What is family office governance?
A definition that can be acted on, the four things governance actually consists of, and the distinction between governance and the investment management it is constantly confused with.
Family office governance is the system that determines who may decide what, on what evidence, and how each decision is recorded so that it can be proved later.
It consists of four things and no more. An account of what the enterprise is for. A set of standing commitments that constrain what may be decided. An allocation of authority, stating who decides at which threshold and who must be consulted first. And a record of what was decided, by whom, on what basis, that outlives the people involved.
Everything else described as family office governance is one of those four wearing different clothes. A family charter is the first two written down. A board is where the third is exercised. Minutes are a weak form of the fourth.
Governance is not investment management, and the two are separated for a reason set out below.
Why the usual definition is useless.
Governance is normally defined as the structures and processes by which an organisation is directed and controlled. That is accurate and it is impossible to act on, because it does not tell a family what would be different on Monday.
The definition above is narrower on purpose. It names four components, each of which either exists in an enterprise or does not, and each of which can be tested by looking at a real decision rather than at a document.
The test for any definition of governance is whether it can settle an argument. If a family disagrees about whether something requires board approval, a definition that mentions structures and processes contributes nothing. One that says authority is allocated by threshold and recorded settles it or reveals that nobody ever allocated it.
What governance consists of.
Each of these fails in a different and recognisable way when it is the one that is missing.
- Purpose
- What the enterprise is for, written plainly enough to settle an argument. Without it, every disagreement becomes a question of personality, because there is nothing above the people involved to appeal to. Its presence is proved by a decision that went the other way because of it.
- Principles
- The standing commitments that constrain what may be decided. Constraints, not aspirations. A principle that has never caused an attractive proposal to be declined is a value statement rather than a principle, and the difference shows up only under pressure.
- Decision rights
- Who may decide what, at what threshold, on what evidence, and who must be consulted before they do. This is the component families most often believe they have. Ask two senior people separately which decisions require the board, and the answers will tell you whether that belief is correct.
- The record
- What was decided, by whom, on what basis, held so that it can be produced years later and relied on. Minutes of what was said are not a record of what was decided. The test is whether a material decision from two years ago can be produced with its approval inside a day.
What a governed decision passes through.
La quarta tappa è ciò che ne fa un ciclo anziché una procedura.
01
Proposta
Una questione raggiunge l’organo a cui la matrice la assegna, con le prove che quella classe di decisione richiede.
02
Esaminata
Autorità, soglia e conflitti sono verificati sul Book of Law prima che qualcuno voti.
03
Decisa
L’organo decide. Chi approva, le prove e il momento vengono scritti nel registro e bloccati.
04
Registrata
La decisione bloccata entra nel Book of Law e diventa il precedente su cui si verifica la proposta successiva.
La tappa quattro è la tappa uno della decisione successiva.
How governance differs from investment management.
Investment management asks what a family should own. Governance asks who is allowed to decide that, on what evidence, and how the answer is recorded. They are different disciplines, they require different people, and combining them creates the specific conflict that governance exists to prevent.
The practical consequence is that a governance system should have no opinion about the merit of an investment. It should have a great deal to say about whether the proposal reached the body that holds authority at that amount, whether a conflicted party took part in the decision, and whether the reasoning survives.
A family that cannot answer those three questions about a decision it made last year does not have a governance problem in the future. It has one now, and the investment performance is a separate matter entirely.
We provide governance advisory services only. We are not investment advisers, we do not advise on investments, we do not manage assets and we take custody of nothing.
When a family needs formal governance.
There is no threshold of wealth at which governance becomes necessary, which is the answer families least want and the only honest one. What creates the need is not size. It is the number of people with a legitimate claim on a decision.
One owner deciding alone needs very little. The moment a second person can reasonably ask why something was decided, an enterprise needs an answer that does not depend on the first person's memory, and that answer is governance.
In practice three events create the need suddenly rather than gradually: a second generation reaching adulthood, an event that removes the founder from the room, and a liquidity event that turns an operating company into capital nobody has governed before. All three are foreseeable. None of them is a good moment to begin.
Questions this raises.
If an enterprise has only one owner, is governance still worth building?
Yes, but for a different reason. With one owner there is nobody to allocate authority between, so the value is entirely in the record: writing down why decisions were taken, while the person who took them is present to say. That record is what a sole owner's successors inherit, and it is the only part of governance that cannot be built later by somebody else.
Should a family write its own governance, or should an adviser draft it?
The family writes the purpose and the principles, and an adviser drafts the instruments. Governance a family did not author is governance a family will not use, and a purpose statement written on a family's behalf reads like one. The technical documents are different: those benefit from somebody who has drafted them before.
What is the first document a family should produce?
Not the charter, which is where most families start. The first useful document is a schedule of who currently decides what, written down as it actually operates rather than as it should. It is short, it can be produced in a fortnight, and it usually reveals that two senior people disagree about something material.
Can governance be added after a family office already exists?
Almost always, and most of our work is exactly that. What cannot be recovered is the record of decisions already taken. Reasoning that was never written down and whose authors have retired or died is gone, and the practical response is to start the record now rather than to attempt a reconstruction that will be partly invented.