What Exactly is, ‘Governance’?

How Families of Significant Wealth Can Develop a Shared Understanding of Each Other, and Establish Better Decision-Making Processes

The term ‘Governance’ may be an overused, vague phrase, but what it really means is developing a shared understanding in order to communicate effectively and establish a decision-making process that is understood by all family members. The concept may seem simple, but when substantial wealth, family history, and human emotion is involved, it can become a complicated task to undertake if not planned out thoughtfully and constructed with the right support system in place.

FORMAL, OR INFORMAL

Formally, governance involves a process that encourages dialogue and communication amongst family members and often involves an objective third party to help guide conversations. Supporting structures may exist to ensure the family is in the best environment for problem solving and open discussions. This may also go as far as creating a family counsel and defining a family constitution to help navigate challenging decisions. However, it doesn’t always have to involve this level of formality.

For some families, governance can be more informal. It can mean a reoccurring family gathering with an agenda in which any family member can add a topic. Or simply, governance can also evolve out of just spending time together. It can begin with families getting together more frequently to build trust among the family members. The more a family can socialize and learn to respect each other outside of a formal environment, the better. Building a shared understanding of each other in the good times can assist the family in navigating through more difficult situations, because there is already a foundation of mutual respect. Conversing in an environment that’s less formally charged may naturally allow for building informal structures. It can create good memories associated with discussions and de-risk certain interpersonal issues.

THE HESITATION TO PARTICIPATE

While most recognize that effective communication is important, certain family members may tend to dismiss the notion of governance as to them, it means giving up control, or letting family members in on information they feel the family will not be ready to receive. For the primary generation – as in the patriarch/matriarch or initial business owner – the concept may be an especially challenging one. They are accustomed to being the one always in control, as that’s how they’ve built their business, and they may not be willing to give up said control to let others into the inner workings of the family enterprise. However, the idea of governance, whether formal or informal, aims to lessen the burden of the decision-making falling only to one or two people within the family.

Gatekeeping such information or not engaging in a constructive governance process also does more harm than good. While the primary generation may believe they are protecting their children or grandchildren from knowing too much, keeping those family members in the dark actually does them a disservice. When many stakeholders exist within the family – spouse, children, even grandchildren – the outcomes of these decisions made by the controlling generation begin to impact the family at large, so it’s only natural these family members would want a say in the decisions, or at the very least, to understand the thought process behind the decision making.

Picturing the future: once the primary generation is gone, the children or grandchildren will inevitably come into this information. If they aren’t privy to why such decisions were made, they won’t be equipped to deal with the situation they’ve been given. They won’t understand the ways to navigate their wealth or the intention of that wealth, and they may not have trust in the primary’s advisors, given no prior relationship was established. Essentially, the years, time, emotions, and energy the primary generation spent building the wealth to provide for their children is all for naught, as the next generation doesn’t know how or why the wealth and legacy was built the way it was. Having conversations while the wealth creators are still alive builds confidence in all family members. Over time, families will feel that they have greater agency in the overall legacy.

While some family members may feel like they’re giving up control, others are hesitant as they think that being so transparent might create disfunction or family secrets may be revealed. There may be concerns over the process being too rigid, not allowing them to speak freely. There are so many reasons they want to avoid these conversations. However, the governance process accomplishes the complete opposite; it helps families create a shared understanding, develops open collaboration techniques, and builds new ways to communicate effectively. So, topics that may have at one time been taboo or problematic may be more easily dealt with as the family is better equipped to discuss such matters constructively.

WHO BENEFITS MOST FROM THE PROCESS?

It may seem like the next generation, spouses, or children, are the ones solely benefiting from family governance. In actuality, the primary generation tends to get just as much out of the family meetings as the others. These meetings encourage the primary to slow down and clarify their own thoughts or feelings and organize their thinking. Successful entrepreneurs have often built their success by acting quickly and trusting their intuition. But as they begin to think of the transition period, the process encourages reflection on decisions made and lessons learned. They are able to provide greater clarity for their families. For the next generation, it’s a way to participate, as opposed to simply being told what’s happening. Across the board, this promotes a greater sense of collaboration, learning and sharing.

If hesitant to disclose everything to everyone, families can establish a Share of Voice and a Share of Vote. A Share of Voice means that whoever is identified within the family to participate in the family meetings is afforded a Share of Voice in which they can share thoughts, sentiments, and bring about topics they feel should be discussed. It’s up to the family to determine who participates, and grandchildren are usually welcomed to participate when they turn 21 or 25. A Share of Vote is exactly that – this may not include everyone but rather a sub-committee of family members that maintain responsibilities and decision-making powers. Third parties often encourage a high Share of Voice within a family but then distill who among them holds the Share of Vote. The goal being those who have a Share of Vote are doing so with the best intentions of everyone in mind.

Humans are emotional beings, and families can be complex micro-communities, especially when there is substantial wealth involved. Governance is about engaging constructively with one’s own family members to ensure everyone is heard, and everyone feels engaged in the decision-making process. It’s a way to build constructive sentiments around the family’s well-being whether it be relating to their financial resources or determining how the family enterprise can be used in a way that is beneficial for all family stakeholders. Ultimately, it’s about everyone in the family understanding consistently how they’re going to undertake the decision-making process when it comes to anything from planning family vacations, to purchasing larger assets, to navigating emotions in situations involving the passing of a family member. Undertaking governance does not mean that a family has failed at not being able to do this on their own, but rather it’s about coming together to facilitate even greater success for each other and their collective legacy by having a process they can lean on no matter the issue they have to tackle, together.