Courtesy of Tiger Lily from Pexels
This blog post is excerpted from the upcoming Passages Issue Brief: Enhancing Your Family Philanthropy with The Family Governance Pyramid. For more information about family governance, please register for our Effective Governance: Principles, Policies, and Practices webinar on April 8, 2021.
Over the past few decades, practitioners and academics from various disciplines have been developing the theory and practice of family governance. Often the primary motivation has been to preserve and enhance the family’s wealth (defined as more than financial resources, but implicitly focused primarily on that) across generations. This approach, while admirable in its aspirations, is not without its limitations. Unfortunately, it’s often an insular exercise with inherent inconsistencies. Nor is it without critics, especially as inequality grows and the wealth gap reaches historic levels. Both these reasons indicate a need for families to look beyond themselves and, to paraphrase John F. Kennedy’s famous words, ask not what philanthropic families need from society but what society needs from them. This is where governance of the family and its philanthropy becomes critical. A family that pays attention and develops family governance and links it to its philanthropy can better help not only itself but also society at large.
What is family governance? Primarily, it concerns itself in with the management of the complex structures, legal and emotional relationships among family members, and the direction in which the family seeks to go over time. A basic dictionary definition defines governance as “the act, process or power of governing; the state of being governed” while to govern means “to control the actions or behavior of; guide; direct. To make and administer public policy for… exercise sovereign authority in…”. The Oxford English Dictionary traces the origin of the word, with reference back to ancient Latin gubernare: “to steer (a vessel), to direct, rule, govern.” The origins of the word provide a powerful metaphor for thinking about governance—it is concerned with movement toward something; that something has a higher end or goal to it. Put simply…
Family governance is the way in which a family guides and steers its collective endeavors.
As a concept, family governance had two main origins over the past several decades. First, lawyers who advised complex families came to understand that something beyond legal documents was necessary if the families they advised wanted to achieve something greater than mere tax savings. The lawyers, and wealth advisors they worked with, who were advising the wealthiest families around the world learned that by creating some structure and process around a family’s joint activities they could help the family bring to fruition the greatest potential not just for themselves but for future generations. The goal was to preserve the welfare of family members and the means to that end was found to be family governance. Second, around the same time, advisors to family businesses, often with training in psychology or organizational development, realized that managing the “systems” of family, ownership, and management in a family business required some form of governance at the family level. This led to family governance as a way of ensuring the preservation of a business across generations.
Over time, these two threads have begun to converge. Today, the need for family governance in families owning businesses, and those with multi-generational wealth, is well accepted by advisors and families alike. Fundamentally, all families live in a governance system. And for the past few decades advisors and academic researchers have been developing what that might look like while families have been experimenting with different purposes and approaches. Family governance today is a field that has gone beyond its infancy; one might say it’s reached its teen years and is bounding toward adulthood. All the while, it still needs some more structure and process both in theory and practice if it is to reach its potential.
The Family Governance Pyramid
While there are many approaches to family governance, the Family Governance Pyramid is unique in the comprehensiveness of its model and the combination of philosophical grounding and actionable processes. The three levels – principles, practices, and policies – in fact parallel the implicit structure of the legal systems in which governance has always been formed.
A family must devote time and energy to understanding and articulating what the family stands for. Similarly, they need to focus on the overarching values and principles that will be reflected in their philanthropic giving programs. The family should agree on a vision statement or otherwise articulate overarching set of principles that provides focus for its philanthropic programs.
Families with ongoing giving programs, whether formalized in a family foundation or not, should consider whether written policies would be helpful to guide the process of their giving. Even in informal giving, it is helpful to define how decisions are to be made and the respective responsibilities of each family member involved. At a minimum, there should be a conflict-of-interest policy, investment policy and a spending (including grantmaking, fees and expenses) policy.
Families should develop a practice of having formal meetings devoted solely to philanthropy. Records should be kept even if there is no formal structure. These will help guide the family along a path of increasingly effective giving. At the beginning, the family might focus primarily on its mission and vision for giving.
Gaining Clarity on Family Governance
Despite the clear origins, metaphor, and examples of governance (from governments), in the family context the term has been used vaguely and inconsistently. One commonly used definition, “collective decision-making,” while helpful, doesn’t adequately encompass the endpoint of governance. Decision making can go in any direction and doesn’t necessarily lead others once done. Another form of definition merely looks at the mechanisms and forums used to govern. In that model, governance consists primarily of entities such as family councils and family assemblies. This too has its shortcomings—most importantly, it doesn’t address “why” those entities are necessary nor does it clarify their purpose.
Without the “why” the “what” and “how” can be meaningless. This brings to mind the timeless words of Mahatma Gandhi:
“Your beliefs become your thoughts,
Your thoughts become your words,
Your words become your actions,
Your actions become your habits,
Your habits become your values,
Your values become your destiny.”
This is no less true for an individual as it is for a family. Governance is the thread through all of these steps.
Patricia Angus is the founder and CEO of Angus Advisory Group LLC.
The views and opinions expressed in individual blog posts are those of the author(s) and do not necessarily reflect the official policy or position of the National Center for Family Philanthropy.