Keys to an effective family office governance framework
Family office challenges might stem from successful operating business
INSIGHT ARTICLE |
Authored by RSM US LLP
A family developing a family office needs to establish a governance framework apart from the operating business that grew its wealth.
Families of significant wealth are commonly the beneficiary of a well-oiled machine—an operating business whose structure of decision-making and committees has facilitated a highly successful and profitable enterprise. However, when the family considers developing a single family office or virtual family office, the new governance framework required might present new challenges and considerations for the family and its trusted advisors.
By embracing the following keys to an effective governance framework—essentially the structure for decision-making, command and control of the family office—a family will thrive in its next chapter apart from its operating business.
- Family values and mission
- Board and committees
- Technology implementation
- Communication and collaboration
- Benchmarks and objectives
- Evaluation and reassessment
Discuss and define the core values and mission of the family office
Several families I have advised are blessed with a patriarch or matriarch who carefully documented the core values and beliefs that led to their success and wealth. Their children, grandchildren, future generations and trusted advisors can study and internalize the core values that shaped these leaders and, equally important, the principles they want future generations to embody.
For the 99% of families that do not have the luxury of pulling a biography from the shelf, there are many ways to help family members identify their core values. It could be as simple as listing characteristics they feel represent the family. Or, in a particularly engaging exercise, family members pull cards with images or words that have an emotional connection for them. Ultimately, deep discussions and focused time centered on mapping out a family mission statement are keys to identifying and documenting the core values and pillars that will guide decisions.
Family office board and committees
While public and private companies constantly refine their best practices in accordance with standards and regulations, many family offices and ultra-high-net-worth families may lack solid governance and could be unprepared for the challenges of managing immense wealth.
Sadly, many successful families suffer the misfortune of having their fortunes lead to conflict and confusion. Values that were once the bedrock of the family can be weakened or completely lost as wealth is transferred without a comprehensive plan to educate and prepare younger generations.
A strong family office board can avoid those pitfalls. The foundational body often determines the size, members and objectives of the investment committee for the family. Additional committees are often established (audit, philanthropy, direct investment, ESG, education, etc.) depending on each family’s values, focus and missions.
A corporate board and family office board play similar roles in providing high-level oversight and a solid organizational foundation, but there are some important differences between the two.
A corporate board maps out strategic goals and oversees the management team in the service of shareholders. A family office board does the same, with family members as the shareholders. More notably, a family office board functions without the boundaries set by many of the laws and regulations that the Securities and Exchange Commission and other regulators have placed on public companies and their boards. That’s why it’s crucial for the family office board to establish its own guardrails and road map.
Integrating technology to maximize benefits and value
Technology becomes essential as the family office coalesces and builds upon its core values and the family mission statement.
There are digital solutions capable of enhancing most family office functions. They enable team members to capture and track investments, store documents and reports, establish benchmarks for performance, and ultimately establish accurate and clear reporting. They facilitate communication with and among family members, make tax preparation more efficient, protect against cyberattacks and support business continuity.
A family office board that collaborates with office committees and trusted advisors can maximize the balance between value and benefits when prioritizing its investments in technology.
Establish the frequency, agenda and objectives for family meetings
Quarterly calls or in-person meetings are critical, particularly after creating a family office following a liquidity event. An effective family meeting agenda includes clear objectives, a timeline for important projects and status updates of key missions. This will help ensure the family members and their trusted advisors are fully coordinated.
An annual meeting serves to review the governance structure, evaluate performance and service to the family, identify any significant developments within the family or the family office, highlight challenges and opportunities, and educate and listen to family members.
Benchmarks and objectives for family office team and advisors
The majority of family offices are established with an initial focus on the management of wealth; therefore, benchmarks are tied to the performance of the investment portfolios. If the chief investment officer and internal team were hired to meet an investment target set by the alpha generation, preserve capital and manage risk, or maintain liquidity for potential acquisitions, then the investment reporting and accounting systems will be critical areas ripe for digital solutions.
Investment benchmarks and objectives, however, can overshadow the important evaluation of how family members feel their voice is heard and incorporated into the decisions made by the family office.
A mistake commonly made by family office executives is to narrowly focus on serving and communicating with the generation that created the wealth, while ignoring or failing to build strong relationships with the children and grandchildren. This might not affect investment performance; but eventually, the family office team will lose credibility. By failing to educate and communicate with the next generations, executives jeopardize the family office mission to preserve and pass down core values.
Family offices can strengthen communications with family members by consistently surveying them. This engages each individual to measure their satisfaction and solicit updates, concerns, questions and requests that may have developed since the previous meeting.
Evaluate and review the mission, policies and progress of the family office
Family offices in their nascent stages may develop a detailed constitution, investment policy statement, thoughtful mission statement and business continuity plan to anchor a plethora of other guidelines and organizational tools. However, without consistently reviewing these foundational components and adjusting them as necessary, they could easily slip out of date and out of touch with the family members.
By reviewing the family office’s core pillars at each annual meeting, leaders ensure they evolve as an accurate reflection of the family’s intergenerational objectives and philanthropic goals. When those updated pillars reinforce office decisions and functions, sustainable success is within reach.
A new chapter, sustained success
A family developing a single or virtual family office lays the foundation for sustained success by establishing an effective governance framework. This involves new considerations and challenges apart from the operating business that helped the family grow its wealth. Of course, a family can lean on its experiences, as well as its trusted advisors, as it embarks on a new chapter in its legacy. By using family values as a compass and several key governance components as landmarks, the family office can ensure that legacy enriches many generations to come.
Call us at (325) 677-6251 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by RSM US LLP and originally appeared on 2021-07-28.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Condley and Company, LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Condley and Company can assist you, please call (325) 677-6251.