Globally, there are many thousands of family offices, with a big proportion of them being set up in the last 15 years. Many of them are still controlled by the generation who set them up, but a great part of them are expected to transition to the next generation of ownership and control in the next 10-15 years.
It’s clear that many of them have yet to experience passing the baton to the next generation and nor have they experienced doing this at the same time as continuing to prosper as a family office. That inevitably raises the question: How can a family office ensure succession works smoothly?
In my view, the key to be able to do this is for a family office to create a strong set of identities for the incoming family members. This is how it can be done.
The biggest challenge in these later stages is the need to align the interests of family members who might differ strongly in the degree of involvement in the business as well as in their lifestyle and character
For the most part, the emergence of a family office is often closely connected with the development of a family business. Family offices are set up as families receive dividends from their business or the business is sold, or listed.
Therefore, a look at the development of the family company will help to understand the changing role of family offices and how they can develop clear identities. Broadly speaking, family firms go through different stages: from the controlling owner to the sibling partnership and then on to the cousin consortium stage to finally the family enterprise stage.
In the controlling owner stage, the founder of the family business owns and manages the company, then the next generation takes over (sibling partnership) and shares ownership and management duties. With the next generational transition (cousin consortium) multiple family branches enter the business. At this level, questions often arise around what roles the family members have in the business.
In the last stage – the family enterprise one – both the family owners and business have grown, and members of the family probably have diversified into other areas and investments. Usually, at this stage, a family with multiple branches controls a portfolio of business activities.
Often family offices are launched in the later stages of the family business cycle mentioned above, usually when the family owners have enough money to diversify. Nevertheless, a family office can be formed in any of the above stages and move from a controlling owner office (principal family office) to a family enterprise office.
Each of the stages that a family firm goes through brings with it difficulties. In the early phases, the challenge is usually centred on the need to reduce the company’s strong dependence on the founder and to ensure a smooth transition of the operational management to the successors.
In the more advanced stages of a family business, there is a risk that the family will alienate itself from the company and that disagreements and decision-making difficulties within the family will hinder the company’s progress.
The biggest challenge in these later stages is the need to align the interests of family members who might differ strongly in the degree of involvement in the business as well as in their lifestyle and character. The more mature a family business becomes there is more likely to be family members who no longer have an active role in the company. Often, there are family members who live in other countries and work in jobs that have nothing to do with the family business. Family members often lose touch with the family business.
So, family ties often become much weaker than in the early generations of the family business. Obviously, these links become even weaker when the family business or a large part of it is sold. When this happens, the unifying element of the family is gone, and many families lose their family ties completely – or, at least, in relation to a business.
As mentioned above, most of the family offices are likely to transition to the next generation within the next 10 to 15 years. So many may need to address – where this is a problem – the alienation of family members in order to keep them in the family office.
Family offices need to fill the gap and take over the unifying function that was filled by the family business. Effectively, where succession is happening, family offices need to become an organisation which promotes a family identify, especially when there is no longer a family business.
If family offices achieve this, they can – in contrast to external service providers or asset managers – help bind family members together, which will also mean the office is more likely to prosper over generations.
Clearly, family offices vary greatly. Nevertheless, once the family business loses importance for the family, a family office has the potential to create a common identity for family members. The need to create an identity that links the family office and the family is key to creating this common identity.
Here are three ways that can help to create that identity:
- The family needs to know the purpose of the family office
This seems obvious, but, in many cases, might not be. For example, ask yourself: Does each family member know why the family office exists and what services it provides? Is the goal of the family office linked to the family business, or is it completely independent? Is the family office staffed with the right family members and non-family staff? What are the “right” family members and staff to work for the family office? What role does the family office play for all family members? And what role does it provide for the younger generation? These questions need to be asked and the issues that arise from them need to be sorted through.
- The family identifies with investments
Identity can be created by the type of investment the family office makes. In general, a family office should align its investment strategy closely with things family members can identify with. And given this, there is the need to embrace the next generation in investment themes as well. Whether the family office purses impact investment strategies, or follows a more traditional approach to investments, these decisions should be taken in close collaboration with the family members in order to help create a strong identity.
- The family office supports the family to organize itself
Family offices should initiate a discussion about family governance, particularly if there is no longer an operational business linked to the family. Family governance comprises the organization of the family in relation to responsibilities and their wealth. Issues like whether family councils are needed; whether boards or committees are needed and how they are staffed, and which functions should be performed by family members and which by non-family members, need to be sorted out.
Further, family offices can play an important role for the next generation. They know the family history and can share information with family members or teach them different aspects of wealth management. Family offices might not be able to provide all those services on their own but this can be done through a network of corresponding experts. Family offices are sometimes the first to know about conflicts within families and therefore have a responsibility to address these issues with the family members.
In sum, through clearly defining their goal, through identity-creating investments and even through supporting the family when issues like conflict among members emerge, family offices have the opportunity to fill the identity gap often left by family businesses and become an important unifying force for families.
Sonja Kissling is an attorney-at-law and mediator. She advises family firms on governance and in decision-making processes at Family Business Matters www.familybusinessmatters.ch.