Share |

Governance: a foundation for family office success

Melanie Stern is section editor of Families in Business.

At Campden Conference's 2005 European Family Office Conference we presented the results of a survey conducted on family governance and the inner workings of family offices from around the globe. Melanie Stern reports on the findings

We in the family business world hear a lot about bad ­governance affecting both familial harmony and business success.
But what we hear less of is direction on what makes good governance, and what is actually in practice by families, their businesses, and among the family offices managing their wealth.

At Campden's European Family Office Conference, held at London's Langham Hotel last November – featuring many respected family business experts speaking about issues surrounding best-practice family office management – we presented the results of a survey we conducted on family office governance earlier in the year.
We asked respondents to talk about the make-up of their family offices, ownership structures, board composition, non-family involvement and the influence of the patriarch. The results showed that the bigger the family office, the more sophisticated these elements were. This applied to all types of family offices, single or multi- (74% of our respondents were single family offices).

Family involvement
As far as family involvement is concerned, 45% of family offices we spoke to retained a family member as the chief executive, and in 18% of cases, the patriarch was solely mandated to choose the chief executive himself. However, family involvement in the office can be seen to decrease as the office gets bigger, with more non-family professionals diluting ­family control.

The effect of the shift in patriarchal control was backed up by further findings. Our research found that for a majority 37% of respondents, a combination of family members, non-family members, the patriarch, family foundation trustees and partners own the family office. In 29% of cases, family members remained the sole owners, while in 18% of cases, the patriarch managed to retain ownership himself, but this was almost entirely limited to small single family offices. Only one multi-family office we polled was owned by a sole patriarch.

Our respondents told us that 41% of their board members were family, but 59% were non-family members. While this is not a large margin, it is one in favour of outsiders. It therefore seems European family offices of all sizes are up to date with this often controversial element of governance procedure. A focus on performance and strength of management – otherwise known as professionalisation – is evident in the larger family offices, ie those offices managing more wealth for more family members. Patriarchs, non-family executives and operating boards in these bigger offices appear to carry the same weight in decision-making, but smaller ones rely more heavily on their families.

We found that all of the medium and large-sized family offices we spoke to had a board, whereas only 61% of small family offices had one. Of the 27 family offices founded before 2000, only three did not have a board, whereas over half of the family offices founded after 2000 did not have boards.

Non-family involvement
While non-family expertise has integrated well into many family office boards, the issue of who is responsible for appointing board members is one area where patriarchs still hold sway. In 27% of cases, our research showed, the patriarch was solely responsible for selecting board members. Meanwhile, 21% of respondents said they chose the board by meeting.

Monitoring the family office's systems and controls appeared high on the agenda of our respondents, regardless of office size. Ninety-three percent of respondents told us they regularly assess family office performance, while 58% said they have a written mission statement to follow, by which they can judge their performance.

From our respondents 68% told us they have an investment committee as well as a board, 78% have a formal risk measurement system and 70% have an emergency/contingency plan in place should systems fail. The larger the family office, generally speaking, the higher the percentage of respondents said yes to having these formal systems in place. A full 100% of those we deemed large family offices had an investment committee, a mission statement, a risk measurement system and a contingency plan.
We concluded that the larger the family office, the more professional it was likely to be in terms of governance, organisation, non-family board members and decision-making processes.

Click here >>