Better Governance, Better Family Offices

The essentials of family office corporate governance

Corporate governance is not glamorous, it conjures images of grey-suited compliance officers obsessing over procedures and protocols.

But failures in corporate governance can be fatal and family offices are particularly at risk

A key family office USP is their informality. Family offices are seldom weighed down by formal bureaucracies or processes. They can be flexible and nimble. This comes with major advantages:

• families can outmaneuver more stolid competitors

• they can sign opportunistic deals

• they can make decisions at lightning speed

• employees can operate without cumbersome corporate policies holding them back.

But with these advantages come risks. If due attention is not paid to corporate governance, the pack of cards can come tumbling down very quickly.

Failures in corporate governance almost inevitably lead to failures in business. That failure may not happen immediately, but risks can compound and undermine everything the family is working towards.

Effective corporate governance is the backbone of a successful family office. It ensures accountability, transparency, and sound decision-making processes.

The best family office leaders will ensure that their family office implements effective corporate governance measures.

Below is a brief overview on how to make this happen.

Establishing a Clear Governance Structure

A clear structure will include defining roles and responsibilities, establishing a chain of command, and setting up decision-making processes. It’s the framework around which the family office is built. Without such a structure, confusion and conflicts are inevitable, especially in times of crisis or transition.

This doesn’t mean that the family office must turn into a stuffy bureaucracy. It can still operate with a flat corporate structure, but that structure should be clear and defined.

Board of Directors or Advisory Board

Like any effective corporation, a Board of Directors or an Advisory Board is an important check and balance. Boards bring in external perspectives and expertise, often invaluable for strategic decision-making.

Family members often occupy key roles within the family office, but it's essential to have independent directors or advisors who can provide unbiased advice and prevent potential conflicts of interest.

Family Council

A Family Council serves as a bridge between the family and the family office.

It typically includes representatives from different branches of the family and ensures that the interests and values of the family are reflected in the family office’s operations.

The Family Council can also play a role in succession planning, helping to groom and prepare the next generation for leadership roles.

Implementing Robust Policies and Procedures

Family offices thrive on flexibility, but robust policies and procedures are crucial to mitigating risks.

Family office policies should cover areas such as investment strategies, conflict resolution, risk management, and ethical standards. It’s surprising how many family offices shun formal procedures and free-wheel it instead.

Investment Policy Statement

An Investment Policy Statement (IPS) outlines the family office:

• investment objectives

• risk tolerance

• asset allocation

• performance benchmarks

It serves as a guide for the investment team and ensures that investment decisions align with the family’s long-term goals.

Regular reviews and updates of the IPS are necessary to adapt to changing market conditions and family needs.

Code of Conduct and Ethics

Successful families often have a strong culture of ethical conduct.

A Code of Conduct and Ethics codifies the family office’s culture and behavior. It sets the tone for family members and employees.

It should include guidelines on integrity, confidentiality, compliance with laws, and interactions with stakeholders. Having a strong ethical foundation helps in building trust with external partners and ensures the longevity of the family office.

Risk Management and Internal Controls

Effective risk management and internal controls are essential components of family office corporate governance.

They help in identifying, assessing, and mitigating risks that could impact the family office’s operations and assets.

A comprehensive risk management framework should be in place to address various types of risks, including financial, operational, legal, and reputational risks. This framework should include regular risk assessments, risk mitigation strategies, and contingency plans.

A dedicated risk management team or officer should oversee these activities.

Internal controls and regular audits are necessary to ensure compliance with policies and procedures, detect any irregularities, and safeguard the family office’s assets.

These controls may include segregation of duties, approval hierarchies, and transaction monitoring. Regular internal and external audits provide an additional layer of assurance and help in maintaining transparency.

When a team is small, it is easy to overlook the importance of internal controls. For example, it can be tempting for family office employees to undertake both front-office and back-office activities or for employees to have single-signatory rights on accounts. And while family offices operate on trust, it is also important to establish structures that effectively control behavior.

Succession Planning

Succession planning ensures continuity of leadership and the preservation of family values and vision.

Preparing the next generation for leadership roles involves identifying potential successors early, providing them with the necessary education and training, and gradually involving them in the family office’s operations.

Mentorship programs and participation in family council meetings can also help in grooming future leaders.

A formal succession plan should outline the process for transitioning leadership, including criteria for selecting successors, roles and responsibilities during the transition, and timelines.

This plan should be regularly reviewed and updated to reflect changes in the family dynamics and business environment.

Transparency and Communication

Transparency and effective communication build trust among family members and stakeholders. Good communication helps manage expectations, prevents conflicts, and helps develop a sense of unity and shared purpose.

Communication should not be siloed. Everyone needs to talk to everyone – there should be open communication among family members, board members, and employees. Regular family meetings, newsletters, and online platforms can facilitate communication and keep everyone engaged and informed.

Regular Reporting

In order to maintain transparency, family offices should report regularly on:

• financial performance

• financial status

• strategic initiatives

This can be achieved through periodic financial statements, performance reviews, and strategy meetings.

The framework for long-term success

Corporate governance in family offices is the glue that holds everything together.

It provides a framework for accountability, transparency, and sound decision-making. Corporate governance ensures the long-term success and sustainability of the family office.

The best family office leaders know that corporate governance is not a one-time task but an ongoing process. They continually evaluate and refine their governance practices to adapt to changing circumstances and ensure that their family office remains resilient and prosperous for generations to come.

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