhere other than in the family business.
At the far end of the spectrum of inactive family members are those who make the decision to leave the enterprise altogether. They should be allowed to do so without recrimination according to whatever terms the family has established for valuation of their share of the wealth.
Those who wish to remain engaged and have applicable skills are prime candidates for such duties as managing a portion of the business or advising those who do. They may be involved in goal‐setting, hiring, decision making, document review, board or committee service, or a variety of other tasks that affect operations over months or years. They may take a leading role in negotiations if the family decides to sell the company and may continue on the corporate board once the sale is completed. Their institutional memory can be invaluable during and after the transition. They often are also leading members of the family council.
Even those who are inactive in operations have critical responsibilities to the business. These members should make it a priority to attend family meetings and become conversant with planned directions so they are not taken by surprise by decisions made by active members and/or the board. They should read and carefully examine documents the family council provides. They should ask—and receive—answers about any potential actions the board or council is anticipating. These simple steps often forestall conflict at the family meeting or in other venues. Certainly uninvolved owners may have a vote on who represents them on the family council.
Because inactive members are removed from the internal machinations of the business, they often have unique insights to bring to those who may not be able to see the forest for the trees because they are enmeshed in the details of running the company. These outside owners have a duty to share their perceptions and to talk them through with members who have decision‐making powers. Their contributions may keep the business from making costly or embarrassing blunders.
Even if they choose not to take a primary role in the family business or wealth management aspects of a new fortune, it's wise for those who are uninvolved to acquaint themselves with topics that affect them as owners. They don't have to become experts, but family council decisions will make more sense if those who are not part of the business have learned the basics of subjects such as estate planning, communications, risk management, financial literacy, and investment philanthropy. The family council should make these enrichment opportunities available to develop future leaders and increase family understanding and unity. Learning together can create strong bonds and might transform inactive members into much more participatory family constituents. If the business is sold, the types of education they received prior to the sale will help make the transition from family business owners to a financial family less confusing.
It sometimes happens that as younger generations of the family mature, they may want to move from a place of inactivity to become engaged owners. Those who have been active for many years may wish to scale back their involvement. Governance documents should spell out the manner in which these types of transfers can occur.
In short, all family members have important roles to fill. Even if they do not participate in the business itself, their value may lie in their questions, life experience, loyalty to the legacy, networks, soft skills and talents, or myriad other strengths. All should be encouraged to bring their gifts to the table and to share them for the benefit of the whole.
In the beginning, some members may resist the introduction of formal governance into family matters, but in time, when hard questions are asked, answered, and resolved, when relationships blossom, and when values pass seamlessly from one generation to the next, most families are glad they took the time to codify their beliefs and practices.