Venture funds and the use by wealthy families of council structures to guide future strategy and avoid succession battles are among some of the trends in family governance laid out by a leading commentator in the field.

Venture funds and the use by wealthy families of council structures to guide future strategy and avoid succession battles are among some of the trends in family governance laid out by a leading commentator in the field.

Barbara Hauser, author of International Estate Planning: A Reference Guide, and an advisor to affluent families for quarter of a century, said in a recent article that family governance is now a “significant global issue”. (Hauser’s article appeared in the latest edition of the CFA Institute Private Wealth Management Newsletter. The comments are reprinted at Family Wealth Report with the publication’s permission.)

“Families with poor governance are in the news everywhere. For example, in Saudi Arabia, the disputes among family members in the Al-Gosaibi and Saad Group involve some 80 banks and loans in excess of $15 billion,” she wrote.

She said there are three main issues affecting family business governance: no clear succession plan; the founder’s unwillingness to “let go”, and sibling rivalry.

What are three key issues in family business governance?

Referring to the lack of succession plans, Hauser says “the failure to plan, however, almost certainly guarantees the failure of both the family business and the family harmony”.

“The family of a founder who does not adopt a solid succession plan is likely to lose the entire business within a few years after the founder’s death,” Hauser said.

She points out that cultural shifts affect how siblings view inheritance and business succession.

“When the founder gives control of the family business (or the family wealth) to one child, the others are very likely to resent it. Years ago, when traditional patterns were widely accepted, such resentment was not as prevalent a problem as it is now,” she said.

“For example, the whole family used to understand that the position of power would be passed to the oldest son. Today, for most families, all the children are encouraged to enroll in top universities across the globe, and often return home with ideas of meritocracy or other values that may clash with the traditional way of doing things,” Hauser said.

Best practice

She said there are three “best practice” points which can help families avoid some of the worst problems.

She highlighted the role of “family councils” or “family board of directors” – referring to a quasi-formal structure through which families can hammer out issues over time and plan for the future.

She also said that education in financial affairs and was vital for the younger generations in a family, giving would-be inheritors time to develop the knowledge they need.

"This notion goes far beyond the traditional bank programs that give financial education to “next generation” members in an annual course of five days to three weeks,” Hauser said.

“One family (which owns one of the world’s largest business empires) has hired a full-time “education director” to plan and oversee the best education possible for all the family members, tailored to the particular businesses of their family enterprise. This program will help the family members be strong owners, even though they are not involved in the management of the businesses,” Hauser said.

And thirdly, she mentioned the idea of “family venture funds”, which are usually a project created by the family council, which appoints a committee to oversee the details.

“In this way, the family wealth can continue to be regenerated and increased. Equally important, younger family members can grow these ventures as projects that they themselves have created, which builds confidence and competency,” she said.