The number of ultra-high-net-worth (UHNW) families that now have ‘written constitutions’ to govern decision-making increased sharply, as the financial crisis highlighted the potential for family disputes over risk management strategy, according to research conducted by the Stonehage Group.
The European multi-family office for UHNW families and entrepreneurs, Stonehage, revealed that more than 20% of UHNW families now have written frameworks in place, compared to just a few per cent prior to the financial crisis.
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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 over asset allocations, or the direction of the family business.
Managing director and head of Stonehage’s Family Office division, Andrew Nolan, said:
"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."
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By GlobalDataAccording to Stonehage, 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.
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. They may also take a different view of the relative risks and returns between the business and the investment portfolio.
Nolan added: "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 revealed the constitution is also important in acting as a guide to successor generations.
"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," Nolan said.
