Succession Planning & Preparing the Rising Generation

Family Governance is a term used to describe how families make decisions together.

Amy Szostak, Director of Family Education & Governance at Northern Trust, sat down with Jane Flanagan, Director of Family Office Advisory, to shed light on family governance practices that successful families employ.

Amy Szostak: Jane, you have been involved with research on family governance by Dennis Jaffe, who is widely known for his work with 100-year families. Can you please give us some background on what you’ve learned from these projects and from talking with client families?

Jane Flanagan: I’ve worked with Dennis for years on a number of research projects about family governance. Families are always interested in knowing what other families are doing, and there isn’t much data on the prevalence of different governance structures in families. We try to help our clients by sharing best practices from other successful families.

AS: Family governance is a term to describe how families make decisions together, particularly over shared assets. How do you describe family governance, and why is it important?

JF: As you know well, Amy, every family experiences governance whether they realize it or not. Governance is a fancy word for decision-making and the ways that families work together to manage shared assets and projects in alignment with their collective values. It’s important to note, too, that there is no one, right way – just what’s right for your family. Governance is important for families who want to stay together for the long-term because it provides a means for everyone to have a voice in and ways to contribute to the future of the family.

AS: In your experience, is family governance only for families with a family business, or do the best practices apply more broadly?

JF: Thanks for asking this question. I think this misconception stems from the fact that families that own operating companies are used to working with a governing board, which is true. In my experience, family governance is critical for any family that wants to stay together for the long-term – business or no business. Building a framework for communicating and making decisions about your shared future; being thoughtful about what it means to be a member of your family; and clarifying the rules of engagement or “how we do things” is a worthwhile investment for every family.

AS: To your earlier point, governance can look different for every family and may even look different for the same family over time. What are some best practices as families evolve from first, to second, and then third generation and beyond?

JF: Governance evolves with the family. In the first generation, decision-making typically happens around the dinner table, where mom and dad make decisions about the future of the family business, their wealth, and their philanthropy. As families grow to the second and third generations, governance structures such as family councils, committees and family meetings become increasingly important as a means of keeping a tribe of cousins, who are often geographically dispersed, feeling connected to the family and providing a way for everyone to have a voice and an opportunity to participate.

Families in the third generation or beyond may have family councils or governing boards with committees (e.g. investments, family learning, philanthropy, family unity) and a family constitution that outlines the family values, policies and practices that define how they work together for the good of the entire family.

AS: Family dynamics can be an even bigger obstacle to successful wealth transfer than investment performance or economic concerns. What kind of time and dollars should be allocated to family governance?

JF: Dysfunctional family dynamics are indeed a threat to wealth transfer. That’s why it’s never too early to begin investing in being a great family. The first investment in family governance is often a commitment to spending time together as a family at a family meeting or retreat where family members experience a mix of fun, education, family time and updates on the family office and/or family business. The majority of our clients have an annual budget for family council and governance costs ranging from $20,000 to more than $100,000.

AS: How do families incentivize busy family members, especially those with children in school, to attend an annual family meeting and participate in family governance?

JF: Most families elect to pay for the cost of the annual family meeting, and many also cover travel expenses. For those families with young children, families can provide complimentary babysitting services. By recognizing the cost in time required to attend the meeting, and budgeting to cover these costs, the family can make it feasible for all to attend.

AS: A common question we get is whether spouses and non-family advisors should be included in family meetings. What do you observe about spouses and non-family advisors being included in governance?

JF: The vast majority of our clients invite spouses/partners to serve on the family council. Family councils and committees also provide a fertile training ground for younger family members. Many families require council service, as a non-voting member, as training prior to joining the council. Over time, many families invite independent directors to serve on the family council to bring fresh perspective and experience to the table.

AS: Jane, thank you very much for your time and your perspective. For our readers, we invite you to review the following resource to learn more.

Recommended Reading: Making Decisions as a Family