Is your family prepared to manage potential risks to your reputation?

By Daisy Medici, Lauren Benenati

Whether your family oversees one or more operating companies or a family office that manages investable assets, the word "risk" usually connotes concepts such as overconcentration, lack of diversification and lock-up periods. But as social media use has taken the world by storm in the last 10 years, every family should also be considering potential risks to their reputation.

Long before anyone ever dreamed of a time when a click of a button could smear the family name forever, parents warned their children not to give the neighbors anything to talk about and admonished them to uphold the family's good name at school and at play. Protecting the family reputation is not any more important today. What has changed is the speed at which information travels and the fact that negative information posted today will be accessible forever.

Reputation as a family asset

Advice abounds about how best to protect your online reputation, but how many people are taking it? As of this writing, according to internetlivestats.com, nearly 5.5 billion YouTube videos are being accessed each day, almost 8 billion Facebook users are active per day and 30 million photos are being uploaded daily. What is being posted online about you and your family?

The public craves information, loves scandal and prefers finger pointing to self-assessment. These are just a few of the reasons why unfavorable videos, pictures and personal information go viral. You must engage your family members in conversation about the importance of protecting one's reputation and how damage to an individual's reputation takes the family's reputation down with it.

People are different; they have different interests, concerns, hot buttons and—important to this conversation—risk tolerances. For some, the risks of using social media are glaringly clear; they are frustrated because other family members don't seem to "get it."

Generational differences can compound these frustrations. For Millennials and Generation Z, social media are a way of life, just as the telephone was for Baby Boomers and Generation X. Simply telling these family members to "be careful, or else" will not be effective. The implications of not being disciplined or cautious on social media should be discussed in a formal setting as a family. Raising awareness is a good start, but engaging all appropriate family members in developing a plan is critical to creating commitment. It is one thing to develop a family policy around a particular topic, but a policy on a piece of paper doesn't result in additional security.

Protecting the family's reputation is as essential as protecting any other asset. Group discussion during the policy-drafting process will help family members understand the implications of not doing so. Such a discussion raises awareness and secures the essential commitment.

One family's Reputation Management Policy commits to discussing the use of social media and potential family reputation risk at every family meeting. They used a third-party facilitator to help educate family members about safe use of social media and required a cybersecurity audit to protect against hackers.

Risks beyond social media

It's also important to talk about the many other means, beyond social media, by which family members might unintentionally damage the family name.

Does your family have a plan for handling emergencies? For example, if a security guard is killed in an overnight fire at a property owned by a well-known family, family members could awaken to find news crews parked outside their homes. Would your family be prepared to respond to the media in an unexpected situation such as this? In today's litigious society, the wrong response can have tremendous ramifications. As Warren Buffett famously said, "It takes 20 years to build a good reputation and five minutes to ruin it."

With this in mind, the family mentioned earlier developed a crisis response plan. They designated a family spokesperson, who would have the responsibility of fielding all media requests. The family also addressed the importance of being polite and respectful when interacting with the media. Experts tell us the typical "no comment" response is usually not well received. A better response is something like, "Our family is in the process of data gathering. Our family spokesperson will prepare a statement once we have more information and time to consider the facts."

Lack of adequate insurance is another area of potential risk to the family's financial future. While most family members have learned by osmosis about the importance of health insurance and homeowners insurance, all too many are underinformed about umbrella insurance. An umbrella policy provides additional liability coverage that protects against major claims and lawsuits—one of the leading reasons why families lose wealth over time.

Divorce also poses a major risk to family wealth. Without expert advice and proper planning, business-owning families who have tied themselves together through shared ownership are potentially leaving themselves wide open to financial crisis in the event of a family member's divorce. Estate planning structures such as trusts go a long way to protect assets, but further protection through prenuptial agreements is the route many families are going.

While properly drafted prenups can successfully protect assets in divorce, imposing a prenuptial requirement on a family's next-generation members can be difficult and emotional. That said, educating adolescent and young adult family members about the value of prenups—well in advance of engagements and marriages—will inform them about the risks of divorce, and about family members' responsibility to preserve, protect and grow the family wealth over time. Many families have worked together to craft a family policy around prenuptial agreements.

Discussing the 'what ifs'

Talking as a family about potential hazards and "what ifs" is crucial. In our experience, families that meet regularly to discuss the business of the family and the family enterprise already have the ideal forum for addressing the issue of reputation management. However, this is a topic that is appropriate for any formal family meeting. Bringing in a third-party expert to educate the family about the many risks to the family reputation and share some current case studies can go a long way toward bringing uninformed individuals "up the learning curve." In our experience, it's often that family members don't know what they don't know. As bestselling author Eric Qualman wrote, "What happens in Vegas stays on YouTube." Be careful out there.

When it comes to families, the concept of risk is applicable to so much more than investments. The family name might not be able to bounce back like the economic cycle, so why take the chance? Given that the success or failure of wealth transfer over time is rooted in the family's ability to communicate, conversations about these issues are of significant importance to families. Getting ahead of the potential firestorm by identifying the risks, gathering the family to discuss these important topics and documenting the conversation can keep the family on a healthy, positive course.

Daisy Medici is managing director of governance and education and Lauren Benenati is director of family education at GenSpring Family Offices (www.genspring.com).

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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May/June 2017

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