Unlocking Long-Term Wealth: The Crucial Role of Family Offices and Governance Practices
Maintaining generational wealth has been a longstanding challenge for wealthy families worldwide. To address this concern, many families have established Family Offices with a primary focus on wealth preservation. However, a significant number of Family Offices lack formal governance structures, succession plans, and family boards, contributing to the limited longevity of such offices. This article emphasizes the importance of good governance practices in facilitating long-term generational wealth for ultra-high-net-worth families.
The findings from a global survey on Family Office compensation benchmarking, conducted in collaboration with KPMG, reveal that 62% of Family Offices worldwide have a primary goal of wealth preservation. However, it also highlights that a considerable percentage lack formalized governance structures (42%), enforceable succession plans (48%), and Family Boards (52%). These factors contribute to the “shirtsleeves to shirtsleeves” phenomenon, where wealth dissipates within a few generations.
To break this cycle, implementing a robust governance framework becomes crucial. Treating the Family Office as a separate business entity rather than an extension of the family is a key principle. A successful UK-based multi-generational Family Office emphasized the importance of being “governance heavy” for long-term generational wealth. They have a comprehensive family constitution that outlines mission, duties, shareholder expectations, compensation, and family values. This constitution helps foster consensus and instill values across the Family Office, a practice that is often lacking in the industry.
Moreover, the Family Office mentioned in the European Family Office Report 2022 by Campden Wealth maintains a family forum for discussions related to Family Office matters and a family council consisting of family directors and shareholders to make critical decisions. These structures provide additional checks and balances within the governance framework, contributing to long-term success.
An effective succession plan is also crucial for sustained wealth. Proactively developing continuity plans ensures that the right individuals assume appropriate roles and facilitates a smooth transition between leaders and successors. Involving the next generation in the Family Office allows them to gain practical experience and protect the family’s legacy. Transparent mechanisms for succession planning have significantly contributed to the longevity of the UK-based family’s wealth, as they intended to pass it down to future generations.
It is essential to note that succession planning does not necessarily mean assigning roles to family members who may lack the necessary qualifications or motivation. Family Offices should consider seeking external experts with professional experience and expertise to mentor the next generation or even take over leadership roles entirely. This approach professionalizes the Family Office, introduces standardized processes, and safeguards the wealth for the long term.
By embracing good governance practices and implementing effective succession plans, Family Offices can improve their chances of sustaining generational wealth and overcoming the historical challenges faced by wealthy families worldwide.