Family Governance: Small Steps to Shared Understandings

IS THERE A ‘RIGHT TIME’ TO ESTABLISH A FAMILY GOVERNANCE PROCESS?

Many understand the importance of healthy communication within a family. The stakes can be higher for high net worth families. Few though understand how to build effective communication channels or practices, or how to develop a common understanding amongst family members to enable easier decision making. A sound governance practice is crucial for high-net-worth families, to ensure every family member has a voice and pressing issues aren’t ‘swept under the rug’ or ignored until they become huge problems that simply can’t be ignored any longer.

• Is there a ‘right time’ to engage in the governance process as a family?
• How does one go about establishing such a structure (formally or informally) for family members if one or two are unwilling to participate?

There may be many hesitations around bringing in an objective third party to help create governance that works for the family. Some may believe strongly in the adage ‘if it’s not broken, don’t fix it’ – meaning if there is no pressing issue at hand, or no added time pressures where decisions are required – they have what they believe is family harmony. This though, is an unhealthy way to look at governance – especially when human emotions are involved (and when it comes to family, emotions are always involved). Governance is usually overlooked until it’s too late. It’s only thought of when demand arises for decision making surrounding a major life event that has brought the family together. Families also may realize they need support during a significant milestone or change when decisions are imminent – the sale of a business, a liquidity event, or a life-changing event such as a divorce, death, or a terminal illness, or when the wealth picture is changing, or the family is growing to three or four generations. However, trying to establish a governance process becomes more complicated when dealing with a live situation, when there’s urgency and major decisions have to be made in the moment. Times like these are not ideal for establishing a process or working out how to come to a shared understanding.

Increasingly, families are electing to engage in governance during a sustained period when they aren’t experiencing a major life event. This is the best time to begin discussing the process, given that there is no urgency surrounding the need for the process or no heightened emotions from having to deal with handling a tragedy at the same time. The COVID-19 pandemic accelerated this way of thinking for many families. It was an unexpected time no one was truly prepared to navigate. Families realized they want to try to get ahead of anything unexpected that may happen again. They made it through an unprecedented time and want to be more proactive and educated.

Practical Steps towards Effective Governance

Governance can be overwhelming though, and sometimes family members feel they can’t proceed because the process is too much. They fear that certain issues will be brought to the table right away and discussing then would only make said issues worse. It’s human nature to want to avoid getting into such situations. But governance is about progress, not perfection. It’s not about reaching a destination right away, rather simply taking baby steps to establish communication and a shared understanding about how decisions are, or should be, made. One first step could be: how do we think through family meetings?

A good starting point is ensuring that family members have input, versus the primary wealth creator prescribing the plan. Creating a safe space where they can speak openly gives agency to family members. Having an agenda is also encouraged, so each person can feel heard on topics they wish to discuss. A facilitator can help navigate establishing the process. Objective third parties adept at the governance process can ensure a constructive environment for family members and help ensure that discussions occur respectfully. A facilitator can also provide context around the importance of these discussions and share how other families have gone through similar situations. Drawing experience from other families helps provide an understanding of possible outcomes of such meetings.

If there are a few family members still unwilling to participate, recognizing the implications of not addressing these issues may help them come around. Meetings don’t have to be formulaic, and they aren’t about pushing value systems onto each other. Rather, governance is about explaining why and how one has arrived at such thoughts, and creating scenario analysis for what may happen in the future. Death or incapacity drills may sound morbid but are practical and helpful to many families. They involve sitting with the primary wealth creators and reviewing everything they’ve planned to date for their family, wealth, and estate. It’s about understanding how things are going to unfold and what would happen to the estate given the current plan.

Building Understanding and Trust

Beyond the practicality of preparing for the future, governance is about understanding, communication, sharing and sometimes, letting go. As it relates specifically to estate planning, the drills to determine what will happen are important, but equally so is discussing the ‘why’. Why is the person creating this legacy in this fashion? Why is it important that wishes are carried out one way versus another? Governance meetings help communicate wishes and values and build understanding around topics that family members may not have fully thought through prior. The goal of establishing the ‘why’ is that intentions will be clearly outlined, and continuity will be established. Discovering such details may change some views, but also helps create frank discussions so family members can engage with one another in a constructive manner. This makes for a smoother transition when the time comes.

The part of governance that resonates with many individuals is addressing issues that at one point in time or another, have impacted them. Every family is unique and has a story and a history that has brought them to where they are today. Interrelationships have often damaged by history. But understanding the ‘why’ helps people realize how they have internalized this history and how they have processed it. Through discussion family members are encouraged to reflect on how certain situations have affected them and how they continue to impact certain interactions with family members. Once trust and understanding are established, family members can start to let go of feelings of ill will and improve their relationships.

Governance is about communicating and navigating emotions in a safe environment. It shouldn’t be thought of as something corporate, or formal and rigid. While successful families and family enterprises do need some structure, this shouldn’t be the driving force behind governance. Governance provides a channel for family members to communicate better, interact in a more supportive fashion and arrive at sound decision making together, in a way that maximizes the harmony of the family circle now and in the future.