Why good family governance matters

A conversation with Honora Ducatillon, Head of Family Advisory, Pictet Wealth Management

Why good family governance matters

Why should families care about governance?

Wealthy families, irrespective of where or how big they are, share a common characteristic, which is that their family, ownership and wealth/business interests are intertwined. To start, a family patriarch or matriarch usually cumulates all the roles. But as families grow, different combinations of roles emerge: some family members are owners, others are not (think of in-laws or of younger-generation members for example). Some are involved in managing the family business or wealth, others are not.

Moreover, with each generation, more effort is needed to maintain family ties: family members are raised in different households and may live at opposite sides of the globe; different generations may also have very different views on the road ahead. Governance involves understanding the various (sometimes competing) interests family members have and agreeing upon boundaries that keep issues manageable. It is also about intentionally nurturing family unity.

Governance also addresses several risk factors which may destroy value, such as nepotism, losing touch with the outside world, sibling rivalry, intergenerational issues, financial disputes and ‘Prince Charles Syndrome’ (a tendency by current family owners to keep the next generation waiting). Failing to recognise these risks could leave families facing similar scenarios to the Lur Saluces family, owner of the prestigious Château Yquem in Bordeaux. Some family stakeholders felt left out by the family member in charge of the business and unsatisfied with the dividends they received. This eventually prompted them to sell out to the luxury conglomerate LVMH, thus ending a family business stretching back to 1593.

How do you help families address these risks?

First, by drawing their attention to the challenges they face. Awareness and education are key to gain support in the family for a governance model. Second, by guiding them through an exploratory journey that alternates individual reflection and collaborative workshops. This approach facilitates the emergence of the different perspectives on the most important wealth issues facing a family.

We start by mapping out a family’s unique DNA: What are the defining moments of its history? What are its core values? What specific skills and interests do family members have? Developing a shared understanding of the family’s history helps members learn from the past and identify its strengths and weaknesses. Discussing values enables them to better understand the motivation behind their behaviour. Recognising the individual passions and capabilities of family members help them realise the role of human capital in crafting a family’s future.

Families then discuss their purpose and mission. This can be an eye-opener. Families may, for example, realise that even if they thought their main aim was to keep the business in the family, their priority at a deeper level is actually to maintain and nurture the family’s identity and unity.

Once families are united around the idea of a mission, of achieving something together, they can see the value of working on a decision-making and governance framework that minimises the risk of conflict. If it appears that there isn’t really a mission shared by all, then families may consider splitting the assets or “pruning the tree” (allowing some of the family members to exit from the shared ownership of assets).

Finally, families determine how to organise themselves to achieve their mission, mapping out the boundaries between their family, wealth and business and deciding which governance bodies they need to nurture unity and decision making (family board, family assembly, family office, etc.)? By defining clear guidelines on access to ownership, employment, and financing, for example, family expectations can be managed. By creating governance bodies, families make sure they “de-personalise” issues and create a fair process which increases the chances that decisions are well accepted. At the end of our series of workshops, we assist them in drafting a family charter covering all the topics addressed.

Is governance only an issue for business-owning families ?

No, it is also an issue for so-called ‘financial’ families (those who have sold their businesses or inherited financial wealth) . As long as a family owns assets together and has a multigenerational vision, then some governance rules are needed. Think, for example, of the clarity needed around issues such as the disposal of a family home or a portfolio of financial investments. 

A family that decides to sell its family business and therefore transform the nature and source of its wealth from business to financial assets needs new skills and a completely new organisation—not to mention a renewed family commitment to act together as a group. Some families may decide to professionalise administration of their wealth by setting up their own family office, while others may prefer to delegate part or all wealth management and advisory to external experts.

You have conceived a three-step ap­proach (see diagram) to help develop human capital inside family busi­nesses. How does this translate into practice?

This approach stems from recognition that the family talent pool is a key asset for family businesses. We have devel­oped a process that allows families to set out different ownership roles, the skills needed for these roles, and how family members can develop those skills. The outcome need not be binary. A family could have an external CEO, but still have control of the board. The question simply is how to find an equi­librium between family interests and non-family management.

What are some of the best govern­ance practices you have observed?

Whatever the size, location and ori­gin of family wealth, governance is crucial. In partnership with the Lausanne-based IMD business school, each year we recognise a family busi­ness that excels both on the business and family fronts through the Global Family Business Award. Past recipients have shown an ability to achieve the right balance between family and cor­porate governance, created a platform to facilitate the relationship between families and external managers, set up training programmes to prepare the next generation of family owners, or extended the family system to include people on the grounds of merit.

What role does governance play in dealing with crises?

A sound governance model is key to weathering crises, as complex trade-offs have to be made, sometimes very rapidly: family owners not only care about the financial health of their business, but also about their network of stakeholders, including their em­ployees, partners, suppliers, family members, and communities. Since the outbreak of the covid-19 crisis, many family business owners have been much more involved in their busi­ness than they were before the crisis. In such a context, being clear about the respective roles of the owners and managers, and beefing up the level of coordination (but without intruding on each other’s tasks), is of particular importance to ensure enlightened and timely decisions.

How do you deal with the increasing prominence of social and environ­mental responsibility issues?

As we help families to align around their values and mission, the social and environmental impact of their ac­tions (their businesses, investments, and lifestyle) is increasingly coming to the fore. A vegan millennial sensi­tive to environmental issues might not be aligned with a family business involved in meat-processing or a fam­ily investment portfolio that includes hydrocarbon companies.

Today, families can use numerous ways to mobilise their wealth and business­es for social and environmental im­pact, through giving, investing and innovating their business model. We help families navigate through the dif­ferent possible strategies and translate their views into coherent action.

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