What good governance looks like
Several years ago, a wealth manager approached me with a problem. The family of one of her clients, a very successful public company CEO, was in disarray. Challenges included spendthrift behavior, family members disrespecting staff of the single-family office, and adult children unsure about how to make their ways in the world.
I asked the wealth manager, “What is the family governance structure?”
She said, “He is the governance structure!”
Translation: Her client had not established any actual family governance.
Although her client had instituted a single family office, he made decisions as dictator and usually on the fly. Very little had been formally agreed-upon or put in writing and the family had little understanding of the role of wealth in their lives.
Lack of family governance, both in family businesses and family wealth enterprises, is as common as it is detrimental to long-term wealth. This post provides background on good governance in general and useful ways to think about family governance at a foundational level.
Governance is good
Governance differs from government. A government in the public sector should provide good governance, but too many national, state, and local governments fail to do so.
Also there are various forms of government and governance. For example, corporate governance—by the board of directors, who oversee management of the organization for the shareholders—should aim to balance the needs of the enterprise’s stakeholders so they all benefit in sustainable ways. Again, as with governments in the public sector, many boards fail to provide that kind of governance.
Not long ago, after I had been writing for a few years about corporate and family governance, I came across a list of characteristics of good governance in a United Nations committee document.[i]
These characteristics, which amount to guiding principles, are applicable to virtually any situation calling for good governance. Of course it takes some work to translate these principles into action.
This post will help you to start making that translation. It presents each characteristic of good governance, along with a brief explanation, then relates that characteristic to family business or family wealth governance.
What is governance?
In general, governance aims to define, channel, and balance the use of power. Governance does this by developing and maintaining an agreed-upon group process for making decisions and getting things done.
The power that needs to be channeled might spring from financial, economic, political, legal, or physical sources, or some other source. Regardless of the source of power, good governance ensures that “might makes right” is not the way things are run.
Most families have strong elements of dictatorship, which can be considered a form of governance but actually isn’t. That’s because governance implies active participation on the part of the governed. Also, dictatorships lack oversight, a key component of governance.
That brings up the notion of human frailty. Many corporations have senior executives who would rather not be subject to checks and balances and not have to deal with the board in its oversight and advisory capacity. By the same token, many boards are lax in their oversight of management. A good number of them are “in management’s pocket” and simply rubber-stamp executive decisions.
That happens in other types of organizations as well, such as universities and other nonprofits. But just because governance is not always properly practiced doesn’t mean it’s a bad idea. It means we have to do a better job of it at every level, including in our families.
Notice too that it is called family governance. That implies the family needs governance if they are to avoid running their business or assets into the ground. That’s because the marketplace is the ultimate governance mechanism over a business or assets. The record shows that families often either stumble or run wild without good governance.
So it’s called family governance for good reason.
9 Characteristics of good (family) governance
Here are the UN’s characteristics of good governance, along with my comments on how they apply to family governance:
- Participation: Everyone should have a voice in decision-making, either directly or through entities that represent their interests.
Adult family members should have a say in financial and business decisions that affect them. Shutting them out of the process or keeping them in the dark won’t work in the long run. They should be able to participate, or at least be represented, in all decisions that affect them.
- Rule of law: Laws should be fair and impartially enforced.
The wealth creator or business owner has the legal authority to make the rules. However, family members will opt-out or revolt if they are subject to rules they see as unfair, didn’t agree to, or had no role in crafting.
- Transparency: The governed need easy access to information on the people and processes that govern them so they can understand, monitor, and participate in governance.
Family members need enough information to make decisions about their finances and lives, in light of the family’s wealth, business, or assets. This does not mean that parents and other family members must reveal their private finances to all; it means that family members should know where they stand.
- Responsiveness: Institutions and processes should work to serve all stakeholders.
Favoring some family members over others or ignoring the needs of certain family members, particularly when those needs are obvious or have been expressed, will serve the family poorly. In fact, it will generate discontent, fray relationships, and generate lawsuits.
- Consensus orientation: Competing interests should be balanced to reach broad consensus on what will deliver the most benefit to the group. To the extent possible, there should be consensus on policies and procedures.
A family, let alone a family business, does not have to be a democracy, with everyone having an equal say. Family members’ interests, skills, needs, and contributions will vary. Yet gaining consensus on major decisions will do the most to preserve family relationships and assets.
- Equity: All of the governed should have opportunities to improve or maintain their well-being.
One tenet of sound family governance (as articulated best by family governance pioneer Jay Hughes) is that of using wealth to nurture the family’s human capital. This means using the wealth to improve and maintain current and future family members’ long-term well-being.
- Effectiveness and efficiency: Processes should meet needs while making the best use of resources.
Family governance processes should not waste time, energy, money, or other resources; instead, they should deliver what the family has agreed they should deliver, including good decisions, useful plans, asset growth, and long-term wealth preservation.
- Accountability: Decision-makers should be accountable to their constituents, stakeholders, and oversight bodies.
Wealth creators and family business owners often find it hard to be accountable to a board or to family members. Most are used to being “king of the forest.” But being accountable to others keeps you honest and earns genuine respect and loyalty.
- Strategic vision: Leaders and followers should take a long-term view of human development, and have a sense of what it requires. They also need an understanding of the historical, cultural, and social complexities of those being governed.
The well-being and development of current and future family members is the most useful vision for a family. The strategic vision—however the family defines it—should consider opportunities and barriers that the family’s history, culture, and situation pose to the pursuit of that vision.
A family with significant assets faces challenges similar to those that a nation does in maintaining good governance. Fortunately, individuals have far more control over governance in their families than over that of the nation.
For a deeper dive into good family governance, see my book Family-Proof Your Wealth [link to landing page for book or Amazon].
Also, sign up to receive an alert for the start date for my upcoming online course, Let’s Take the Nasty Out of Dynasty [link to landing page for course].