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The 'thesis' of family governance
11/10/2017 , Rupert Phelps, partner, family office services at Smith & Williamson ,

The practice of family governance seeks to offer a methodology for drawing accountability and decision-making together for the benefit of the family’s wealth. In considering the assets of substantial families and the issue of passing these down through the generations, it must be stressed that the biggest destroyer of family wealth is neither taxation nor investment performance. It is unpreparedness and family conflict. The phrase ‘clogs to clogs in three generations’ expresses the near-universal truth that very few fortunes survive the third generation (studies generally suggest that this is true for roughly 90 percent of families).

If there is a pattern amongst those few who are successful, two clear themes emerge: first, effective ‘family governance’. Second, the importance of considering the family capital more broadly than just its financial assets – these are the family’s human, social, intellectual and spiritual (values) capital. Family governance is a process that allows purpose and values to be established.

Ascertaining these key family values is a fundamental first step before starting to consider the purpose of financial capital. Starting with asset allocation (i.e. detailed examination of the financial capital) is completely the wrong way round and will lead to serious problems within the family. The usual dissipation of family wealth is a stark problem and values alignment (not necessarily agreement) and governance techniques form a powerful element of its solution. This shift of gear to first establishing an ordered and constructive procedure is the most challenging transition to make.

Initiatives around establishing beliefs, leadership and education matter because they are part of the potential mortar that enables human members to be built into an effective, functioning family unit. This reflects the fact that governance is a tool as well as a concept, but in essence is concerned with the process for making collective decisions with measurable consequences. Disharmony, from which conflict is a likely extension, is a considerable threat to a family’s wealth. Seeking strategic advice in this area can be a potent force for harmonised deliberation.

Families have only three choices of what to do with their capital; they can enjoy their financial assets during their own life, they can give them away, or they can seek to pass wealth on to their heirs. Most clients combine all three (the blend reveals their character). Whether a family’s purpose with its wealth is to consume, contribute or conserve, the control and continuity offered by a family office will enhance their ability to make that decision their own. 

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