The governance issues that can arise with art investments and collections are important and a noted expert in the field, Randall Willette of Fine Art Wealth Management, examines the issues.

Editor’s note: Here is an article on the
governance issues that can arise with art investments and collections. It is
written by Randall Willette, managing director of Fine Art Wealth Management.
Among his roles, Willette is a member of the editorial advisory board at
WealthBriefing, sister website to this publication.

Family
governance is a term sometimes used to describe the management of a family’s
assets by a family office however rarely do you see it applied to the family’s
private art collection.  Just as family
governance is important to ensuring adherence to the family’s value system and
successful wealth transfer of financial assets the same holds true for a
collecting family’s art assets. 

Today,
the private collections of ultra-high net worth families can rival those of
major art institutions and private museums and foundations are being created at
an astounding rate.  Unfortunately, with
the exception of a small minority of major collectors, most families either
never address governance when it comes to their art assets or wait until they
are in the midst of a family crisis before they finally get serious about
creating and implementing a sound art governance plan.  

Applying governance

It’s
difficult to define “family governance,” because the term means different
things to different people. Sometimes, the term is used interchangeably with
“family office” - a central administrative function that manages certain
aspects of the family’s affairs such as its investments. 

In
academic circles, family governance is commonly defined as a process to help
make better, more-informed decisions.  A
sound family governance system for a collection comprises both structure and
discipline. The concept of family governance for an art collection has to be
rooted in the notion that there’s something worth governing, perpetuating and
developing. Because each family’s needs are different, there is no real
standard or template to follow.  To be
most effective, however, whatever system that is ultimately developed should
facilitate three essential functions:

-- Agreeing shared values for the
collection and what kind of legacy the family should strive for;

-- Creating a framework for
decision-making;

-- Setting expectations for the collection;

Agreeing shared values

In
order to agree shared values for a family collection the process of creating
governance-related documents such as a family collection policy or a mission
statement can be truly valuable. If a family can come together and engage in
the collaborative process necessary to produce such a document, there’s a good
chance it will emerge with a set of principles that reflect what’s important to
the family, what kind of legacy it would like to achieve for the
collection,  and how to accomplish it.

Revisiting
these principles on a regular basis and holding the family to them at all times
can help family members stay connected to each other and to their collective
goals for the collection. 

Creating
a framework

While agreeing shared values is a necessary step
in establishing a robust family collection governance system, it doesn’t create
a framework within which a family can actually make decisions.  This requires the formation of a family art
council, a structure that is typically the chief decision-making body for
managing the collection and is bolstered by a well thought-out collection
policy and set of bylaws.  We’ll talk
more about the family art council later in this paper.

Setting
expectations for the collection
A common complaint within families that fail to have a
rule-guided, transparent system in place for their collection is that most
decisions are made, or appear to be made, ad hoc. The problem with such a
decision is that it is susceptible to challenge on one or several grounds
including: it was not consultative; it was not deliberative; or it was too
emotionally driven. By contrast, if a decision is made pursuant to a rule
directed and transparent process, it will be - by definition—deliberative and
consultative. Moreover, it’s much more difficult to attack a decision that
results from such a process as being motivated by personal emotion. 

Families
that have created a collection policy often find that each time the family art
council issues a decision that the family ultimately accepts, the respect for
the decision making process itself grows. And with each favourable outcome, the
system acquires increasing moral and persuasive force. If the family can get to
this point, the authoritative impact of a decision rendered by the family art
council regarding the collection becomes almost unquestioned. 

One
key to make sure a collection doesn’t damage family harmony is to work toward
open communication and look for creative ways to include family members in the
decision making process. Equally important, if the family can create a set of
rules and procedures in advance and then seek to apply them neutrally to situations
as they arise, it’s more likely that the decision will be a principled one.
Such a decision is then likely to have greater moral and persuasive force.

The Family Art Council: A critical framework
for the family collection

As
suggested above, a family art council is the single most important structure a
family can put in place to help address and resolve - in a systematic and
normative way - issues regarding the family collection.

These
may include:

--
How to conform the strategic and tactical plans of the collection to the
family’s core values;

--
Determining what kind of legacy the family should strive;

--
Preserving and protecting the family’s art assets;

--
Planning for the transfer of the collection to the next generation;

 

--
Identifying charities the family would like to benefit through gifts from the
collection and what, if any restrictions they wish to place on the gift;

--
If the decision is made to sell the collection developing an orderly disposal
strategy.

Depending
on the nature of the family’s concerns, the family art council also can address
curatorial management issues relating to setting standards of best practice for
art due-diligence, valuation and collection management. The family art council
can be an extremely powerful part of a family’s strategic plan for the
preservation of the collection’s legacy and culture, and for managing potential
family conflict.

When
creating and structuring a family art council, one of the most critical
questions that must be resolved is who will be members of the council and is
there a role for outside advisors and other non-family members? Part of the
challenge is to find the answers that are best for the family -that’s why it is
helpful to have as many family members as possible at the table initially to
talk through them.

Once
these questions have been thoroughly discussed and a consensus has been
reached, many families will create a document that officially establishes and
empowers the family art council, and delineates its role and functions.

Roadblocks

There
are numerous obstacles that can hamper governance discussions regarding a
family collection and the implementation of an effective system. These may
include the following:

Avoidance.
One classic roadblock is the presence of a first-generation wealth creator who
refuses to engage in the governance-development process because it involves
both giving up control of the family collection and facing the fact that their
taste in art is not shared by younger members of the family.

Resistance to change. This roadblock can
present itself when the wealth creator attempts to implement his or her vision
of a family legacy for the collection, including too many restrictive
provisions. More often than not, this kind of overzealous approach creates a
legal quagmire and stalls itself in the process, so nothing ends up getting
resolved or implemented. 

Lack of Experience.
The qualities that brought a family business to great success are often not the
same qualities that can help smoothly transition the family collection to the
next generation. Decisions about its
future can be quite emotional and deciding where the collection may reside
after it passes from a family’s control, be it with an institution such as a
museum, a family member or another collector, also is a key consideration. 

Other
roadblocks can arise when a governance system is set up and then ignored, or
when the governance system is difficult - if not impossible - to amend to
reflect changing family needs. In
the light of potential tax and other financial liabilities, deciding on the
best strategy early on can be of critical in valuing and transferring a family
collection.   

Best practices

Unlike
the financial markets, the art market lacks professional regulation and there
are not industry wide standards of best practice. Over the past few years,
provenance, or the history of ownership for a particular work, has become
increasingly important. Provenance can help determine the authenticity of a
work, establish the work’s historical importance, and trace the work’s
legitimacy.

Undertaking comprehensive art due-diligence
can also help prevent or diminish family disputes. If the assets are not
appraised and reviewed for proper title and provenance, distribution of
individual items can result in a highly inequitable allocation to beneficiaries
at time of distribution. 

Dealing
professionally with art requires time and considerable knowledge. Obtaining
recognition as an art expert generally requires intense study, whether theoretical,
academic or practical. There are a variety of art market professionals and a
family’s chosen experts should be recognized leaders in their field. 

Even
for families stocked with talented and accomplished individuals, it is a
mistake to attempt to develop and implement a family governance system for a
collection without professional guidance and support. This process is a complex
and nuanced one that calls for some independent vision. Even the most
experienced collecting family can benefit from professional guidance in today’s
fast paced and complex art market.

Other
best practices for a family art governance system include the following:

--  Review the system annually and update if
necessary—there should always be a process for changing or amending it;

--
Understand the real value of the collection and consider it as part of the
family’s overall financial and estate planning;

--
Know the collection and learn about its history, availability, market trends
and prices supported by quantitative, qualitative and behavioural research;

--
Plan for the future by discussing with family members early on their level of
interest in the collection and what kind of legacy they want to strive for;

--
Should a family decide to gift the collection, bring in an art succession
planner that can help work through the range of emotional and practical issues;

--
Be aware that the art market is becoming more litigious and retain the services
of an experienced art law specialist.

Monitoring performance

Family
art collections also need explicit governance practices that hold art market
professionals who are advising on the collection
accountable, such as pre-determined benchmarks, regular evaluations based on
set criteria and clear reporting outcomes. Accountability plus objectivity
contribute to building trust, a key underlying factor in the selecting the best
team of art experts.

Independent
and objective advice on art is not always easy to obtain. To date, this has
been provided largely by art dealers, galleries, and auction houses for which
conflicts of interest often exist. Families would be wise to seek advice from
independent professionals who have no vested interest in the art and draw on
expertise from both the academic and commercial art worlds. 

Conclusions

Like
many other things in life, you’ll get out of a family governance system for a
collection what you put into it. If you invest the time (it’s typically a multi
month process) and some careful thought (we recommend using an expert to help
guide this process), and include input from an array of voices (both family and
nonfamily), there’s a good chance collecting families will end up with a
reliable way to make decisions regarding their art assets that are more likely
to be respected over time. As more time passes, the moral legitimacy of this
system will be cemented, providing a solid foundation for the family to build
upon its successes and its legacy.