Governance issues are most apparent in wealth management for a large family, and particularly for illiquid assets such as an active business.  In those circumstances, younger family members can become, in a sense, involuntary investors in the enterprise.

Governance issues arise in many other contexts as well, such as in the management of a philanthropic mission or in succession planning for investment funds where continuity may depend upon preserving the effectiveness of a small circle of individuals who are actively engaged in management.

In each of these contexts, successful governance requires both continuity and flexibility, which usually depends upon preserving not only the right of a small circle of individuals to make decisions, but also the willingness of a large group to accept those decisions.

Successful governance does not occur spontaneously.  The experiences of our clients indicate that foresight and attention to certain principles are likely to foster successful governance.

Corporate Model.  The corporate model is the best starting point for structuring the various roles of group members, investment office employees and outside advisors.  This model, rather than the trust or partnership model, makes it easier for people with different skills and perspectives to work together and tackle the strategic, operational and administrative aspects of management.

Board. The substantial assets of a large and wealthy family are best managed through one or more legal structures that can be governed by a board consisting of family members, close associates, and trusted advisors.  Institutional trustees play an important role, but cannot substitute for the best judgment or strategic thinking of this board, with its blend of perspectives.

Peer Review.   Periodic peer review of a management system can yield very positive long-term results.  Peer review encourages vitality in management, promotes confidence in succession plans, and reduces the risk of abuses of power.  Peer review should provide a commentary and perspective to owners and managers, rather than a scorecard or audit.  In selecting the reviewers, keep in mind that a review by persons who are predisposed to criticize, justify their efforts by finding fault, or promote their own self-interest can be counterproductive.

Personal Liability.   Members of each governing body, including directors, trustees, and advisors, should be adequately protected from personal liability through a combination of insurance and legal arrangements.  The availability of appropriate insurance varies greatly depending on the exact context, but is almost always a challenge of some degree.

Statement of Principles.   Governance must allow an organization to adapt to change without abandoning its founding principles.  Much like the traditional model for a public governing body, legal structures for wealth management should generally follow a pattern or model that includes, in binding legal documents, a meaningful statement of founding principles.  This statement serves as the constitution and encourages adherence to the original purposes and values.  It also provides continuity of purpose throughout years of amendments and adjustments.

No Boilerplate.   Whether applied to a personal trust or a charitable foundation, this constitutional statement of principles must be rich in content, dealing specifically with long-term objectives for the use of funds.  It should reflect the values and purposes of the particular case, and not simply repeat empty terminology and legal jargon.

Operating Plan.  The structure also needs an operating plan.  Individuals, serving in various roles, can be empowered to develop, spell out, and change the operating plan from time to time.  This governance model can also provide room for amending the statement of founding principles for compelling reasons, subject to certain checks and balances.

The Dead Hand.   The view that one generation should not control the agenda of future generations “from the grave” is only half-right.   The details of an operating plan for a personal trust, investment vehicle or foundation will surely become outdated.  Yet, this does not mean that continuity is a meaningless or impractical objective.  Founding principles can be preserved, and management succession improved, if the structure follows the model described above.  There is no empirical evidence that a well-conceived, legally documented governance plan will outlive its usefulness.

Informed Participation.   When dealing with these issues in the United States, we should not forget that our culture was founded on the belief that governance gains its authority from the consent of the governed.  This explains our cultural focus on individualism and fair process, which is evident in our heavy reliance on courts to protect individual rights and settle disputes, and in our expectation that free markets and full disclosure will generally provide financial justice.  This focus on individualism and fair process needs to be considered in fashioning a governance plan in the U.S. for private wealth.  A plan is more likely to fail in the long run if it is based entirely on command and control from the founders or management group.  The plan is more vulnerable if it presumes consent and satisfaction without communication, or if it completely divorces ownership from control, or discourages informed participation.  Such a plan is more likely to provoke resort to open conflict, lead to atrophy through lack of interest, and eventually end in failure.

Dialogue.   If management produces good results, this outcome will be meaningless unless the “ owners ” who are not involved in management understand the good result.  At the same time, a shared understanding of risks and rewards, and successes and failures, will be harder to achieve as the circle of owners expands.  Quite naturally, as the ownership group grows larger and more diverse, management and control will become more centralized, and the common ground of shared experience and knowledge will shrink.  Regular, deliberate, and active communication, evidenced by dialogue rather than reports, can help rebalance this trend.