5 Differences Between Family Business and Family Office Governance
26th September 2021
Family businesses can be highly successful over multiple generations with little or no conscious thought applied to family governance (how the family and business interact, how they communicate, share information and ultimately make decisions). The natural governance that has served the family well may continue to do so for generations to come. However, when a family gets to the point at which they start to need a family office, this can significantly disturb the equilibrium and put a strain on even the most robust governance frameworks. Those family offices that go on to be successful learn to evolve their governance mechanisms accordingly. This article looks at 5 ways in which the governance of family businesses and family offices can differ and offers some practical considerations for families and family office executives whatever stage of this journey they are at.
While there can be questions about the owners long-term intentions for a family business, the purpose of the business itself is usually fairly obvious - a widget maker makes widgets, a construction company builds things. The profits they make are the consequence of them doing their thing well. That is not to say that the purpose of a business can’t shift or evolve over time. There can also be great benefits for a family to reflect on their shared purpose but the starting place for this discussion is usually on fairly familiar ground – do they want to continue doing what they are doing?
It can be much harder to discern the true purpose of a family office. They typically undertake a much broader range of activities: managing investments; administering other assets; providing legal and tax services; developing education programmes; running the family foundation. You could say that most family offices are there to protect or grow the family’s wealth but this does not really tell you the full picture and successful family offices offer much more than this.
This difference can have important consequences when embarking on an exercise to establish a new family office or review the governance of an existing one. When speaking to the new CEO of a family office recently, he could articulate the investment mandate very clearly but found it much harder to explain in any detail why the family offices was being set up. Without this clarity it can be very hard to develop a clear strategy, decide on the right structuring or make conscious choices about which services to provide in-house and where to outsource.
2. Family Alignment
This point follows on from the first to some extent. If there is a degree of uncertainty regarding the purpose of a family office, there is a much greater risk that different family members are not on the same page. When a family business transitions from one generation’s leadership to the next, there can be a change in direction or a parting of ways but the likelihood of this happening is significantly higher in a family office, particularly when the transition is from founder to next generation. There have been many instances recently of family offices splitting or being dissolved at this point as different family members were simply not on the same page.
Many of the activities undertaken by a family office are personal by their very nature and there can be a myriad of different views or opinions. A good example of this is philanthropy – and many long-running family offices find themselves managing this by enabling individual family members or branches to select their own causes to support, perhaps alongside some more established family choices.
Family office resources are often stretched. Where there is a lack of alignment, those running the family office can quickly find themselves being pulled in multiple directions. Which activities should they be focusing on, what takes priority and who bears the costs?
It is a healthy exercise for any long-running family office, and an essential undertaking for any preparing for a transition, to undertake a review of the family members’ needs and expectations to determine whether they are still aligned and enable the family office to provide real value on the things that matter most.
Anyone familiar with the three circle model of a family business system will be familiar with the importance of understanding the full picture, those working in the business, the owners and the wider family. This last group can have a significant influence on a family business even if they do not have any formal role within it. However, most do recognise and respect the family business as a distinct legal entity (at least to some extent).
Family offices often do not have such clearly defined boundaries. Where does the family office stop and the family begin? A family office head recently spoke to me of the challenges posed by certain family members ‘parachuting in and out’. It is therefore particularly helpful for both family members and family office executives to spend some time considering who should be accountable for what and to establish their respective remits. What can and should be decided by the family office? What must be referred to the family, when and how?
When someone is appointed the CEO of a family business, whether they are a family member or not, it is usual for them to have a degree of experience. Either they will have spent time working for the business already or they will be coming from a reasonably comparable role elsewhere in the industry.
Most family office job specs also suggest that applicants with prior family office experience are preferred. However, the number of family offices has been increasing rapidly in recent years and it is often not possible to find a candidate who has both the required skills and has spent any significant amount of time working in a family office. Even just focusing on the skills required can be a tall ask given the likely range of assets under management and wider family services being provided.
When selecting a family office leader, it is much more common to find the family appointing someone who understands the family culture and has the right character traits and expecting them to learn the rest on the job. This is quite understandable given the personal nature of the role and the degree of trust the family is placing in them if they are not a family member themselves. There is also nothing wrong with this approach. Many in this position have gone on to help establish very successful and long-standing family offices. However, what is important is to recognise this fact, as the degree of involvement and governance required from the family in this situation will be different from that required in a family business following the appointment of a new CEO. If the family aren’t clear on their purpose, lack alignment or aren’t able to communicate effectively, it is unlikely that the family office will fulfil it’s full potential.
5. The role played by trustees
Both family businesses and family offices can be held through family trust structures. What can differ however is the role that the trustees play. Where a trust holds shares in a family business, while the trustees may be fully engaged as responsible owners, it would be unusual for them to become actively involved in the day to day running of the business. Many trusts that hold family businesses are in fact drafted to limit the degree of involvement the trustees can have.
In contrast, where trusts are used in a family office context, they typically own a range of assets including real estate, financial investments and increasingly private equity. Here the trustees can be called upon much more regularly and have the potential to have a much greater impact on the performance of the assets, deciding on sales and acquisitions and appointing and overseeing investment managers. It is important to understand this distinction when selecting trustees and providing them with sufficient guidance, particularly if a trust starts out holding shares but it is envisaged that these will be sold in the short to medium term.
In reality, the distinction between a family business and a family office can be blurred with many business families beginning to diversify their holdings. Each family will do this in the way that works for them. However, taking time to establish a clear direction of travel, checking that everyone is aligned, and spending a bit more time honing the mechanics that support communication, information sharing and decision making will make the road that little bit smoother.