Written decision-making frameworks have become increasingly important for UHNW families over the last few years to prevent disagreements on asset allocations, or the direction of the family business
London, April 5, 2013 – The number of ultra-high-net-worth (UHNW) families which now have ‘written constitutions’ to govern decision-making has risen sharply as the financial crisis has highlighted the potential for family disputes over risk management strategy, according to the Stonehage Group, the leading European multi-family office for ultra-high-net-worth families and entrepreneurs.
Stonehage says that more than 20 per cent of UHNW families now have written frameworks in place, compared to just a few per cent prior to the financial crisis.
According to Stonehage, written decision-making frameworks – or constitutions as they are commonly called – have become increasingly important for UHNW families over the last few years to prevent disagreements on asset allocations, or the direction of the family business.
Stonehage says that one of the most common dilemmas for UHNW families is when the family business looks to fund itself from other family investments, which were expressly set aside to diversify the risks and to provide for family members not involved in the business.
Raiding the Portfolio
Many family businesses have experienced cashflow problems during the down turn and, with external sources of funding sometimes hard to access, the temptation to ‘raid‘ the investment portfolio is often difficult to resist.
Stonehage explains that the family business often involves a minority of the family. Other family members may well have different priorities, and take a different view on how much capital should be allocated to support the business, especially when economic conditions are very uncertain. They may also take a different view of the relative risks and returns between the business and the investment portfolio.
Andrew Nolan, Managing Director and Head of Stonehage’s Family Office Division, comments: “A rapidly growing number of UHNW families now have written documents of this kind, whereas before the financial crisis decision-making would often have been largely ad hoc. As decisions about how family assets are used become much more contested, these documents are proving invaluable.”
“The recession has put pressure on some family businesses, with many experiencing cashflow difficulties. A well drafted constitution is of immense value in such circumstances, because it defines the purpose of each of the main family assets and the decision making processes involved, before one asset can be used to help support another. It is particularly important to protect the interests of family members who are not directly involved in the business, whose voices may not otherwise be heard in the middle of the storm.”
He adds: “Getting the balance right can involve very delicate negotiation, and having a codified set of rules can make that process much easier to navigate.”
Stonehage says the constitution is also important to the management of the succession and acts as a guiding light to successor generations. In such circumstances, a written framework can be vital to resolving leadership and strategic disagreements quickly and amicably.
Andrew Nolan says: “The younger generation are often more individualistic and less duty-bound than their seniors. Whereas previous generations might all pull in the same direction, younger generations can have quite disparate goals, which can be difficult to reconcile with the overall interests of the family.”