FAMILY GOVERNANCE

Jason Howell |

You have something in common with Mark Zuckerberg; Bill Gates; the Waltons of Walmart; the Rockefellers of today; and the Queen of England. That something may just change your perspective on what's possible for your life and the life of your family, for generations. The rich don't get richer just because they're rich. The rich get richer because the rich get help. And they have for centuries. Let me tell you a story about Family Governance

As a new father five years ago, I had been on the lookout for best parenting practices, along with the best advice for co-equal management of the family household with my wife. There are bits of guidance provided by our Christian religion; social norms exhibited by fellow parents at our kids’ daycare and school; and of course the pristine U.S. model of the 1950s-1960s “traditional” nuclear family. I initiated deep, sometimes-awkward conversations with my clients; some of the best people I knew. I would ask about how they spent their time: from running their households (chores) to scheduling leisure activities (hobbies), what their family values were (knowing they likely weren’t written down anywhere), and when they the principals (parents) made time to talk about money. What I came to learn is that even my highly curated, successful families - the ones financially capable and well-balanced enough to hire a financial planner - each managed their family life differently. Both personally and professionally, I still wanted to identify a repeatable system of family life management that consistently led to success.

A LITTLE HISTORY

The history of family governance, outside of the ultra-high-net-worth families, is not well documented. Most experts in the field define the use of family governance as a system for managing the distribution of family assets; particularly from a family business or a extraordinarily high value estate. Only at the point of immense wealth do the 232,000,000 business results from an internet search start speaking to the need for a structure; one for distributing values along with the wealth.  The Family Business Institute divides family governance into two broad topics: governance of the business and governance of the family. While this may point old-school wealth management firms to a highly profitable target market - serving ultra-wealthy family businesses - I believe there's a great social opportunity available when applying a family governance system to aspiring high achieving families. Those families are the focus of Jason Howell Company and make up many of the client families we serve. Before I get into the weeds of the family governance concept, it may be helpful if I first get back to talking about the successful families who have used this very system. 

WHO

Family Governance as a concept is not new. It is a strategy that goes as far back as The Roman Empire, beginning in 27 BC, and headed by Gaius Julius Caesar Octavianus (aka Julius Caesar).  Nearly 25% of the world’s goods and services were produced by Rome, and most of the assets were owned by Caesar. Major wealth accumulators like Caesar (or the Emperor of China and the King of Timbuktu hundreds of years later), all worked with small teams, akin to what we now call a family office, that managed their resources.

A more familiar - the most familiar int the world - family with a centuries-long family governance structure is the House of Windsor, the current royal family of the United Kingdom. That family’s wealth is managed by a Sovereign Grant from the “Crown Estate,” or property held within the United Kingdom. Though it has varied over the years, 15% of Crown Estate’s profits are paid to Queen Elizabeth II annually (about 82 million pounds). This arrangement goes back to 1760, part of a compromise between King George III and the UK Parliament to have a fixed amount of income to the monarchy be managed by the House of Commons. By law, the Queen is not required to pay taxes (though she apparently does voluntarily). This Sovereign Grant or Framework Agreement is the essence of family governance: rules around how wealth is to be managed according to values established generations before. 

John D. Rockefeller is (still) considered the wealthiest man of all time thanks to tricks associated with is Standard Oil Company during the "robber baron" days of the late 1800s and early 20th century. When Rockefeller died in 1937, his wealth was at $255 billion.  He had managed this wealth with a then pioneering organization called a "family office" which usually precipitates the application of family governance. This "office" - replete with employees - was set up exclusively to manage the family's wealth through trusts. (These "family office" structures are known still today as the only catalyst for creating a system for family governance. See this "family office guide" for one current example). In 1911 the Supreme Court broke up Standard Oil Company into 34 firms for competition's sake but those firms have mostly consolidated since into ExxonMobile.  David Rockefeller, Jr. says the breakup of the company, rather than hurt the family, actually helped. As of 2016 the family is collectively worth approximately $11 billion and is entering its 7th generation of wealth. In a world where most families lose there wealth in a global wealth phenomenon called "shirtsleeves to shirtsleeves in 3 generations," the Rockefellers have thrived. How? That's what I wanted to know and what led me to identifying what I think family governance actually is. 

WHAT

After some research, I initially defined family governance as, 

“The wealthy family’s system for nurturing values, traditions and wealth that is passed on to the next generation.”

In that kind of definition, owning a family business was not a prerequisite but having wealth (of values and/or money) was. Wealth has a complicated history of its own. Over time, it has been concentrated among the few, usually handed down successfully over at least two or three generations before being unintentionally squandered or lost. This is the "shirtsleeves to shirtsleeves" concept that worries so many families that have "made it" only to see their hard work squandered by the time they are grandparents. 

Admittedly, when I first rolled out family governance to my clients, I was looking for was a way to harmonize the idealized financial life we were building together with the regular world they had to live in. I wanted to uncover a kind of kitchen-table family governance that would work with both younger and later adult children. Even though I still seemed to be only grazing the surface of what a successful financial life looked like beyond the numbers, I knew I was asking some of the right questions. I soon found that there were people, made up of mostly ultra-high-net-woth families, who had a grasp on the communication, the life skills, and the financial world we live in. And they had that luxury because they were getting instruction from a myriad of advisor/consultants who specialized in the vague subject of "family business consulting." I wondered why this couldn’t be translated to families with smaller businesses; or no business besides the business of family. I decided the reason was merely a lack of imagination. These best practices and their harmonizing effect should be and need to be articulated for all of our families. In fact an argument can be made that the common regular-net-worth family needs family governance more than any ultra-high-net-worth family. I believe we can transform ambitious regular-net-worth families to at least high-net-worth families - $5 million net worth or more - within one generation. 

To do that, we can't just longing look up to "the wealthy family's system," but instead grasp onto another definition, akin to a more "kitchen table family governance" readily available to all of us:

"Our system for creating high-net-worth and high-self-worth for each of our families, for generations."

To translate family governance for regular net-worth families, I had to do some experimentation and some reading; some of which I am sharing here. Unlike a magician, I am happy to share a few of the tricks (or research) of my trade . Below are a five (5) resources in the form of books where you can draw your own conclusions about family governance:

  1. Seven Stages of Money Maturity by George Kinder
  2. Wealth of Wisdom by Tom McCullough and Keith Whitaker
  3. How to Keep Your Family Connected by Mitzi Perdue
  4. The Opposite of Spoiled by Ron Lieber
  5. JOY of Financial Planning by Jason Howell, CFP® (yes, that's me)

Kinder's Seven Stages of Money Maturity does a great job of highlighting inner conflicts about money. Naturally these inner conflicts become outer conflicts whenever "two or three" are gathered hence one of the biggest reasons for divorce (fights over money). Kinder discusses in the book the impact of first finding out you are wealthier than some and poorer than others. He asks what that moment meant to you. He also speaks to the untested money beliefs we have called "innocence" and the testing of those beliefs he calls "pain." It's a book that will help you navigate the emotional part of family governance; or at least get you started.

In Wealth of Wisdom, the authors do a great job of curating thoughts from other researchers and scholars. This book will lead you to other books on how the wealthy manage their values, traditions and family structure. The author clarifies that these values aren't ever really "taught," but rather are "caught" by the actions of the parents (founding members). What stands out is that wealthy families (obviously) don't worry about financial independence for their children; they instead worry about their children's actual independence. They also worry about how to provide their children experiences that shaped their own successes; this so the list of family accomplishments continue to grow. It is a guide for ambitious families regardless of where they land on the net worth hiearchy. 

Most people don't know who Mitzi Perdue is or the family she comes from. A good guess is that her money comes from the Frank Perdue chicken empire known as Perdue Farms. In fact, Mitzi was Franks 3rd wife before his death in 2005 but Mitzi was first a member of the Hendersons. In 1944 Mitzi's father Ernest Henderson and his business partner were buying and merging hotels when they came upon the Copley Plaza Hotel. That purchase, along with others, soon became the Sheraton name brand we recognize today. A New York Times article published in 2017 does a great job of describing what Mitzi would say were both family's smartest decisions: putting great effort into being strong families that passed along their values. 

Ron Lieber's Opposite of Spoiled is a wonderful book that helps to answer tough questions from your kids: Are we rich? Poor? Why is that person asking for money at the stoplight? Why didn't you become an investment banker like my friend's dad so we could on better vacations? It also walks through thought exercises for how to instill perseverance, patience, gratitude and many other positive qualities in your kids using money. I'll always remember the book for confirming that every conversation about money is essentially, a conversation about values. 

In my book, JOY of Financial Planning, I focus the first of 7 strategies on the history, background and application of family governance as a practical concept. Although I touch on the traditional definitions, I make an effort to describe a kind of kitchen-table family governance. This version allows an ambitious family to identify and raise their standards for future generations. 

HOW

One reason that family governance has been relegated to the ultra wealthy, is that it takes time to implement and execute. Kitchen-Table family governance is rarer still because parents of children under 18 years old - who would still be sitting at the kitchen table - are busy! Traditional family governance takes a traditional patriarch or traditional matriarch of the family to get it going. It is typical for that person to be the cornerstone of the entire, extended family; this is the "founding family member." When I wrote my book, I crafted an extended definition of family governance that included those founding members:

"The system for creating family harmony, preserving family history, and nurturing family values and wealth through the purposeful structure and stewardship of the founding family members."

Our most precious recourse is time. The wealthy don't have any more than anyone else and neither do their advisors. The firms that are willing and able to service the ultra-high-net-worth have to be willing to spend a lot of time with the families. Since every family is different, serving families by helping them identify, write, nurture and institutionalize their family standards and values takes a lot of time. The product sales and commission industry in financial services is nearly 10X larger than the advice industry because most financial firms can't or won't invest all of that time on families.

What takes all of the time in creating a system of Family Governance? Asking a series of questions that our firm has broken into 7 steps.  

 

7 STEPS

Yes, there are actually 7 distinct steps towards a building a system of Family Governance for just a family and/or a family business.  

 

STEP 1: Tell Your Family Story

This is the George Kinder part of the process where getting to know who you are, what you believe and challenging those beliefs becomes a thing. It can only be done through discussion, thought and deep listening. Here are examples of some questions:

  • What did your parents/grandparents teach you about money?

  • What phrases did you overhear about money as a child?

  • How much value do you place on money in your life?

  • How hard has it been to save money over the years?

  • What was your most successful financial moment or year?

  • If you could go back, what one financial change would you make from your past?

Depending on how old your children are, some or all of your discussion should be shared with them. This doesn’t need to happen all at once; most parents I know drop little stories about themselves over time. (Usually, it follows, “When I was your age…”) I am not qualified to judge how well those piecemeal revelations work, but as a fellow parent, I know I want to be more intentional. Begin with the end in mind when it comes to building your family governance system: tell your family story. If your children are old enough, have them start writing theirs.

 

STEP 2: Identify Your Current Habits/Lifestyle

Maybe you talk about money frequently, maybe you do not talk about money unless it’s an emergency. Identify what you and your significant other are doing now. Stepping back, without judgment, to talk about what you actually do when it comes to money is the next step in determining what you ought to be doing. Start with some of these questions:

  • Who earns money for the household and why?

  • Who makes the spending decisions and pays the bills for the household?

  • Who makes the long-term saving decisions in the household?

  • How do you handle financial disagreements? Are there “ground rules?”

  • If someone is earning an allowance, what does it represent?

  • How has charity or posterity influenced your financial decisions?

 

STEP 3: Reveal Your Aspirations

Most families don't have financial goals, they just have goals. After you share some of your family story, write about your aspirations - short-term and long-term.  Feel free to write down aspirational goals that seem improbable. Use this step to observe how directly or indirectly your current money habits are supporting your aspirations.

  • What does financial freedom mean to you?

  • What would you do with your time if you didn't have to work?

  • What do you want money to do for you and your family in 10 years?

  • Who is best suited to track the day-to-day finances vs. long-term planning?

  • What specifically do you wish to teach your family about money?

  • What do you wish your family understood about you and money?

 

STEP 4: Draft Values and Mission Statement or Motto

After writing your stories, what you have done, and where you intend to go as a family leader, forming your mission statement and family motto will come a lot easier. The values represent how you hope each member of the family treats each other and what you want your last name to mean in the community. You can get as detailed as you like here, but brief missions are more easily remembered (hence writing a "motto" instead is a viable option). Sometimes one word can mean so much. It’s why mottos stick, while mission statements just stick on a wall.

  • What words/phrases did you see repeating?

  • What values would you like your family to be known for?

  • What values would you like to pass along to your kids?

  • How will you commit to exemplifying your important values?

 

STEP 5: Drafting the family narratives

Having each member of the family patch together the family stories into narrative form is as much a thinking exercise as it is a writing exercise. This is where each spouse or child may start creating the "story" of their family that includes the past, present and future. This may take the longest amount of time because you and each family member are literally writing short essays to compare, contrast and consolidate. Here are the prompts for how you get started:

  1. Family STORY: “When I was younger…”  

  2. Actual CURRENT financial lifestyle: “I see a lot of…”

  3. Personal ASPIRATIONS: “I would like money to…

  4. Ideal STANDARDS and family culture: “As a family we believe in...”

  5. Mission statement or MOTTO: “Our family mission is to…”

 

STEP 6: Create space for family meetings

As you may be able to tell, this is deep stuff. If your family is "doing it right," each of the steps will take 30 minutes or more. If your nuclear family is just two of you, then you two can become the new Patriarchs and Matriarchs of the family and share your vision with others in the future. If you have children, how do you find time in an already busy schedule to reinforce values?  You create space.

  • During the daily commute (not every day)

  • During meals

  • When the kids are napping

  • Date Night (I know…)

  • Family trips/vacations

  • Family reunions (long term)

 

STEP 7: Draft a Family Constitution 

To draft the ultimate document that you and your family will follow and amend over time, will take some time. Traditional family governance structures define a "family council" that is in charge of the process but this is your family; a separate "council" is not necessary until you have multiple adult family members involved. You can be as formal or informal regarding the review of your Family Constitution  as you would like. Note that likely none of your neighbors are putting themselves through this crucible of creating a family governance system; but you were never really like your neighbors. Here's how your family may outline the elements of your family constitution:

  • Outline the roles and responsibilities of each family member

  • Document how often the family will meet (decisions, goals, etc.)

  • Describe how financial decisions will be made and by whom

  • Outline how to resolve arguments and family “consequences”

  • Decide when  3rd party professional is used (i.e., advisers)

  • Create a reporting mechanism (style, frequency, distribution, etc.)

 

SUMMARY

The more I spend time researching family governance and applying that research to clients (and my own family), the more I realize how it impacts every stage of financial planning. In my book, I highlight 7 Strategies for Transforming Your Finances and Reclaiming Your American Dream. The very first strategy is working through the challenges of implementing family governance. By making decisions about how you want to live today and how you want to live tomorrow, family governance can actually make decisions around tax planning, estate planning etc., a lot easier. Having a solid system of family governance can help you make intentional decisions around the other six (6) strategies I, and many other comprehensive financial advisors focus on:

  1. JOY of Enough (Earning, Spending & Taxes). When deciding whether to take a promotion/new job that increases your time away from family; spend on nights out; pay for tax planning

  2. JOY of Balance (Cash, Credit and Debt). When deciding upon a new car vs. used car vs leasing a car or buying a house versus renting

  3. JOY of Safety (Risk Management). When deciding about how much life insurance to get and for how long; or whether to buy a general liability policy

  4. JOY of Legacy (Estate Planning). When deciding how much to leave to charity (non-profit causes) vs. posterity (kids) or whether to build or sell a family business

  5. JOY of Opportunity (Investment Management): When deciding how much risk to incur in the markets and whether to invest in securities at all

  6. JOY of Time (Retirement Planning). When deciding what your retirement will look like; whether you will work more, travel more or volunteer more

This intentional family governance structure preserves not only the financial wellbeing of the family, but the culture and relationships up and down the family tree.Beyond wealth, family governance is a long-acknowledged cornerstone for family safety and longevity. It is something I imagine that the Waltons, the Kennedys, the Bushs, the Mars family, and many others have known about all of these years. At a time when our political, religious, and even academic institutions are struggling, each of our families need to create their path to making an impact on society. 

I am building that cornerstone for my family, the Howells. Now, it’s your family’s turn.

 

Jason Howell is a CERTIFIED FINANCIAL PLANNER™ professional, former U.S. Congressional candidate and President of Jason Howell Company. With an emphasis on developing high-net-worth families through family governance, the Jason Howell Company develops parents into future patriarchs and matriarchs. Jason is also the the author of JOY of Financial Planning: 7 Strategies for Transforming your Finances and Reclaiming your American Dream.​

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