In holding wealthy families together and ensuring smooth successions, what can be gained from capturing the values of a family inside a coherent, actionable document? This article explores the issue.

The following article is by Jennifer Booth, senior associate at Maitland, the South Africa-headquartered asset management and fiduciary services firm. The arguments in this article have global relevance.

The views expressed here are those of the author and the firm, not necessarily of this publication, but the editors are delighted to share these insights and invite readers to respond.

In essence a family governance charter is designed to promote open and honest communication regarding the generational transfer of family assets, to foster trust, unity and collaboration between family members, and to ensure that there are no elephants in the room which could ultimately result in the dissipation of family wealth and the degeneration of inter-family relationships.

How this is achieved
The process of “getting to know you” occurs over a period of a few months depending on the family members' availability to attend group meetings. Once family members have a better understanding of what makes them tick and how they like to give and receive information then meaningful dialogue can begin. This is achieved by asking each family member to complete a personal profile in line with a Myers Briggs personality test and may involve an external facilitator to explain the results.

The starting point is to analyse the family DNA and from this the “family vision” can be distilled and recorded into a single living document in which all parties participate in the creation thereof and agree to and adopt the principles contained therein.  

The family DNA consists of examining the values of each family member and documenting them. From these individual values certain core family values can be identified. These could be, for example, commitment to achieving an objective, never give up or finish what you start.

These core family values then become the basis of the family vision, which is a set of principles which the family has agreed to apply when considering matters and making decisions that affect family members.

For example, the investment philosophy applied to the family wealth will be formulated in line with the family values. This could mean that if a family value is to encourage entrepreneurism, a portion of the investable assets may be allocated to private equity ventures that family members are participating in, however it could be that any venture considered must meet certain viability standards so as not to encourage recklessness.

Perhaps the most important application of the family vision to a decision-making process will come in the formulation of a distribution policy. Often family members and spouses across the generations feel disempowered by the existence of wealth that they have no clear access to. The uncertainty as to how its existence may benefit them often leads to distrust and resentment. There is a desire to benefit children but not to the extent that it encourages or sustains laziness. Likewise, when does one inform a child of the existence of independent wealth and once they know it is there how do they motivate themselves to be productive? The answer is not always clear but providing a forum in which the issues can be debated against the background of the family vision can provide parents with a guide as to how to introduce children at a young age to financial issues such as the effect of compounding growth and the benefits of delayed gratification.

For example, a family may say that children should only be introduced to the family wealth once they have established careers. Alternatively a gradual introduction may occur with monthly allowances and first cars at 18, then entry level houses and replacement vehicles at 23 and large ad hoc distributions at 30 and 40 years to enable lifestyle assets to be acquired.

Likewise there may be a desire to benefit spouses, but to what extent and what effect does this have on their relationship with the family member concerned? The family vision will guide this process and the result will be that the decision reached is not a reflection on the individual spouse concerned but rather the application of the broader family’s values in this regard. Spouses can be part of the discussion, if appropriate, so that their views can be considered and they feel part of the decision. A family may decide that it is mandatory for all beneficiaries to conclude pre-nuptial agreements, for example.

The decision-making process takes place in the forum of the "family council". The initial members are usually the current family members over the age of 25 years but this depends on the circumstances of each family. Future members are admitted onto the council once they reach the prescribed age. The purpose of the council is to ensure that the family vision, DNA, investment philosophy and wealth strategy are all implemented and adhered to, and may include some of the following aspects:

-- Overseeing the interests of the family, integrating descendants into the family and the family business where applicable, anticipating and managing conflicts that might arise, and acting as the communication organ between members of the family;

-- Giving direction to the family by reinforcing, sharing and perpetuating the family vision and DNA, by communicating and engaging with the family in relation to the investment and distribution of assets, sharing the family history, traditions and symbolisms, providing opportunities to engage and develop entrepreneurial spirit within the family, engaging spouses and broader family members appropriately and encouraging and developing the diverse skills of family members in their chosen vocation;

-- Ensuring the proper governance of the family by acting as a bridge between the boards of the family business and the family members, managing the generational succession dynamics between generations, monitoring the management, performance and mandates and investment allocations in respect of the assets, and updating the family governance charter as required so that it can function properly.

Consensus
The family business charter records the consensus reached by the family on the principles and policies that should be followed by the family in its relationship with the family business. It will include matters such as the family’s long-term goals for the business, the relationship between individual family members and the board members and most importantly the recruitment, engagement and appointment of family members as employees and directors of the business.

Aspects such as no automatic right to be part of the business and appointment only on merit are discussed at the family council so beneficiaries’ expectations can be managed.

The family governance charter will also detail and explain the family asset holding structure, be it trusts or companies or a combination thereof, as well as detailing the process for establishing an investment committee of appropriately skilled people to advise on strategic investment decisions and asset allocation.

In conclusion, the process of creating the family governance charter is designed to engage with all relevant family members in a collaborative manner, where open and honest communication is facilitated to establish a set of guidelines and a forum in which contentious issues can be discussed in the future.

Apart from facilitating communication and debunking the elephants, it ensures enhanced corporate governance in respect of the family assets and the structures that hold them.