While the global pandemic continued to create challenges in 2021, its impact has helped provide focus in the private client space with governance and legacy moving further up the agenda.
Those working with family offices know only too well the importance of a robust governance framework but, as we emerge from the trials of the last 18 months, setting down shared values to underpin that framework has taken on a deeper resonance.
Such values not only act to bind disparate branches of a family, but also protect a legacy for future generations.
And that legacy carries the potential to have a much wider positive impact; as urgency around protecting the environment gathers pace, values that incorporate environmental, social and governance (ESG) concerns have the power to be transformational with wealthy families, unconstrained by the same demands on returns as other investors, able to truly lead the way in sustainable finance.
There’s no doubt that the notion of governance as a core component of a family structure is translating into action at practitioner level.
A report recently published by Jersey Finance and Wealthbriefing looking at sustainable family governance models in an evolving environment, for example, found that a clear majority (61%) of advisers believe that enterprising families should have a formal governance programme in place by the time they have £50 million in assets with a still substantial 28% putting the threshold at a far lower £20 million.
Aside from setting down practical rules, governance programmes are instrumental in supporting meaningful action in the wider world based on a family’s most deeply held values. Creating a robust framework and articulating these values, however, can be challenging with research conducted by the Williams Group finding 10 per cent of breakdowns in transferring wealth resulted from a lack of purpose for the family’s wealth.
Further the study concluded that without common values and a common mission few families stay together in the long term with this exacerbated by larger families with increasingly diverse financial interests.
So, how to go about consolidating differing values?
For a start, open communication is key with any set purpose developed via engagement across the entire family spectrum.
Professional advisers should also take this opportunity to talk about the value of wealth, how to manage it appropriately and what shared values are held. And, while these values must be unreservedly believed in, they must not inhibit an individual family member’s ability to pursue their own interests.
Many sophisticated families have already become aware of such complexities but understand that having an over-arching set of values can bridge the gap between the founding and future generations, setting the scene for succession planning.
Another element to bridging that gap is formalising how the management and ownership of a family’s business empire and other assets should be transitioned. This is crucial in avoiding the confusion and conflict that can destroy not only financial value but family relations.
For this to be successful, however, once again, clear values must be set down as part of governance efforts - in fact, recent research by PwC affirmed that succession plans were more likely to be in place (41%) if family values had been formally set down (PwC, Global Family Business Survey 2021).
But what if the aspirations of different generations seem, on the face of it, divisive? One example would be where Millennials and Gen Z values tend towards climate change while baby boomers focus more on safeguarding investments and businesses.
Evidence shows these approaches needn’t be mutually exclusive; sustainable equity funds and sustainable taxable bond funds outperformed their non-ESG peer equivalents by a median total return of 4.3% and 0.9% respectively in 2020 (Sustainable Funds Outperform Peers during 2020 Coronavirus, Morgan Stanley Institute for Sustainable Investing, 2021).
Indeed, having a variety of voices and attitudes within wealthy families can be a good thing, offering diversity of opinions and perspectives, avoiding ‘group-think’ and paving the way to a more comprehensive approach to ESG.
Expert consultation is key though and advisors able to keep lines of communication open between the various branches of a family and provide necessary guidance on how to proceed are paramount to the success of laying down the foundations for effective succession planning.
By underpinning governance with open lines of communication, families can ultimately safeguard a legacy that can be a force for good.
As we look to the future, an integrated approach to governance will undoubtedly continue to dictate the direction of travel for families.
However, there are other forces shaping the landscape too. Events of the last year have also served, for example, to compound the importance of location when choosing a jurisdiction. Proximity to business interests, family lifestyle and the drive to cut down on airmiles have all risen in significance.
So too has resilience and reliability in digital connectivity. As a result, technology ecosystems and the cybersecurity implications of operating in a particular jurisdiction are now coming to the fore.
Depth of legal and ancillary expertise as well as a high-quality regulatory regime able to offer a range of asset holding structures, from foundations and partnerships to Family Investment Companies, also remain key requirements for families of considerable wealth.
As such, the importance of quality IFCs remains as vital to the global financial world as ever and those that focus on governance, security and transparency while offering stability, depth of experience and a sophisticated technological infrastructure – all on a sustainable basis – will be obvious choices.
For advisors, the focus will need to be on working with families according to their bespoke values and needs, listening to their objectives and helping them to frame their strategies in a world that prizes governance and sustainability.
MANAGING DIRECTOR, PRIVATE WEALTH DIVISION