As part of an occasional series, Melanie Stern chairs a roundtable discussion at Campden's Family Office Conference on the pertinent issues for family offices in 2006 and beyond
Mike Orr is vice president and CFO of SEB Management, a single family office in Victoria, Canada and president of GlenRoss PTC Holdings Inc, the trustee company for the Brydson family trusts. He is originally from the UK.
Bernward Brenninkmeyer hails from the founding family of European clothing chain, C&A. Bernward left the company in 2001 following a reorganisation, and set up family business consultancy Brenninkmeyer Seyer & Partner.
Paddy Walker is head of a UK family office managing a real estate portfolio retained by the family after they sold their tobacconist chain, Leon Group, to a subsidiary of Imperial Tobacco, in 1969. Paddy is married to one of the fourth generation.
Willy Schneider is managing director of Proseba, a single family office in Switzerland. Willy has worked for this family for over 20 years, having met the principal through his previous work at a large Swiss bank.
Fred Fruitman is managing director of Loeb Partners, a single family office in New York formed when the family sold its investment banking firm Loeb Rhoades to Shearson in 1989. The family is in its fourth generation.
We talk about corporate governance a lot in family business. But when we talk about family offices, what does corporate governance mean? And what about implementation?
Paddy Walker (PW) We think corporate governance is very important. I am the fourth generation and our role is of steward rather than entrepreneur. From my point of view it is harder to keep the family together so we spend a lot of time implementing governance procedures. We have a shiny new constitution, a family council, and for the first time, a family forum. I think it's been useful for us to do that – be cutting edge – from a business stability point of view. We have two family branches and one of those is actually not represented in the family office, so well-organised communication channels is vital. Everyone has bought into it and it hasn't cost us anything to do. We received advice from the Institute of Family Business and used precedents from several of their members to form our own.
Bernward Brenninkmeyer (BB) In a family office the most important aspect is obviously managing family money, but next to that it's managing the family. This is especially true if you have more than three generations. Governance in this case includes things from goals the family sets itself, who the money goes to and how much – up to questions like, "do we want to be involved in a business in the next generation, or just manage our money?". Family councils are a good way to make sure everybody's viewpoint is expressed and everyone's expectations are understood. Then the family can create a suitable family strategy.
So corporate governance for family offices is really about creating a workable mandate for the family's wealth?
BB Yes – it is very important that everyone feels comfortable asking questions that have a significant impact on their lives – and that they receive a response to these questions. This ability to communicate and respond needs to be encouraged. It contributes to the handing on of responsibility, or the ability to respond. It's a lot of work but it contributes to the building of trust. To be honest, in my experience – in my own family and the families I have advised – the is the most important but also most difficult aspect of all. You can't buy trust – and you don't get it for free. But if you succeed, you can become a really strong business family.
Fred Fruitman (FF) The family office is quite different to any U.S public company. There are a lot of stories about bad corporate governance among those companies today. Being fourth generation now we are effectively at the second cousin stage – we've found that by the time we get to that generation, you try to minimise the number of things that people have to agree on in order to avoid conflict. We have also found it is very hard to get people to agree to a single charter. So we take more of a free market approach – we can offer investment products to all family members and each individual family member can opt in or opt out of anything. When the business was sold in 1979, the glue that held the family together was lost.
BB Do you manage other people's money as well as the families'?
FF Yes and no. We manage the family money but we have certain products like hedge funds that we have a few other investors involved in.
WS There are no two family offices that look alike. The most important thing is to handle each family based on their specific needs.
Michael Orr (MO) We're using the term 'corporate' governance here, but in this environment it isn't that applicable because we aren't public entities. At a conference in Canada by the Institute of Chartered Secretaries, each delegate was asked to give their definition of corporate governance. Virtually all 240 delegates gave a different answer that was miles apart. We are a third generation family office and what we look for when we talk about governance is transparency. Quite often in the first generation, if you need something done, you talk to the president, and it's done; but with increasing generations it is harder. Family governance is crucial because if you're managing their money, it doesn't matter how much you make. If you give it to a dysfunctional family, you might as well give it to a charity. To a certain extent the relationship has been somewhat dysfunctional, and through recent efforts of creating structures to create our 'family centre', we created an example of how the family office should be run. This means the families (there are a couple of branches) can have confidence in the fact that there is no competitiveness between them. It is an ongoing effort – sometimes it can be like herding sheep when the sheepdog's asleep.
Michael, you were saying earlier that the family office is more than just managing family money – can you expand on that?
BB The family office is a lot more than managing family money. The family office has to deal with everything from the legal structure of the business, to the number of properties a business family owns as homes, to the schools and universities the kids of family members go to and whether they are tax deductible, and so on. For instance, I have been living in several different countries and managing the associated tax implications is time consuming – I wouldn't have been able to manage that without our family office. The family office has to take care of all these aspects of business – and asset goals the family sets themselves – and combine them with family and individual aspects: it should be managed as one family aim. You need to investigate all members' viewpoints and expectations , align them and then build the strategy around them. Part of that is finding out about the roots of the family, ie what the founder wanted and how and why he did it the way he did, and seeing if the family is still committed to his vision, or if things have changed. In a family I currently advise, the family had a 26-year silence around a hotchpotch of issues that no-one wanted to talk about. They now have a lot of problems to solve which could cost a lot of money and time.
MO There is a family in Seattle, Canada whose family office has quite a complex task. They recently celebrated their 150th anniversary, and gathered 350 family members in Hawaii to celebrate. One of their executives is on our board and I asked him how he got all these people from all around the world together in one place at one time. In their family, when you marry in and even after you divorce and have had children, you are a family member for life. It's about definitions – who is a family member?
WS I think there is a misunderstanding with the term 'family office'. Anyone who manages family wealth calls himself or herself a family office, but what they often don't do is manage the family, which is the most important thing. Money can destroy a family if it's not properly managed. Somebody mentioned the word 'dysfunctional' earlier and I believe there are families in this sector who in those terms are dysfunctional, or have branches that are dysfunctional. The family offices are there to see that these families have enough money for a good life but at the same time are not being destroyed by this same money.
MO Our new 'family centre structure' - we used this term rather than family office – has three main functions, the trusts, the business and the family. The trustees are important because they have a big impact on the family and the relationship between those controlling the trusts and the beneficiaries. Control through the family centre is important – otherwise it can be destructive.
When managing family wealth, what is the key driver – to maximise or preserve the money?
MO The classic phrase 'shirtsleeves to shirtsleeves in three generations' really applies. Those in their third or fourth generation are in essence trying to preserve their wealth. Inheritors need to steward the wealth. To a certain extent many family members carry a lot of guilt around with their inheritance because they don't know what to do with such a large amount of money, while others will just go mad spending it. In general though, stewardship of wealth is probably the more common key factor. Family members often can't respond to what trustees tell them because they're from different worlds – as are family members and corporate institutions, who are usually very financially focused. That's why we formed our own corporate trustee that meets the need of both the business side and the family side.
PW I would be more optimistic. I like the analogy of 'get rich' money and then 'keep rich' money. When you're looking at the third generation there is a 20/80 mix with the emphasis on staying rich. But the question could be flawed because at my generation, you're likely to be everywhere on the efficient frontier - though we ourselves are an un-geared property company, which is bizarre. Others are out there doing equity tranches of collateralised debt and loan obligations, timber, oil funds. Managing wealth is a difficult business. Look at the Forbes Rich List: in less than one generation, of the first 400 constituents, only 52 remain on the list now. Either families have not balanced their risk and over-invested in one area, just frittered the money away or given it all to charity.
WS Our family office is interested in generating capital and preserving it. We are conservative – we put aside substantial amounts for philanthropic donations and this is managed even more conservatively. We are focused on preserving capital, but we also invest in private equity, hedge funds and alternative investments.
FF I see this question of growing capital versus protecting it as the greatest source of conflict within families, especially as you move down multi-generations. Every individual family member has their own agenda: a highly educated and skilled member will usually look to grow it, while one less so will look to preserve it. We try to solve the problem by offering the family five different asset classes, each with their own sub-classes of products ranging from high to low risk. For example, within our hedge funds portfolio, there is one fund with the mandate of preserving capital, and another with the mandate to grow it. Unless members of the family don't mind conceding control, I can see that conflict arising.
PW By creating this system you've almost created an exit mechanism for the family as they can pick and choose what they invest in. In our family, one of our faults is that we've got no exit mechanism, no way to pick up the value. You would think the idea of capital preservation versus growth would be an issue for us, but actually it isn't, as we still have operational businesses.
WS It depends on how much the family is involved and the challenge of including them in managing their wealth. It is a question of whether they can contribute.
BB You need to make the distinction between professional ownership and professional management. Managers should and could help to put things in place, but the final responsibility lies with the owners. Nothing can change that! Family offices should be a catalyst to build up professional ownership of family businesses. In this respect I like the say: "Tell me, and I will hear; show me, and I will remember; involve me, and I will care'". Professional ownership is all about caring for the business, the assets and the family. All at the same time, at all times.
What is the family office take on alternative investment and who does what in this market?
FF Alternatives have really grown in the family office sector in the past ten years. Some family offices that would not have invested in alternatives ten years ago now invest up to 30%. I know families who hold 100% in alternatives. But alternative investment these days can mean private equity, hedge funds. The drive to alternatives is dying though, mainly because there is some argument as to what an alternative is. For instance, hedge funds are seen as risky, but certain types of hedge funds can be for those seeking low risk. We tend to keep our hedge fund investment down to merger arbitrage, distressed securities and long/short equities. We don't do convertible or statistical arbitrage, collateralised debt obligations and so on, because we just don't understand them. We've done very well in alternatives and in fact our allocation goes up each year. The concept of risk has changed too. The equity markets are risky; even the fixed income markets are risky. When considering moving into an alternative area the question is "how do I protect my assets"?
PW We invest on the back of other people. Making investments when others have proven their worth first - I would never go bald in to a new manager. We quite like exotics and, apart from anything else, the property business can be incredibly boring. So long as we make sure we're well diversified, we'll allocate a small amount to a new alternative and see how it goes.