How Can Family Offices Facilitate A Family Governance Exercise? Nick Jacob writes for IFC Review

Private Client Partner, Nick Jacob, has authored an article entitled 'How Can Family Offices Facilitate A Family Governance Exercise?'.

The article was first published in IFC Review on 23 June 2021 and can be read in full below.

Facilitation is the key word. Family Offices (FOs) come in all shapes and sizes. Many are set up purely for investment purposes, but an increasing number of FOs are set up to carry out a much wider array of tasks for the family. A family that fails to plan puts at risk the business and wealth that often has been created with great diligence.

There is a good deal of confusion over what “Family Office Services” really are, compared with “Family Governance” (FG). Family Office Services relate to the services provided by FOs to the family for whom they work. Many do provide services to the business but that is not generally the function of an FO, save perhaps for seeking and co-ordinating external advice for the business. FG is the process whereby planned succession of the family business and wealth is transitioned from generation to generation in a structured and organised manner and in a manner that is likely to hold the family together rather than split it apart. The two are very different, yet strongly connected.

The fundamental problem that exists in the FG arena is the time and commitment needed by family members. One of the early questions I ask families is whether they have the appetite to give the time and commitment the process needs. If they don’t, they will find the process unsatisfactory as it is the process itself that is so important to the family. Most entrepreneurs are busy people with a great determination to succeed. However, when you question them as to what they are succeeding for, it is often clear that they wish to leave a legacy. However, they often don’t give that wish the time it needs to plan that legacy. That is where the FO can come in to facilitate that process.

That’s the theory, at least. Can it work in practice? Let’s ask a few questions:

• Will the officers in the FO have the skills to manage a Family Governance (FG) exercise with external advisers?
• Will they prevent the external adviser getting “under the skin” of the family members, which is crucial to do a meaningful exercise?
• How aware of the psychological aspects of FG will the FO officers be?
• How helpful can they be in supplying information to the external adviser?
• Will they actually “get in the way” of the external adviser conveying important messages to the family members?
• Can they facilitate the involvement of the younger generation?
• Can they co-ordinate arrangements with family members scattered around the world?

What are the answers?

The aggregate effect of these questions is that, in my view, the FO officers can be an enormous help to the family and the external advisers, but the family should ideally not hide behind them as their own involvement is crucial. The ability of the FG external adviser to understand the psychology of the family is often not recognised adequately but that, too, is crucial.

I was once asked by an FO if I could provide my “template” for them to implement an FG arrangement. There was a fundamental misunderstanding as to what FG was, and it took them six more years to realise where they went wrong with that question and see the benefit of a proper tailor-made solution involving all adult members of the family.

Purpose Of The FO

The FO is rarely intended to be a governance vehicle itself. It is there to facilitate the FG by providing informational and organisational support, but not “passing on the messages”. Just like “Chinese whispers” it is inevitable that messages and nuances will be lost if the FO officer is acting as an intermediary or go-between. It cannot and should not be seen to be the mechanism for the decision making on FG issues. However well known or trusted by the family, they simply cannot convey the most important aspect of FG – the psychological interaction with the family.

What they may be able to do, however, is when the preliminary work is completed and there is an agreed structure to be set up – if, indeed, that is the case – they can be involved with the tax and regulatory advice required to set it up and the setting up itself. However, there will still be the need for interaction with the family for fine tuning structural aspects, not only to ensure that they understand it and are comfortable with it but also to ensure it is properly tailored to the requirements of that family. In my experience of doing this for over 25 years, no two arrangements for any family are the same or even similar.

Selection Of The External FG Adviser

Families often delegate the selection of the FG external adviser to the FO. That may work but at the end of the day, the family must be totally comfortable with the external adviser and see them as a totally “trusted adviser”. If they are not satisfied of that, or if they have not been part of that selection process, then they are far less likely to “buy in” to the FG process. By all means delegate the process of finding potential candidates, but it is imperative to bring the family into the final selection process.

In Whose Pocket Is The FO?

The FO needs to be clear as to whose instructions are paramount. If the senior generation is dictating the agenda, the FO can help to get buy-in from the other generations. Of course, they may be unable to do so but they can at least act as some sort of a sounding board for the first gen. If the influencing person is the second gen where the first gen is still alive and active, then the first gen may feel that the second gen is utilising the FO to take up their agenda for the planning and it may be resisted. This needs to be handled very delicately.

Once an FG arrangement is in place, it should be the FO’s role to oil the wheels of the arrangement by ensuring that all parties are doing their job and making sure that everything is properly co-ordinated. This may include family members themselves, trustees, external service providers and foundations. If a Private Trust Company (PTC) has been set up, it will be important that the FO oversees the trust company normally administering the PTC to ensure that it is acting as a proper trust company and not just a nominee.

Dealing With Difficult Issues

Whilst I do not advocate the FO to deal directly on all aspects of the FG exercise with the external adviser, there is a definite role for them to play. In my view it is essential to extract from all family members any potentially contentious or difficult issues. If part of the rationale of the FG exercise is to plan for an effective and successful succession, that will be undermined by a failure to recognise difficult issues before they become impossible to deal with because views have become too entrenched and polarised. The FO has a real part to play here in that it will usually be able to help deal with these difficult issues as it is likely to understand them better then the external adviser. If it can facilitate the resolution, or at least understanding of those issues, it will have achieved a great deal towards making the FG process work effectively.

The FO may well be able to mediate to some degree when there is a family dispute and take on specific projects which may be difficult for outsiders to do so.

Technology

There is no doubt that the embracing of technology is an imperative in today’s world. In this area, the FO has a significant part to play. In my view, this is a key area where the younger generation can justifiably find a “way in” to the family environment and, indeed, provide added value. I have recently been involved in advising a family with a very large logistics business. The older generation really had no idea that if this business did not embrace technology, and fast, then it would be left behind. I suggested that the third gen, in their late teens and early twenties, worked together on a project to how the business needed to develop (after we gave them a few hours of education as to what the business really was all about). The FO organised the educational seminars and the outline of the project. Almost magically, they came up with an amazing set of ideas which were immediately embraced by the older gens and this was a way in for seven of the nine third gens. FOs can and should have a big part to play in businesses looking in to the future.

Immortality

There seems to be a particular type of businessman where great success gives rise to a feeling of immortality. Maybe the COVID pandemic has put paid to that. But here again, the FO can provide a significant contribution. Many family members find it difficult to raise the issue of succession with the Patriarch or Matriarch. FOs can – and probably should – help the successive generations on a pro-active basis. If that does not facilitate FG, then I am not sure what will.

A Pro-Active Family Office

Many FOs are too reactive to the requirements of the senior family members but a good and thoroughly trusted FO will be a bit detached from the family and be able to make suggestions regarding things that should be done. This includes Corporate Governance for the family’s operating companies, overseeing education and mentoring, and ensuring that agendas for Family Council and/or Assembly meetings are drawn up well in advance, with careful thought as to relevance and to ensure engagement by family members.

FO Governance

Even if the FO does not control the FG, in order to make sure there is continuing support of the family the FO’s own governance is important to ensure succession, accountability and relevance.

Conclusion

While it is imperative that the FO facilitates the FG, it must ensure that family members actually engage in the FG and not stand in their way or simply act as a conduit. That is a recipe for failure. Yet without a good FO, the FG exercise in the broader sense is unlikely to be effective. The co-ordination of implementation, working and ongoing reviews is a crucial function of the FO.