Family governance: charities, philanthropy, education and family offices

Family governance: charities, philanthropy, education and family offices

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Charities, philanthropy, education, family offices and good Family Governance

  • Family Charities and Philanthropy. Many families are involved in charities that are important to the family. Sometimes these are areas of concern that pull the family together; sometimes these are actual operating family charities. These can also be included in a Family Constitution. Some examples include:
    • Agreeing on annual grants from the family charity to direct needs
    • Creating and supporting an orphanage, a business school, a mosque, etc.
    • Working through “RFP”s (request for proposals) to ask direct charities what they would do if they received a grant of a specific amount.
    • Creating a “younger generation” group that would be authorized to agree on and distribute a certain amount each year.
    • Include an investment committee that would provide oversight to ensure that the investment funds being held for charity would include restrictions on the permitted investments that would be aligned with the family’s values.
  • Family Education Oversight. In looking ahead to the future many families decide that the quality of education of all of the young family members will be a critical factor in the long-term success of the family. Those families have included in the Family Constitution an obligation to oversee the education of all family members. Some create specific education modules that are designed to make the younger family members future owners with a strong knowledge base in the areas of concern to the family (this could be only investment skills or could include an understanding of the family business.)
  • Creation and Operation of one or more Offshore Trusts. Many families decide that they want to separate out some “safety” amount of the family wealth to set aside for any unforeseen needs of the family. A trust is often the ideal arrangement to use, and to diversify any economic or political risks, these trusts are usually set up in an off-shore jurisdiction. The terms of the trust can usually be written to cover any of the specific needs the family wants to provide for. For example, many families are concerned about potential uninsured catastrophic health care costs. Sometimes the trust is to be available for starting a business or buying a home.
  • Creation of a Private Trust Company. Whenever a family has a substantial number of trusts the issue of selecting the right trustee (or trustees) is often difficult. Several states in the United States have passed very friendly laws for families to create their own trust companies. Those trust companies can then serve as trustee of the family trusts (and the family owns the trust company.) In some cases the family trust company will partner with a large institution to provide the back office administrative and regulatory services. Several off-shore jurisdictions also have laws that welcome private trust companies.
  • Establishing and Operating a Private Family Office. When a family decides it has needs that justify hiring dedicated staff employees to serve those needs, it often decides to create its own “family office.” The provisions about the family office would be very much tailored to the needs of the individual family. They might include:
    • Individual budget reviews
    • Payment of all bills
    • Hiring and supervising household staff
    • Maintaining additional homes, yachts, aircraft, etc.
    • Curating any special collections
    • Obtaining appropriate risk coverage
    • Putting in place emergency provisions (including kidnap protocols)
    • Coordinating trusts and wills
    • Overseeing the operation of any family charities
    • Ensuring that appropriate tax planning is always in place
    • Overseeing the investment of liquid portfolios (in some cases this is the only function of the family office, in which case they are more accurately referred to as private investment firms.)
  • Family Venture Funds Most families received the family wealth historically from an entrepreneurial business venture. With a concerned eye on the negative “shirtsleeves to shirtsleeves in three generations” proverb, many families are working proactively to instill and encourage that original entrepreneurial spirit. One way to do that is to create a Family Venture Fund, which might include the following:
    • A fund from the family wealth is set aside to be used for new entrepreneurial projects.
    • A family member would present a proposal, with a complete business plan, to the committee in charge of approving proposals.
    • The approval committee could include a non-family member with experience in the particular field involved in a proposal.
    • The committee could require a pay-back schedule.
    • The funding could be as an ownership investment, a loan, or a gift.
    • If it is funded as an ownership interest, the family will have one more common asset to tie them together.
    • On-going monitoring is usually included (part of “accountability”).
  • Annual Family Gatherings. Finally, for the family to stay strong and connected to each other, they need to be with each other. Most families who work on family governance include a provision for annual gatherings. The annual gatherings can include:
    • Celebrations of family milestones (anniversaries, graduations, public recognition, etc.)
    • Fun team-building activities (river rafting, mountain climbing, camping, group cooking, fishing, etc.)
    • Educational programs, about the family business or investment topics or professional skills building
    • Reports on the operation of the family business, family investments and any family charities.
    • Family stories and family history presentations
    • Creation of a family history book
    • Talent shows by family members

How can family a succeed?

• By creating a tailored family governance system.
• Family governance can take many forms—go ahead and be creative.
• The key is to include and respect all family members in creating a system for family decisions.
• With “transparency”, “accountability” and “participation” a family’s governance system should result in multi-generational success and continuation. (end of 4th article?) https://www.brhauser.com/

Should we have a Family Constitution and what should it cover?

Should we have a Family Constitution and what should it cover?

By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. 

What is a Family Constitution?

A Family Constitution is like a constitution for a country (or the By-laws for a listed company). The benefits of having a Family Constitution are:

  • Decision-making is clear. In a Family Constitution the rules are set out for exactly how decisions will be made.
  • Which kinds of decisions are made? The Family Constitution will explain which kinds of decisions will made by the Family Council; which are areas of personal decisions, for the family member to decide (such as the Bill of Rights in the United States), and which are the major decisions that need to be referred back to the larger family group for approval. (For a listed company this is like the business areas that can be addressed, and which decisions can be made by the Board itself and which are the larger decisions that need to be referred back to the shareholders/owners for approval (such as a sale or major acquisition)).

What is usually included in a Family Constitution? Each Family Constitution is very much tailored to the particular family. Some families like to begin with a simple, short Family Constitution and add to it in future Family Council meetings. Other families like to address and include every issue they have in their minds.

  • Preamble is very important. The best Family Constitutions begin with a Preamble of why the family is making the Family Constitution. This allows a family to tell its story about why it cares, what the history is, and what the long-term goals are.
  • Flexibility is very important. The Family Constitution is intended to apply to future family members and in future circumstances. It is very important to include a provision on how the Family Constitution can be amended. It must be a flexible document or it will not survive.
  • Creation and Operation of a Family Council. The Family Constitution will include the basic structure of the family decision-making process. This includes the formation and operation of the Family Council.
  • Rules for Shared Assets. If the family has shared assets, these often cause friction within the family because of the lack of clear rules about how and when they are to be shared (and who is responsible for what). These include vacation homes, family compounds, private aircraft, yachts, etc. This is a common area that comes out of the initial individual interviews. The Family Council can propose rules for use, for approval by the larger family, and these rules can be included in the Family Constitution.
  • Conditions for Employment in the Family Business. If there is a family business, another area that often causes family conflict is whether or not there are any agreed-upon rules for entering the family business. Families who decide to have clear rules often want to include them in the Family Constitution. The exact rules will depend on the particular family. Sample rules include:
    • Educational Requirements. Are there any agreed upon educational requirements? These might include having a particular type of degree, in a particular field of study, from a particular type of institution, with a particular set of successful grades, etc.
    • Outside work experience. Another common type of requirement is to be employed outside the family business prior to entering the family business. These requirements often include the number of years to be employed outside, the type of outside business, and the success/promotions displayed during that time.
    • Defined Progress System. After joining a family business, it may be helpful to spell out how important it will be for the family member to report to someone outside the family, who can monitor the progress by evaluations and also to provide mentoring.
    • Provision of Executive Coach. Another provision that can be helpful to a family member who joins the business is to provide support in the form of offering an executive coach.
    • Termination of a Family Member. This is not usually addressed, but is a very sensitive subject that could be addressed ahead of time, instead of at a time of crisis. Most families agree that it is important to the business, to the other employees, and to the family members, that the family member who works in the business be accountable for his or her performance in the same way that non-family employees are accountable. In the Family Constitution it may be sufficient to simply state that principle.
  • Family Members Serving on the Board of Directors. If there is an operating business, one area of great value for the future is to provide that one or more family members will be expected to serve on the Board of Directors. This area could include provisions for:
    • The number of family members expected to serve on the Board.
    • Their required experience (if any)
    • Their term of office (best practices would treat them the same as all other board members)
    • The possibility of creating a “Junior Board” for members of the next generation to gain experience of a Board.
    • Encouragement of at least one family member to serve on the investment committee of the Board.
    • If there are multiple businesses, to adopt a procedure of family rotation among the various Boards.
  • Dividend (and distribution) Policies. If there is a family business one issue that is always of great interest is the amount of a dividend distribution. This is an especially sensitive issue if one or more family members work in the business (and receive a salary income) and one or more family members do not work in the business (and would receive only dividend income). It is critically important that the employed family members are paid salaries that are considered fair by all family members. (The communication about the salaries is part of the “transparency” value.) It is also important that the whole family agrees that the dividend policy is a fair one.
  • Salaries for Family Members. Usually family members agree that a family member who is employed should be paid the same amount that a non-family member would be paid for the same position. That can vary by family, however. Some families agree that the employed family member, especially at the Chairman level, is expected to spend more as part of the related social obligations in that culture, and so should be paid more to cover those expenses.
  • Exit Provisions. If there is a family business, and especially if some family members are not satisfied with the amount of the dividend distributions, it may be wise to include in the Family Constitution a method for the dissatisfied family member to “exit” from his or her ownership position. In other words, the family member could sell his or her stock and receive the cash instead. In fact, some multi-generational family businesses claim that this “escape valve” has been the key to the lasting success of the business. https://www.brhauser.com
A Quick Guide to set up a Good Family Governance system?

A Quick Guide to set up a Good Family Governance system?

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good family governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Families agree in general that they will do better if they have the benefit of an outside advisor to lead them through the governance process.

How to set up a proper Family Governance system

The outside advisor is likely to begin with getting to know each family member:

  • Interviews. Individual interviews take place, to provide an opportunity to share their individual views and concerns. An initial question is which family members to include in the interviews (children? Spouses?). Family members need to make those decisions. In the interviews family members often want to share a history of “grievances” which help give background, but are not usually the focus of the ongoing work. (This step, by the way, is an important part of “participation.”)
  • Report from the interviews. After having all of the interviews the outside advisor might put together a written (diplomatic) summary of the content of the interviews (This step, by the way, is part of “transparency”). It is important to show that each person was heard, but to keep the focus on common issues that would benefit from family attention, discussion and decision-making. It is also important to respect the confidentiality of each person’s comments, especially on difficult issues. The report should be shared with each family member who was interviewed (part of “transparency”).
  • Issues from the Interviews. The issues that come out of the individual interviews can be used as the Agenda items for the family meetings. The family meetings might be a smaller group of the family members, or the entire large group may be at the initial meetings. Some families mark the toughest issues as special “white elephant” issues, to be addressed in separate sessions, with an outside advisor (in some countries they are “pink elephants”.)
  • Creating a Family Council. One of the first steps for the family group is to decide who will be the representative group (the “Family Council”) to represent the rest of the group. This smaller group will be “accountable” to the larger group. It should be an “elected” group. Following “best practices” from governments and from listed companies, the members should be elected and have predetermined terms of office.
  • Family Council Meetings. Next is for the Family Council to begin its meetings. The meeting procedures need to be established. How often should the Family Council meet? (quarterly? monthly?) Where should it meet? (an office, a home, off-site etc.) Should there be an Agenda sent around in advance of the meeting? How much notice should be given about the date? Is it “required” to attend the meeting? (is there a penalty for failure to attend?) Can someone who cannot attend give a proxy to someone else? Must there be a minimum number (a quorum) in order to have a meeting?
  • Running the Family Council Meetings. Who will run the Family Council meetings? When creating the new system of family decision-making it is important not to follow the old method of decision-making. For example, if there was a Founder model (who made all the decisions) then the Founder should not be in charge of the discussions to create a new system. This is a role that should be filled by the outside advisor. This frees up each individual, including the Founder, to participate in the discussions. The outside advisor may suggest some rules of protocol to follow during the meetings (such as: no interruptions, sincere statements, respect for differences in opinion, turns for each member to participate, etc.)
  • Voting Rights. Families are often concerned at the beginning with the control issue of voting rights. They may spend some time deciding which category of the family tree would have how many votes, and also on the issue of how many votes would be needed for which type of issue. In practice, however, it usually happens that there are never any reasons to take a vote: a good meeting ends up working by consensus.
  • Written minutes from the Family Council meetings. Many families tend to forget exactly what they may have decided during the meetings. The outside advisor can put together clear and detailed written minutes of each Family Council meeting. These minutes would be circulated to all members of the Family Council, for review, corrections, and approval. (This written record allows for future “accountability”.)
  • Continuing the Family Council meetings. As an on-going process it is very important to continue to have the family council meetings. The discussions in the meetings, regardless of the nature of the actual topic being discussed, give great behavior practice to a family. The skill of discussing and resolving issues during relatively peaceful times will be a valuable shared skills in a future time of crisis. https://www.brhauser.com/
The benefits of mediation in family disputes

The benefits of mediation in family disputes

Can mediation solve family disputes? And if so what are the benefits of mediation in family disputes? Families are complex systems with several players. The way in which they function involves a combination of rational and emotional elements. It is only natural that people with their own individual talents, interests and perspectives do not always get along harmoniously. Spouses, children (clash of generations) and other members of the family system can all experience conflicts.

Can mediation solve family disputes?

Isolated and limited measures often fail to achieve any sustainable and positive effects. Legal action and other forms of enforcement of unilateral interests can certainly lead to results, but also to hurt and long-harboured resentment. The latter situation is particularly undesirable if children are involved.

Mediation is not magic but a practical craft. It is based on an acceptance that conflict exists and that it can be addressed. However, the result is not a foregone conclusion. In some cases the conflicts can be completely resolved. In other cases this is not possible, but it at least results in the consensual resolution of the consequences of a conflict. In this way the original conflict is contained and prevented from further escalating.

This in itself can be a considerable advantage if one thinks of the financial and psychological consequences of litigation that could stretch over many years. In mediation the parties have the opportunity of settling their issue by mutual agreement. The alternative to this is often a legal judgment, which can sometimes be difficult to predict in advance.

The process

The process is led by a neutral mediator (or by two co-mediators), whose core role is to help the parties work out a solution. The process can vary, but the common principle is that the participants clearly define where they are coming from and identify the interests underlying their personal perspective. What a person explicitly says and what their actual concerns are can sometimes be two quite different things. It is only once this groundwork has been carried out that fruitful and creative solutions can be found. These must be recorded in writing at the end of the process.

Sessions can be held in a choice or combination of different settings:

  • The traditional set-up consists of individual meetings over several weeks.
  • In the case of one-day sessions the participants begin in the morning and work in an open-ended fashion; and it finishes in the evening, whether or not a solution has been reached.
  • In shuttle sessions the participants are in separate rooms, at least for some of the time, and the mediator moves between them.
  • The participants can always have their lawyers or advisors with them during the sessions.
  • Hotel sessions, which are mainly one-day sessions, take place in a peaceful hotel.

Mediation is thus an option for working on family disputes in an effective and solution-oriented manner. https://allemann-recht.ch/
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Middle Eastern Family Business: Inheritance Laws and Family Divisions

Middle Eastern Family Business: Inheritance Laws and Family Divisions

Middle Eastern Family businesses are challenged by generational change, due to the combined effects of inheritance laws, companies laws, large families and rivalry amongst heirs, challenges which are usually recognized when it is too late. 

Internal threats to Middle Eastern Family business

  1. Many Middle Eastern family businesses have been remarkably successful and have become true financial and business powerhouses. Paradoxically, even the most successful families often have dangerous fault lines within, and they fail to recognise potential lethal threats from the inside before it is too late.
Fault Lines Within
  1. Dangers from within the family are subtle and these problems are often more difficult for the founder or other family members to perceive or acknowledge, let alone tackle in an effective manner. But even hairline cracks in the family can widen and invite disaster, particularly where the cracks are disagreements between siblings, the family’s bridge to the next generation.
  2. In 1967 fine corrosion cracking triggered a catastrophic collapse of the Silver Suspension Bridge across the Ohio River in West Virginia, under the twin stresses of low temperatures and high bridge loading. A total of 46 people in motor vehicles died when they fell into the river with the bridge. Likewise, in families, the twin stresses of leadership transition and business pressures can open up differences between siblings or cousins and can lead to the disintegration of the fabric of the family and the business.
The Middle Eastern Cultural Context
  1. Most Middle Eastern family businesses were started by one or two founders who retain ownership of the equity. In the wings awaits a fresh generation of owners, and the number of heirs in the wings is often large, because the culture in the Gulf region favours large families. It is one thing to build a successful business, it is quite another task to imbue every stakeholder with a culture promoting the cohesion and continuity of the family in nurturing and growing successful business enterprises over generations.
  2. Regardless of whether or not a particular sibling understands the family business or embraces the culture, the Middle Eastern inheritance laws guarantee that this sibling will receive an inheritance share commensurate with each other sibling of the same gender, and the Middle Eastern companies laws in the Gulf region guarantee that any heir inheriting shares will have one vote for one share inherited. This combined force of inheritance laws and companies laws means that for most families in business there is absolutely no guarantee that equity and the voting power will be vested in those heirs with the knowledge, ability, character and commitment to lead the family enterprise. Those heirs who do have the training and experience are commonly outnumbered and outvoted by other heirs without these qualities.
  3. The control of family business assets is a key which may unlock a vast reservoir of financial power, social prestige and an enviable lifestyle, so it is natural that there should be rivalry amongst heirs to lead the business. Add the element of sibling rivalry as an overlay and it can be seen that there is real potential for family business disagreements to escalate, particularly at the time when the founder ceases to play an active role.
  4. For these reasons, the inevitable transition associated with generational change and the inheritance process carries with it the potential to develop into an existential threat to the continuity of many Middle Eastern business enterprises. Even where the family business does not break apart, the paralysis of decision-making and the need for complete unanimity in the post-founder era may cause a gradual erosion of the business and asset base.
What Can Middle Eastern Families in Business Do?
  1. The first and the most important thing is to realise that in many cases the past history of the family and its enterprises may not be a reliable guide to what will happen in the future, so something must be done to secure the future.
  2. A family which has a desire to sustain and grow a business together must:

(a) develop a vision;

(b) generate a consensus to embrace the vision;

(c) formulate a plan to take the practical steps to ensure the vision continues (including a succession or stewardship plan); and

(d) implement that plan in an effective way with the best advice.

What Can Families’ Legal Advisers Do?

  1. There are clearly limitations as to what legal advisers can achieve in managing close familial relationships. However, good legal advisers can help, particularly where the atmosphere in the family remains positive. For example they can:

(a) suggest that the family needs to work together to develop the right succession plan and framework of arrangements to promote stewardship, continuity and an orderly transition when generational change occurs;

(b) make sure the right questions are asked and addressed even though the questions may be tough (e.g. should present or future in-laws have a role in the business?);

(c) encourage the creation of safety valves, because if a minority of family members becomes locked into a structure which others control they may feel they have no choice but to fight to break up the business, unless the minority is provided with a fair exit option.

Conclusion

    1. Family businesses are vital to the lifeblood of Middle Eastern economies and societies but there is a great need to educate families on the need to put in place the structures and governance platforms necessary for future continuity, harmony and growth in the business enterprise. The hidden economic and social costs of families in business which are dysfunctional are very high, measured in lost business revenues and missed growth opportunities. The family must put in place a leader or a leadership group which can act decisively to move the business forward. Well structured arrangements are needed to head off the ultimately destructive process of open conflict and litigation within families.
    2. The challenge for families is to apply the right guiding principles for good corporate governance to build a cohesive family and business dynamic for the good of future generations. Otherwise, the bridge to the next generation will crack and fail, and the family legacy will be lost.

Note: An extended version of this article was first published in “The Oath”, the Middle East Law Journal for Corporates in May 2014. https://www.linkedin.com/in/gary-watts/?originalSubdomain=au