Making a success of succession

Effective family decision making and good governance are essential to protecting wealth from one generation to the next says Vistra Jersey’s Marc Farror.

LIKE ALL BUSINESSES, family businesses need to deal with a diverse range of challenges which typically include reacting to market turmoil, cash flow pressures, retaining the best management talent and driving international growth. Without doubt, though, the most critical challenge involves generational change.

Within the trust world there are countless stories of families who create wealth through an entrepreneurial individual and loose it again within three generations. Often the wealth creator can directly influence the second generation, their children, to be frugal. However, whilst the children may be careful, they may not always be as expert at creating wealth as their parents.

Very often, the children will manage to maintain the status quo, and keep the family wealth static. However, given inflation and the increasing cost of living every year, maintaining the status quo can often mean that the family are gently eroding their wealth in real terms.

When grandchildren arrive, they may be born into wealth and may not always have the same discipline that was instilled into their parents. If few family controls are in place, this can sow the seeds of disaster, as some might feel it is acceptable to go on to spend the family fortune with largesse. Under these circumstances, it really is only a matter of time before the majority of the wealth is eroded.

Making a success of succession is not by any means impossible and there are large numbers of high profile families who not only protect their family wealth, but manage to actively grow it from one generation to the next. So the question is, what distinguishes the family who diminish their wealth from the family who actively manage to grow their asset base, and how can the trust industry contribute to the key area of succession planning?

Effective family decision making and good governance is certainly at the core of this discussion. Family governance is a well understood concept within larger families and structures, such as trusts which can be used to ensure a detailed and recorded family governance process is in place and implemented by all the family. Where good governance is created for families covering the way they operate their businesses, it can also impose similar disciplines that are used in statutory corporate governance for a PLC.

Governance helps determine how, when and by whom decisions are to be made. It helps resolve disputes within the family and also how to resolve differences between the family and a trustee, all of which can impact upon the preservation and growth of the wealth. Good governance, then, lies at the heart of effective succession planning and it is an integral part of wealth structuring.

Education in its broadest sense is another factor. Education should not be limited to formal processes but rather, business oriented families need to establish their own values and be clear about what those values are, if they are to be handed down. Whilst today it might sound odd to try to codify such ideas, for the entrepreneur thinking ahead to future generations, it can be useful to see basic principles written down in the context of the running of the family business. A trust structure can provide the perfect backdrop to achieve this.

Emotional education can also be extended to ensure the family is at ease with itself when it comes to laying down rules on how to look after family members, particularly those who might be vulnerable, such as children or aged family members, and having in place a process for resolving disputes and aiding decision making in the best interests of the business.

Some protocols which straddle family and business may also be beneficial, for example, rules about what education and experience is useful for family members to bring to bear on the family business. Many families who run their own office prefer family members to have worked for a significant period in, for example, the investment industry prior to entering the company. In the more successful family dynasties there is a direct correlation between effort (in the family business) and reward.
Outside of the company, having an awareness of and policy towards philanthropy can pay dividends. Whilst it is not essential that families give to charitable causes, philanthropy certainly is a proven way of engaging members who are not core to the business, and providing a worthwhile outlet for their energies. Philanthropy also has the added advantage of improving the profile of the family.

Establishing open channels of communication can help eliminate divisive behaviour, the same can certainly be said of communication between trustees and individual beneficiaries. One of the perennial problems that trustees face is how much information they should pass to beneficiaries.

On a practical basis it perhaps makes sense for trustees to engage with beneficiaries as early as possible. This allows the younger beneficiary to understand, over a period of time, why and how decisions are made. In addition, they can develop a better comprehension of how investments work and what the family’s investment strategy is. Generally, this dialogue builds a greater appreciation of the role that the trustee actually plays on their behalf.

For the family seeking a successful succession strategy, a wide range of structures exist which can be adapted to suit the most complex requirements, crossing continents, religious and cultural boundaries. Trusts, foundations, private trust companies and sharia structures can all have a role to play in this context.

Planning education in its broadest sense and the use of appropriate structures and investment strategies can all be combined to create an environment to enable a family to prosper and both keep and create wealth, but care and attention to detail are essential, if the business is to flourish. Good governance both within the family and between the family and trustees lies at the core of an effective succession strategy.

Marc Farror TEP, is the private client and family office director of Vistra Jersey Limited


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