The Family Constitution: Governance Part 2

Video transcript

The family office association was founded in 2007 as a peer network for single family offices. Family office governance. There are whole courses and books on governance. Here we will share a few observations from the perspective of the unique challenges faced by family offices. Some of these points may seem obvious, but you would be amazed how often they are overlooked. The size and complexity of the family office will be an important factor in determining the design of the family constitution and how the various elements fit together. With that said, the family constitution ties together all the entities that make up the governance structure. So, let's look at these entities in more detail. The family constitution is a statement of the principles that outlines the family's commitment to the core mission, vision, and values of the family office. It is a living document that evolves as the family and family office continue to evolve. The family constitution may also be referred to as the family creed, protocol, statement of principles, family rules and regulations, or strategic plan. Often the specific details of the constitution are a closely held secret. Disclosing them could potentially compromise the family's interests and objectives. Some of the elements that are typically included in the family constitution include the governance structure which describes the roles, responsibilities, and decision-making authority of various family members, committees, and advisory boards involved in managing the family's affairs. investment policies which include the investment objectives, risk tolerance, asset allocation strategies and guidelines for managing the family's portfolio. Succession planning encompassing the provisions for leadership transition, inheritance and transferring control to the next generation. Philanthropic guidelines which include the rules and criteria for charitable giving, foundations and other philanthropic endeavors. Conflict resolution mechanisms which spell out procedures for resolving disputes among family members. And lastly, confidentiality and privacy provisions which contain measures for maintaining the confidentiality of the family's affairs and protects their privacy. The next governance entity to consider is the family assembly which comprises the universe of family members often delineated by major family groups. Think of this as cousins and other shareholders that are not actively engaged with the family office. The purpose of the family assembly is to bring the family together, share information, and avoid potential conflicts. When the family assembly becomes too large or unwieldy, a family council may be created to drive specific strategic initiatives for the family. The family council is a working body to deliberate on family business and family office issues. It may also be referred to as the supervisory board, the inner council or the executive committee. The family council is responsible for suggesting names of candidates for board membership. Drafting and revising family position papers on its vision, mission, and values. Drafting and revising family policies such as family employment, compensation, and family shareholding policies and dealing with other important matters of the family. Span of control is clearly an important factor in determining the size and scope of the family council. The advisory board is a group of external experts who provide important insights to the family office. Typically the advisory board consists of independent advisers who do not hold voting rights. This means advice can be freely given but there is no accountability or legal responsibility tied to the advice. It also means the advice may not be systematically followed by the family office. The investment committee is the primary way a family office makes investment decisions. Since investments are so important, family office investment governance often exists independently from other family office governance structures. Just as the family council has a constitution, the investment committee has an investment policy statement that outlines asset allocation, direct investing, and manager of manager mandates among other things. Thank you for listening. We hope you have enjoyed this content. Please share with others or visit tfoa.info to learn more.