Succession

Focus on your key people

Focus on your key people
In the second of five articles, Grégoire Imfeld, founder of One Family Governance, and Adrian Murdoch look at two pitfalls surrounding the chief executive that Single-Family Offices need to avoid.
By Grégoire Imfeld and Adrian Murdoch

Last week we looked at the first two pitfalls that Single-Family Offices (SFO) need to avoid, specifically the mistake of prioritising individuals over objectives and neglecting to create a mission statement. 

This week, we turn to the chief executive and the mistakes that SFO should do their best to avoid. As we said before although each family office has its distinct characteristics, the advice presented here serves as a valuable basis for informed discussion and self-assessment.

Misstep #3: Overemphasising CEO Competencies

This misstep often becomes evident when the first two missteps that I discussed last week have already occurred.

Family office employees often possess specialized skills that take precedence over their career paths. The chief executive of a Single Family Office (SFO) is typically chosen based on specific competencies and the trust built over time with the family. When an external candidate is selected, their background, network, reliability, values, and quality of work are crucial factors.

Managing expectations is crucial here, especially for chief executives chosen based on their skills from previous roles. The transition into the new role requires particularly careful management. 

A point that came through clearly in the The Family Office Operational Excellence Report 2024 from Campden Wealth and AlTi Tiedemann Global is that more than half of family offices reported having difficulty retaining talent for key positions. Even though larger family offices offer much higher levels of compensation and more robust incentive plans than their smaller peers, retention problems extend across the sector irrespective of family office size. The report found that 56% of small and large offices had problems with retention, a figure that slips to 50% for midsized offices. 

The other difficulty with external candidates is that this becomes even more evident during high-stress situations, where they are likely to revert to their comfort zones, relying on skills that have been successful for them in the past while potentially neglecting newly required ones.

Families should engage in dialogues with the chief executive about filling any gaps and evaluating performance. Given the isolating nature of the SFO chief executive role, having a trusted, knowledgeable and experienced group, such as a family office board for consultation can offer valuable support.

Having a leader with emotional intelligence (EQ) is not just a desirable trait but a crucial one, complementing IQ and technical skills. This becomes particularly significant when the family office serves a multigenerational family, where the dynamics are more complex, as opposed to serving just a founder’s office.

Effective communication is a key skill for the chief executive of any SFO, who often acts as the family’s ambassador and the conduit between the family and the office.

Some families establish communication protocols to minimise direct contact between family members and SFO staff. Although staff are highly skilled in their technical responsibilities, they may become uneasy when directly approached by family members due to perceived, albeit not necessarily accurate, ramifications. These protocols aim to maintain the staff’s focus on their technical tasks and alleviate stress associated with direct family interactions.

The solution is robust governance. A well-structured family office governance system can mitigate these risks through monitoring, control mechanisms, and performance indicators. Some families establish a family office board as a consultative body for the CEO, offering coaching and advice, and potentially are also involved in the original hiring process.

As one respondent to the Campden Wealth and AlTi Tiedemann Global report said: “Anything the family office can do to promote communication between family members and keep them aligned is, by my definition, value added. Creating a family constitution, or family council, and supporting the next generation is critically important.” 

Chief executives may believe their credibility is established based on their previously recognised skill set. For family members in this role, initial credibility often comes from their close proximity and access to the family. When weak governance is in place, the chief executive’s role and deliverables may become skewed, potentially leaning toward areas where the CEO is already knowledgeable.

Families should consider a balanced approach that includes clear objectives, a mission statement, and robust governance to ensure the SFO’s long-term success.

Misstep #4: Neglecting Key Person Risk

Family offices aim for efficiency, which often involves lean operations and cost management.

While rent and IT are significant expenses, human resources (HR) can take centre stage in cost considerations. Family offices often employ specialists in various fields, each bringing a unique set of skills. However, this specialization can create a vulnerability known as “key person risk,” where the absence of a specialist could disrupt operations. The chief executive, who usually serves as the linchpin of the family office, represents the most significant key person risk.

While a family board may possess some high-level knowledge, it’s generally insufficient for day-to-day operations. Even if a specific family office has a sounding board that understands the CEO’s role better, it’s usually not enough to mitigate the risk effectively. Most family offices have not adequately addressed this issue and would find it challenging to navigate if it arose.

The figures from the Campden Wealth and AlTi Tiedemann Global report should be wake up call to SFOs. A hefty 57% of family offices have no succession plan at all and only 15% have a formal written plan. More to the point, the message hasn’t got through that this is a real issue. 
More than a third – 35% – of respondents without a formal succession plan were satisfied with their future planning. 

In their contingency planning documentation, some SFOs specifically include scenarios such as the sudden absence of a chief executive. These plans, however, often focus more on identifying a replacement rather than on preserving institutional knowledge, which is a crucial element in mitigating the impact of any “absence”. While some SFOs do have succession plans, these are usually activated when the need to identify a successor becomes imminent, often just prior to the chief executive’s retirement.

Interestingly, some family office structures are inherently less susceptible to key person risk. For example, the virtual family office, which outsources most responsibilities, offers a more resilient model. This structure is particularly appealing to wealth owners who find traditional SFOs too costly. Investment offices also have a lower key person risk because strategic asset allocations, deal flows, and trades can be managed independently.

Ignoring key person risk can have severe consequences for a family office. While specialists bring invaluable skills, their absence can disrupt operations. Therefore, it’s crucial to have contingency plans, such as an Operating Memorandum, to mitigate these risks and ensure the family office’s long-term stability.

Top Stories