Up to this point, we have established that the foundation of a family’s multigenerational succession and wealth transition involves articulating its shared values, creating a shared vision statement, and assessing the assets of the family—human, intellectual, and financial—and explored some structures that can be used. The next question to answer is, “What is the path a family will travel in order to transition the family’s capital from today’s successful generation to the benefit of future generations?” The answer is that the path of governance will be traveled by many generations, beginning with loose and informal arrangements in the first generation, which ultimately evolve to become methodical and formal structures by the third generation.
“Governance” describes how the Family Bank organizes itself to reach a family’s shared vision. Interestingly, every family already has some form of governance. Commonly recognized forms of governance in families include an autocracy or dictatorship, where a family is ruled by one family member; an oligarchy, ruled by a few, or perhaps both parents; or a democracy, ruled by many, or perhaps all, of the family members. One of the differences between a family’s current form of governance and a Family Bank’s is that the latter is created to exist over several generations. Additionally, it’s common for a family’s governance structure to arise in a haphazard way, often reflecting the way things have been done in prior generations of the family. The governance structure of the Family Bank approach, however, is specifically created, with or without legal structures, to reflect the family’s shared vision.
For many reasons, including culture, the age of the family members, and the size of the family, different families are better suited to different forms of governance. In creating your Family Bank’s governance structure, you will not necessarily aim for the structure that is deemed the best but rather aim for the governance structure that is best suited to your particular circumstances. For instance, if your Family Bank only has two members, you and your spouse, and you have decided that your financial assets should be transitioned into philanthropic activities, your governance structure might include the establishment of a legal structure, like a private foundation. On the other hand, if your Family Bank is composed of four generations of family members—grandparents, children, grandchildren, and great-grandchildren—your Family Bank governance structure may evolve to include some of the following kinds of structures: a family board, to reinforce the family’s values and shared vision; a Family Bank board, to oversee the stewardship, growth, and recirculation of the family’s financial assets; a philanthropic board, to coordinate the family’s philanthropic endeavors; a junior board, to prepare and educate younger family members about their future roles and responsibilities; and a council of elders, to provide the wisdom and insight that comes from experience.
Again, the specific path of governance a family travels will reflect its unique circumstances. However, I recommend that where possible, and as the family grows in size, it is wise to have some kind of structure but to also remain flexible so that the structures can evolve as the family evolves. Like the family’s shared vision statement, the governance structure that will be the most effective will be the one that the family members agree to, not necessarily a legally established governance structure like a legally executed family shareholder agreement.
Of special note, though, every adult should have at least one kind of legally prepared governance structure in their succession or wealth transition plan: a will. Many people think that once they have legally executed a will, and stored it away in a safety deposit box, their estate plan is complete. But a will should not be seen as a static document. As families change, so must their wills. For instance, the will of a single person should be updated upon marriage. The will of a married couple should be updated as children come into the family. The will of a family should change when young children become young adults and then mature adults and then parents themselves, and so on. In the same way, the shape and composition of your Family Bank and its governance structure will change as your family matures and evolves.
As Craig E. Aronoff and John L. Ward explain in their book Family Business Governance, “a desire to work together for the general good of the family and the business is the common glue a growing number of family business owners are using to establish a framework for governance—the principles and processes that enable maximization of the potential of both the family and the business.” By way of example, Aronoff and Ward note that the Pilgrims headed for New England in the 1600s had a remarkable instinct for self-government, working together for their common good in the New World. This was evidenced by their signing of the Mayflower Compact, which, while lacking legal status, had the strength of common consent and consequently became a benchmark for governing institutions worldwide. Whether or not you utilize legal structures, the Family Bank approach allows members to work together for the common good of the family.
To see how the Family Bank will become formalized over three generations, it would be useful to explore how the path of governance evolves within each generation:
A family’s governance structure is usually informal in a family’s early years, but it does exist. Typically, with the first generation dedicating a lifetime of work to the financial realization of their dreams, the family falls into a random system of communicating and decision making. Initially, family governance most often takes the shape of an ongoing dialogue over a family meal. This is where the seeds of a common family purpose are sown, and where the family’s human, intellectual, and financial assets are discussed, though the family will not always identify them in quite the same way.
If you are a member of your family’s first generation, it is important not to get overwhelmed by administrative details concerning governance structures for future generations. You have already done the work that will allow your Family Bank to be created, through building your family’s financial assets and encouraging each family member’s sense of belonging and pride. It will be the rewarding work of succeeding generations to engage you, the elder generation, in the process of creating formal structures to ensure the successful stewardship of your Family Bank for future generations.
The transition to the second generation, represented by what many experts call the sibling partnership, has its own unique set of challenges. One is that it will be the first generation to simultaneously be individual wealth creators with their own dreams and stewards of the Family Bank created by the dreams of the prior generation. In addition to balancing these two roles, the family members face the challenge of having no direct role models for how to operate as siblings in a partnership. While their parents likely worked together as partners, relationships between marital partners, which are chosen, are different from those between siblings, which are not chosen. The approaches to governance requirements at this stage will be critical to laying the foundation for future generations to be able to effectively work together as well.
The importance of good communication built on trust and a shared vision within the family becomes clear at the sibling partnership stage. It is essential that the governance structure facilitates the siblings’ ability to learn to work well together as a team. By modeling genuine respect and caring for each other as they tend to the Family Bank’s affairs, they significantly improve the chances for a successful transition to the third generation and beyond.
At the sibling partnership level, the governance structure often requires a degree of flexibility. In one family I worked with, first-generation members, the grandparents, had placed a sizeable portion of their liquid assets in a trust for their grandchildren. The trust named the sibling partnership, the parents of these young children, as sharing responsibility equally as trustees for the beneficiaries. The original intent of the first generation members was for significant assets to be turned over to each grandchild as they attained the age of twenty-one. However, as stewards of this wealth, the sibling trustees consulted with one another and agreed that their children would not be prepared as heirs for this level of wealth, and its accompanying responsibility, at such a young age. With the common goal of stewarding the family’s assets on behalf of the beneficiaries, the siblings jointly agreed to delay the transition of these assets to an age at which their children would be better prepared to receive such an inheritance.
As time passes, families get bigger. As in operating a business, there is usually a tipping point at which the governance structure of a family must evolve from being informal to being a more formal structure. As a rule, a formalized structure is usually required once a family reaches a size of ten to fifteen members. This situation most often occurs when the family is transitioning its financial wealth, in whatever form that takes, to the third generation: the cousin consortium.
I would not be honest if I said this transition to the third generation is a simple process. However, it need not be a difficult one. The problem is that, in our culture, we do not have much hands-on experience with this stage of wealth transition. Additionally, the challenges encountered during this stage often have little to do with increasing revenues or decreasing costs but everything to do with managing messy human emotions, a fact traditionally ignored or dismissed by most advisors.
At a minimum, your Family Bank’s governance structure will define who is to have a participating voice in your Family Bank (I address earning a voice in the Family Bank in detail in the next chapter), as well as establish a process by which your family, especially if it is large and multigenerational, is most able to effectively communicate and, to the best of its ability, continually work towards developing policies before they are needed. At the cousin consortium stage, a more rigorous process is often required in order to maintain communication and trust within the family and to educate the next generation. The ability to keep everyone not only informed but also engaged in the Family Bank as the family grows will be vital to the family members’ ability to continue to work together with a shared purpose. This can include activities like regular meetings, and the recording and dissemination of the minutes of Family Bank meetings to all its members, but will depend on the unique needs of each family.
The two primary assets of family wealth are family businesses, where wealth creation often originates, and financial investments, where wealth preservation is often the goal. As wealth increases, often the role of financial investing increases, and families who are new to the financial market industry, perhaps as a result of having sold their family business, or just starting to invest profits from the family business, must understand that it is one of the most competitive businesses across all industries. Sometimes, successful families enter the financial market industry with the same risk appetite they had as they built their businesses, leading to some costly mistakes. This is where a disciplined investment approach is most beneficial for families seeking to preserve multigenerational wealth.
Members of a family following the Family Bank approach, who begin by defining their shared values and vision, and assessing the family’s assets, are setting the family’s strategy. An investment advisor that understands this will then create an Investment Policy Statement (IPS) for the family, which translates the family’s shared values and vision into financial objectives. With a clearly articulated IPS, families often find that checklist approaches—like investment products, tax minimization, control structures, and insurance products—are not the only considerations in making financial decisions. For instance, many years ago, my husband and I were approached to invest in a casino. The business was sound and our potential partners were solid, respected members of our community. However, in spite of the soundness of the investment and the potential profits, the industry did not align with our family’s shared values, so we did not invest.
Developing an investment governance structure at the beginning of wealth creation is advisable, to assist with the success of both meeting financial objectives and ensuring a smooth transition to future generations. For instance, a family could create an “investment committee” within the Family Bank, which would set the guidelines for the stewardship of the family’s financial assets and also be responsible for reviewing the work of any outside advisors with regards to risks taken, adherence to the investment guidelines they have been given, and their results.
This committee would also make a commitment to understanding the family’s shared values and vision and manage the expectations of Family Bank members, while providing a more formal venue for strengthening communication in the family. Additionally, having any outside advisors report to the investment committee as a whole, rather than only the Family Bank leader, further prepares the Family Bank members who sit on the investment committee for their future responsibilities in financial asset management, and allows them to develop long-term relationships with outside professionals.
In North America today, our increased longevity is a delightful reality. I am reminded of this development whenever I open the newspaper, and in my personal life I am able look to my mother and my in-laws as examples of robust aging.
For a family that wishes to remain connected, elders have a valuable role to play as advisors and guides for grandchildren and sometimes great-grandchildren. This senior generation has likely begun to cede control within the family, but their wisdom and insights are significant family assets. At a time when the parents of children are inundated with the commitments of work and day-to-day family operations, elders can assist with passing along the family’s shared values and traditions. All of this will help to prepare the next generation for their future roles as stewards of the Family Bank.
Philanthropy offers a marvelous starting point, one I strongly encourage, for this kind of cross-generational involvement. In working directly with grandchildren on the family’s shared philanthropic goals, elders can create a nurturing environment in which their grandchildren can learn the importance of genuine caring for others and experience the satisfaction of working together on a common goal.
In my experience, the families and Family Banks that survive and prosper over many generations share several characteristics, like certain shared values, but another is a clearly defined governance structure, which may or may not include legal entities, for both the family and family business. Whatever committees, councils, and structures the family uses to organize itself, the goal of the Family Bank’s governance structure remains the same: to create a cross-generational team in which all the generations are able to effectively work together in making decisions aligned with the family’s shared values and vision.