Developing Family Oversight: One Family's Experience
By: David Lansky, Ph.D.
Family leaders are made, not born.
As business-owning families evolve, their interests are bound together by more than their business. Common interests in estate planning, philanthropy, and their real estate and business holdings emerge as a result of business success. In these families, complex family oversight roles develop over time around directing their businesses, supervising real estate holdings, serving as liaisons with professional advisors, and managing interlocking trusts and foundations. Often the roles grow up around the senior family members who, by virtue of their early involvement, were able to develop very high levels of comfort and competence in rather difficult positions.
As families grow and their enterprises evolve, they begin to recognize the need for new leaders to assume oversight responsibilities that their seniors previously held. Succession in this respect might apply to running a business, but succession in family oversight is also desirable when a family’s assets are invested outside a business, or lie in a family office or in a foundation. Even when non-family professional managers are introduced, family oversight is required to ensure that these professionals are meeting the family’s expectations.
Occasionally, one or more of the younger generation seem naturally to rise to the level of competence and authority that the family requires. These people acquire the education or experience necessary to run the business, to manage the investment portfolios, or to supervise non-family managers. More often, family members are appointed to positions of significant oversight responsibility without adequate preparation, and they must then struggle their way through, sometimes successfully, sometimes not. At other times, the family’s holdings are sold or divested as a result of a lack of succeeding generation leadership.
The families who succeed recognize the need for evolving and developing family oversight and are able to make things happen in a systematic, effective way.
The Smith family (names and other details have been changed to protect confidentiality) is a fifth-generation family business with three family branches and 30 individual shareholders. Their wealth is distributed between the family business, real estate holdings, and a family foundation. The current CEO of the company is a fourth-generation family member. Several fifth-generation family members work in the business, but none has been tapped to assume the role of CEO anytime in the future. Currently the CEO and other fourth-generation members have responsibility for managing their real estate holdings, providing estate planning oversight, and directing the family foundation.
The fourth-generation family members recognized the need to transition responsibility for oversight of co-mingled assets. They knew they needed to develop a process to manage the transition. From the start the Smiths were able to articulate a mission and a rationale for the succession process. They also understood that the process would succeed only if the fourth generation could ensure buy-in from other family members. The Smiths approached the situation in a businesslike way. They presented their case at their annual family meeting, which helped to reduce emotions and focused their discussions on the relative merits of establishing a family task force to pursue the matter. All family members were invited to serve on the task force; this created a sense of inclusively and was one of the factors in the plan’s ultimate success. The family agreed to reimburse the task force members for all expenses incurred by attending task force meetings.
The Smiths conducted the process up to that point without any outside help. But the process soon became bogged down. Another factor in their success was their ability to recognize the need for support. With outside assistance the task force was able to articulate the following key tasks:
Identifying the family oversight roles that needed to be filled
Delineating training needs
Establishing compensation policies during training and thereafter
Developing an exit policy for family members who wished to separate
Each of these issues was addressed in a systematic way. The task force agreed that a leadership development chairperson was necessary, so a job description was developed for the position and one of the task force members was elected by the task force; another task force member was elected co-chair. They then conducted a “skill gap analysis” for these two positions and began to identify training needs and methods. It was decided that these positions were substantive enough to require compensation and that the entire family needed to be involved in that decision. Task force members then realized that past relationship and communication problems might derail the process as it was moving along. Therefore, the task force recommended to the entire family that a special family meeting be held to address communication and relationship issues in a constructive manner. This move ensured that whatever decision emerged regarding the leadership development process, it would not be contaminated by past events.
Once again, the family proved its unique character. The special family meeting was attended by almost every family member. During this meeting, family members shared stories about their past accomplishments and future goals, to articulate how they wanted to communicate and interact with each other and to identify relationship issues that could be allowed to pass without past hurts being dredged up. By the end of the meeting, the family voted to fairly and substantively compensate the leadership development chair and co-chair.
The leadership development team now had a mission, a method, and the entire family’s emotional support to continue its work. In the following months, family members were surveyed regarding roles and responsibilities that they currently held. A document listing these roles and responsibilities was circulated, and family members who were interested in serving a particular function signed up for that function. The family then conducted a “job fair” to further ascertain the interests of family members, to establish necessary skills, and to identify associated skill gaps for particular people interested in particular positions.
The development of this family’s leaders is an ongoing process that will continue to evolve. The size of the family, the nature of its assets, and its emotional character certainly render this a unique situation, but every maturing business family should understand, in relation to its own unique circumstances, the essential elements of the Smith family’s process: proactive planning, involvement of all family members, willingness to address family issues, and the need to communicate with the family.