You may have seen the illustration: three kids are trying to watch a baseball game from behind the outfield fence. One of them is tall enough to see over the fence without any help; a second is just a bit too short to see the game, and the third one’s height reaches only about halfway up the fence. The equal approach is to give each of the kids a box of the same height to stand on: in this scenario, the tallest kid can still see the game, the middle kid can just barely see it if he stands tiptoe, but the shortest kid still can’t see over the fence. In the second scenario, the equitable approach, the tallest kid doesn’t get a box (since he can already see the game without it); the second kid gets a box tall enough to permit a good view, and the shortest kid gets the tallest box, allowing him to see the game as well as the other two.
The contrast in the appropriateness of the solutions, of course, is implied in the difference between the words “equal” and “equitable.” Though, in the first example, the solution featured equality (all the kids got boxes of the same height), it didn’t really solve the problem. The second example, however, was based on equity: providing a solution that actually met the differing needs of everyone involved.
Family Office Governance and Unique Family Needs
Many of us tend to think of the words “fair” and “equal” as synonyms. But when considering the varying needs of beneficiaries, founders, and other stakeholders in a multigenerational family enterprise, some important distinctions need to be drawn between the two concepts. Just as each family is unique, each constituent in the enterprise is unique, and those highly individualized differences require careful consideration when designing and implementing governance structures for the family office.
Consider an enterprise in which the founders are grooming a next-generation individual to become the leader of the company upon the founder’s passing. After several years, however, a sibling of the anticipated leader expresses an interest in taking a more active role in the enterprise, which is deemed appropriate by the founder. How should the founder handle the matter of compensation for the two who are now involved with the company? Equality or “fairness” might suggest that they should be compensated equally and also share equally in the decisions for the company. But would that be equitable, considering that the first sibling has already dedicated years to learning company operations, personnel matters, and other intricacies of corporate leadership?
Or, consider a situation where one sibling has been closely involved with “learning the ropes” and preparing for leadership, but another, less interested in directly running the company, has instead devoted themselves to a very worthwhile but separate path: religious ministry, teaching in an underprivileged area, or assisting a medical outreach in the Global South. Both have pursued laudable efforts, but should both benefit identically from the success of the family’s commercial interests?
Finally, consider a scenario where two or more siblings or cousins are engaged in directing the family business, but they possess very different visions, abilities, and leadership priorities. In such a case, how can the enterprise continue to thrive with multiple leaders with equal control pulling in different directions?
Clearly, governance structures in the family office are not “one size fits all.” Instead, while allowing for the efficient management of the business(es), they must also consider the unique talents, inclinations, and acknowledged accomplishments of those who are to benefit from the success of the enterprise. The solutions must also be fair for beneficiaries and others—but not necessarily equal.
Promoting Equity in the Family Office
Solutions to situations like the above, like solutions to most of life’s thornier quandaries, begin with communication. Governance structures for the family office should encompass systematic, organized gatherings dedicated to the open and frank discussion of matters involving succession, compensation, requirements for inheritance, degrees of control, and other sensitive matters. Importantly, no one should ever be surprised by the terms of the arrangements concerning the family enterprise, its operations, its leadership, or its goals.
Though there are many questions that could be included in the communication process, here are some that should rank high in importance:
- What are the core principles that support the common interests of the family?
- What policies or agreements best support the family’s core principles?
- What are the different roles played by various family members and other stakeholders?
- Whose talents, training, and interests best support those roles?
- What are the expectations of each family member?
- How do those expectations support or detract from the family’s core principles?
Similarly, conversations around allocating assets, benefits, and compensation might proceed on various parameters, including, but not limited to:
- Financial value—dividing assets along equal lines initially while recognizing that they can change over time (such as when one beneficiary inherits operating control of a manufacturing business, but another inherits the associated real estate holdings);
- Contribution—based on “sweat equity” and direct involvement;
- Merit—rewarding performance, often market-based;
- Need—recognizing individuals’ special requirements, such as an adult child with severe disabilities.
In fact, some structures might utilize a combination of some or all of the above parameters.
Additionally, it is important for founders or other stewards of family wealth to understand the desires, goals, and inclinations of those who will inherit the enterprise. For example, suppose a founder has two children. One is actively involved in operating the business, while the other is much less involved in the day-to-day. The founder may be thinking that the equitable solution is leaving the business to the one who is most active and bequeathing all of the non-business liquid assets and insurance proceeds to the less-active child. But suppose the active child feels resentful because the other sibling doesn’t have to deal with the stress and risks of the business: no employees, no debt, no competitors, no industry-specific risk—just stress-free wealth. Conversely, the inactive child could also see this arrangement as being cut off from the family’s “golden goose,” wishing for more of a say in the operation of the wealth-generation engine.
The point is, founders and other stewards need to have these conversations with their heirs and other future leaders well in advance of the need to pass the torch, before making decisions based on assumptions that may be incorrect.
Begin with the Goal in Mind
The point of these conversations, of course, is to come to consensus on what constitutes equitable treatment for the stakeholders: deciding who needs to have the tallest box to stand on. Once that consensus is reached, it is much easier to develop governance structures that deliver the intended and needed results. Those structures should then be formalized in writing and distributed to all family members involved.
It should also come as no surprise that as families evolve and change, governance structures will need to do the same. What was fair and equitable in one generation may be less so, one or two generations down the line. So, the structures should allow for periodic review and amendment, when necessary.
It is likely that almost every family has stories about how wealth and inheritance matters created strife, some of which may have lasted for generations. Certainly, this is not what any family desires, and the best way to avoid it is to have proactive, structured conversations about what constitutes equitable treatment in the control, benefits, and distribution of family wealth.
As a fiduciary wealth advisor in its third generation of family leadership, Rothschild Wealth Partners is well-positioned to serve as a resource and guide for those building or maintaining multigenerational family financial legacies. If we can help you find answers or ask the right questions, we would appreciate the opportunity.
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