Building a Family Office Through Effective Governance

For generations, the Pritzkers—one of the most philanthropic and affluent families in North America—primarily managed their assets to enrich the family as a whole, rather than generating wealth for individual members. The family, which grew its vast $15 billion empire through the Hyatt Hotel chain and other businesses, had historically shied far from the public eye. That was, until in the early 2000s, when two young Pritzker heirs questioned the asset distribution and leadership directive of their forefathers, resulting in intense and lasting media scrutiny, and eventually the shattering of the dynasty.

Billionaire family blowups aren’t new or exclusive to the United States. North of the border, we have our own examples with the Bronfman family (Seagram’s) and even more recently the family once headed by the late media mogul, Ted Rogers.

These cases serve as cautionary tales for ultra-high-net-worth (UHNW) families, highlighting the importance of having a clear system of governance in place to manage family assets and plan for succession. For the Pritzkers, the Bronfmans and the Rogers, the lack of governance and oversight have had costly and irreversible impacts on the family, their reputations and their business interests.

What is governance with respect to a Family Office?

In the Family Office (FO) context, governance is a framework for family direction and decision-making based on a shared mission and goals. It enables the centralization of all decision-making and it is often separate from the operating businesses.

To be effective, FO governance must be active and ongoing; it cannot be considered “one and done.” Operationally, the governance framework should be reviewed and evaluated regularly to ensure it continues to meet the goals and needs of the family and office. This should also include the consistent evaluation of the size and complexity of the family and their Family Office.

A defined governance structure supports the running of a Family Office through five main pillars:

Protecting the family's wealth: An FO is typically responsible for managing a family's wealth across generations. Good governance helps ensure that the assets are protected and preserved for future generations.
Defining roles and responsibilities: With clear governance structures in place, everyone involved in the FO, including family members and staff, understands their roles and responsibilities. This helps ensure that the FO operates efficiently and effectively.
Promoting transparency: Effective governance promotes transparency and accountability. This is particularly important in a FO where conflicts of interest can arise. By ensuring transparency and accountability, the family can be confident that the FO is acting in their best interests.
Ensuring consistency and continuity: Over time, inevitably there are changes with both the family members as well as the FO team. A strong governance structure will aid in ensuring consistency and continuity are maintained in the management of the family's wealth, regardless of those changes.
Mitigating risk: FO's can be exposed to a range of risks - financial, legal, and reputational. Good governance structures can help mitigate these risks by ensuring that risks are identified, monitored, and managed effectively. Any strong governance framework is constantly evolving to meet the needs of the family and the FO.

Speaking of risks...

Unfortunately, tales like those of the Pritzkers, the Bronfmans, and the Rogers are all too common with FOs across the globe, operating without well-managed systems of governance. The risks and challenges faced by those organizations are numerous.

Without a governance system in place, the Family Office may lack a clear strategic direction. This can lead to confusion, inefficiency, and difficulty in achieving long-term goals and objectives. This misalignment is further magnified when the FO serves multiple generations and family members with diverse financial goals and interests. It then becomes challenging to align these objectives, potentially resulting in conflicts and disagreements among family members.

A governance framework promotes transparency and accountability within the Family Office. Without it, the lack of clarity regarding decision-making processes, financial reporting, and overall accountability can lead to potential disputes and an erosion of trust which would fundamentally jeopardize the effectiveness of the Family Office.

When clear guidelines are absent, we often see a lack of standardized procedures and protocols for operational processes. This naturally leads to inefficiencies, duplication of efforts, and a higher risk of errors or oversights. Furthermore, when these oversights extend into the compliance, legal or regulatory space, the family risks potential legal and financial consequences. A lack of governance can easily lead to loss of wealth, as there is no defined policy for investing, nor a system for distribution of income and/or assets. This could lead to the family neglecting to take risk into account when investing and disregarding the Family Office's needs when distributions are made to the family.

Perhaps the most crucial function of the Family Office is the management and preservation of family wealth across generations. When a governance system is lacking or out of date, it, of course, becomes challenging to facilitate effective succession planning and ensure a smooth transition of responsibilities to the next generation.

The three Ps of implementing a governance framework

The greater the complexity and diversity of the family and its assets, the more critical governance becomes, particularly with respect to outlining roles, responsibilities, decision-making processes, communication channels, and mechanisms for conflict resolution. As we have seen, implementing effective governance practices can help ensure the longevity, stability, and success of the Family Office.

That said, regardless of the level of complexity surrounding the family and their needs, the approach to establishing the governance framework for the FO remains the same and it all starts with the three Ps.

Purpose

Within a family, the individual members often have varied relationships and interests. Some members may not be interested in continuing the business, while others may wish to change it fundamentally. Some may be extremely traditional in their views, while others may have a growing appetite for defining value and purpose beyond traditional performance indicators, most notably in the Environmental, Social, and Governance (ESG) arena.

All the above factors must be considered when defining the values and the strategic “why” for the Family Office. The purpose-statement acts as the North Star - guiding and preparing the next generations’ education, growth, development, living and succession.

People

UHNW families often find themselves in situations where private assets and company assets are linked and intermingled. As the complexity of managing family wealth increases, families look to professionalize this process through FO functions.

From a governance perspective, business rules and policies must be established to define and document:

the roles and functions of executive and nonexecutive family members;
how talent recruitment and appointment of key roles takes place;
policies on thoughtful resourcing (insourcing vs. outsourcing); and
when, how, and if there is an integration of next-generation family members into the management of the FO.

Process

Communication is fundamental. Successful FOs maintain solidarity and unity by implementing a strong framework, communicating regularly and planning for succession.

Items to consider in the development of the Family Office processes include:

Selecting a governance system: top-down or parallel?
Developing a comprehensive risk management framework
Creating effective communication channels for family members that allows for quick decision-making routes
Tax planning and asset holding strategies that account for both personal and corporate needs including asset protection, succession, and regulatory requirements
Instituting investment policies
Managing family wealth effectively across borders in an ever more globalized world
Building a philanthropy framework and management control methods
Establishing technology, key functions and organizational oversight

Crowe Soberman’s role in the governance of your Family Office

Crowe Soberman’s Family Office is built on the mandate of empowering families, preserving wealth, and securing legacies.

Acting as your CFO, we provide a comprehensive and personalized approach, tailored to your family’s needs. It is our size that makes us different - small and nimble enough to understand and excel at the relationship factor, yet with unparalleled bench strength and depth. Crowe Soberman’s affiliation with our international network, Crowe Global, provides access to even further resources otherwise unavailable to most family offices.

Our team has long-standing experience and understanding of the unique needs of a UHNW family and are dedicated to helping our clients achieve their financial goals while simplifying their financial lives.

This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.