Is good governance different in the family office setting?

By David Lansky, Ph.D., Jennifer Pendergast, Ph.D.

Many elements of family office governance are derived from family business governance practices. But family offices have their own special requirements

As single family offices and multi-family offices grow increasingly influential in the practice of wealth management, it has become widely accepted wisdom that a sound family governance structure is a key element of the family office’s success.

• In a report entitled “Highlights for Benchmarking the Single Family Office: Identifying the Performance Drivers,” the Wharton Global Family Alliance noted that “…the more you invest in a governance structure for your SFO [single family office], the more you communicate and interact with the family members and the more you invest in the education of the next generation, the better the [financial] performance will be.”

• In a study of “Single Family Offices: Private Wealth Management in the Family Context,” researchers from the University of Pennsylvania’s Wharton School, the IESE Business School at Spain’s University of Navarra and CCC Alliance LLC, an affiliation of independent family investment offices, noted, “Family governance is key to ensuring adherence to the family’s value system, its overall purpose and successful trans-generational wealth transfer.”

But what are the essential elements of good family office governance?

Because the wealth that is managed by many single family offices and by multi-family offices often originated in a family enterprise, many concepts of family governance that are familiar to family members are derived from governance of a family business.

Several years ago our colleague John Ward wrote an article entitled “Good Governance Is Different for Family Firms” (Families in Business, January 2003). In that article Ward pointed to some key factors differentiating good family firm governance from the governance more typical of publicly held companies. Among the factors he cited:

1. Owing to the owners’ strong influence and care, the board is just one partner in the governance system rather than the dominant player.

2. The board can operate on two very different premises: The owners may have goals beyond near-term share value, and the board can focus more on increasing value than on watching over self-interested management. Thus, the core function of the governance system—and especially the board—is more about creating value than being a costly source of checks and balances.

3. The key ingredient to that value creation is mutual trust among the owners, the board and management. Having trust allows the board to focus more on contributing to the managers’ strategic thinking and on aiding the owners’ efforts to unify their point of view. As a result, building and strengthening mutual trust among the governance partners—the board, the owners and the managers—is the most critical issue of family business governance.

4. The clarification and coordination of governance roles and responsibilities among the owners, the board and the managers are central to building this valuable trust.

5. The owners’ roles and responsibilities are what distinguish this framework from the public model. The owners establish the values that drive the culture, set performance expectations and offer a vision that creates boundaries for strategy.

With these observations in mind, we believe it is timely and appropriate to revisit John Ward’s discussion and ask, “Is Good Governance Different for Family Offices?” We share below some observations about the nature of the family office as compared with family businesses, and draw implications for family office governance.

The cohesive “glue” of the business is missing. For families who own operating businesses, the business itself can act as a cohesive element in keeping the family together and focused on agreed-upon goals for the future. When a family transitions to a primary task of wealth management rather than business management, reasons for staying together may be less clear.

Implications: Participants in a family office must think carefully and continually about their reasons for staying together as collaborating owners. While vision and mission are also important for business-owning families, the family’s vision and mission for the family office may need to be revisited with greater regularity, and family leaders may need to focus more strongly on managing family cohesiveness.

Individual rights are inherent in ownership and must be respected. The family firm typically represents a single entity that should be managed for the benefit of a unified shareholder group. As families grow and family units increase, the benefit of ownership is increasingly distributed among more discrete units (in other words, nuclear families). This can have a further impact on fragmenting ownership vision.

Additionally, there are more “degrees of freedom” in investing than in running a business, so people are free to have more disparity in their financial objectives. The risk, growth and profit profile of a business are somewhat constrained by the industry in which the business operates, so owners must accept that profile or get out. When it comes to investing, there are many more choices. Family members can choose profiles that fit their needs, which are typically not going to be the same across the group.

Implications: Individual ownership units must think carefully through their financial objectives, and a process must be established for them to articulate these objectives and design an investment portfolio that meets their needs. Particularly when individual participants in the office vary considerably in income level and age, the processes of articulating investment objectives and integrating disparate goals become crucial. While a clear investment policy approved by all participants may contribute to continuity of the family office, recognition of diversity and efforts to accommodate the various perspectives will become increasingly important as the family grows.

The aspiration for a family business is a cohesive ownership group with consensus on business goals and objectives. By contrast, family office management must be more responsive to individual needs, and processes should be developed to identify and address individual differences and needs.

The family culture is the business culture. A key element of family firm governance is the separation of family and business domains. While family mission, vision and objectives provide parameters in which the business operates, an independent board, a family employment agreement and other elements of governance are intended to restrain the family’s personal influence over business management. In the family office, however, the mission and vision are family mission and vision.

Implications: The family culture takes on more importance and relevance in the family office context, since this culture will form the matrix that gives rise to mission and vision. We have found that well-run family offices recognize these circumstances through a strong and continuing emphasis on shaping a functional family culture, providing financial education, engaging in philanthropic initiatives and taking an entrepreneurial approach to the creation of new family wealth. In our view, there should be at least equal emphasis on shaping and nurturing the family culture as on developing structures that support the family office’s investment and other activities (see “Managing paradox,” by Stuart E. Lucas and David Lansky, FB, Spring 2010).

Authority is vested in family owners rather than the family operators. In the family business, business leaders are usually a limited group of family members and non-family members whose authority is recognized by family and non-family alike. But in the family office, every owner may have a legitimate right to interact with managers. This means there is potential for a greater number of diverse, and potentially conflicting, authoritative requests being made of managers. This also means that all owners will be responsible for making more decisions in the family office environment than in the family business environment.

Implications: Family office managers must be vigilant about the possibility of conflicting messages or requests from family members. Triangulation can be a real threat to the smooth operation of the family office. Executives thus must be clear on their rights and responsibilities and their authority relative to family members. A clear process must be established for managing the flow of requests from family to family office staff, and boundaries on what is appropriate to request of the staff must be clearly defined as well. Finally, given the amount of responsibility saddled upon owners in the family office environment, more education of family members with regard to the business of the family office is crucial, whether they have background in the business or not.

Compared to a family business, family owners in the family office may have considerably more power. Therefore, it is crucial that family office operations be clearly defined with regard to lines of authority, and with regard to the process of managing family requests to executives and operators of the office.

Family offices tend to oversee a broad range of entities and service providers. While the family business is often a single entity or a small number of entities, family offices typically manage assets with a broader range of complexity. This may include active management of businesses, majority or minority investments in businesses managed by others, partnerships or passively managed assets. Such complexity drives increased decision-making requirements for owners and management and a good flow of extensive information in order to make sound decisions. At the same time, even the largest family offices typically outsource a number of their functions, making clarification of accountability and oversight more complicated.

Implications: Clear authority and responsibility for oversight of service providers to the family, as well as accountability for service provider performance, are crucial. Also essential to ensure sound decision making are good information flow and programs that educate family members about the various components of the family investment portfolio. In many ways the requirements for management accountability, communication with owners and owner education are similar in the family office and family business context.

Is good governance different for family offices?

Taken together, these observations suggest that family governance—in the form of vision, mission, role clarity and next-generation education and development—are at least as important in the family office environment as they are the family business environment, if not more important. Our review suggests that family offices differ in the need to recognize and integrate a more powerful role for family owners and to respect and manage individual differences. This points to a requirement for a well-structured organization with articulated policies, plans and ownership roles, which can accommodate the need for ongoing individually tailored conversations with owners. Our personal observations suggest that these elements of governance are often underemphasized in family offices.

A word about multi-family offices

We recognize that there are many differences between single and multi-family offices. With respect to governance, however, we see the requirements as fundamentally the same, although perhaps more challenging for the MFO whose managers might have less clearly defined authority with regard to a specific family’s governance structure.

Whether a family office oversees the investments of a single family or many families, the family members involved should establish a clear mission and vision, clarify their roles and responsibilities vis-à-vis the family office, educate themselves about the business of the office and put processes in place for all stakeholders to work well together.

David Lansky, Ph.D., is a principal and Jennifer Pendergast, Ph.D., is a senior associate with the Family Business Consulting Group Inc. (

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