Why form a council?
It takes guts to amass a fortune; guts, confidence, and well, let’s face it, hubris. These same qualities which make success possible act as a double-edged sword within a family setting, because the hubris and power of successful family members may silence others in the family. How, then, can a wealthy family stay united in purpose? How can you counteract the natural tendency of wealth to dissipate over the generations? The answer is simple: form a family council.
Moving from a traditional way of doing things to working within a family council may seem like a daunting task, but with the right guidance and encouragement, the organization of such a council is not only possible but deeply effective. By involving all family members and listening to what they say, the family council provides a beacon of understanding in decision-making processes that may have formerly been exclusive and relied on the judgment of only a few select family members. It is important to understand what a family council is for. It is not a board of directors. It doesn’t make decisions about shareholders. What it does is provide a vision and a guiding set of values, based on consensus, to unite family members.
The Tenth Man Principle
During the council, each voice has equal weight, and each family member must have the opportunity to speak. This is one of the central points, really, of the family council. The first point is to hear all of the voices. What you also need to consider is the dissenting voice. The tendency is always just to silence the dissenting voice. Sometimes these voices have a very good point that needs to be addressed. The others in the majority will say, “it’s because you’re too young/ too old to understand this.” You have to apply the so-called tenth man principle, where you look at the most unlikely event, take it as a given, and work on risk management from there based on that premise. That can give you insight into where you may be blindsided by groupthink. The majority of the group may have one idea, but that one dissenting voice may point out a risk or possibility you may not have seen. With the tenth-man principle, you work your way through that lens, which may point to risks you have to manage. The family council is more about managing groups and groupthink and forming a consensus to form a better, more risk-aware decision.
Unity and togetherness
Within the family council meetings, you also form a sense of togetherness. The togetherness is also there to keep the wealth together. It’s easy for the first generation, more difficult for the second generation, and downright improbable for the third generation to keep the wealth together in one fund. However, it is worth the effort: keeping the wealth together is advantageous because you will have higher performance and lower risk, due to the scaling effect of the wealth. You can counteract the tendency towards splitting the wealth and having each family member go their way by implementing, practicing, and living the family council idea. It needs to be intergenerational, and become “the way we do these things around here.” It is difficult to set up, but the payoff is very great, and you don’t lose any flexibility. Say you have a client with 5 children. Each child will get 1/5 of the family wealth when the parents pass away. If they do not coordinate with the others, each child will go their own way. Some will stay with their current asset managers, others will hire their asset managers. The funds will then become too small to take advantage of the scaling effects inherent in wealth. The access you get to investment vehicles, partners, etc. If you can keep it together, along with the compounded interest over the years, will give you a significant advantage. What do you do with the inherited wealth? Do you just single-handedly take that and do the same asset management as your parents? The dynamics shift a bit if you invest it in your own company, however, that is seldom the case. If your parents had one big company, the idea of splitting this one company into five will lead to confrontations and endanger the firm, down the line. Then, one party may be forced to sell that company. That’s why it’s important to keep it all together. The living expenses of each family member will be catered for by their entrepreneurial endeavors and/or supplemented by the family fund. By keeping it all together, you can improve on all these outflows. Sometimes you have this question or difficulty that one of the five children is very gung-ho and wants to take on lots of risks, and the others are risk-averse. However, there are good, effective ways to manage these different risk profiles under one roof.
The other big thing that the family council is here for is to establish family values. The family council is guided by these values, and the values give feedback on the kind of abilities that the family council needs either to have or to outsource, to achieve its goals. If you say you want to support educational purposes, the question goes back to: how would the family council support this philanthropic idea? One idea is to say we have this external charity, do we have the ability within the family council to think about these things and point out which direction it should go? Do we have education within the family? If we don’t have it or can’t develop it ourselves, who can we bring in from the outside to aid us?
A hands-on approach to philanthropy leads to a better chance of consolidation of goals and unity. Coming back to the 5 C’s: Curiosity, Commitment, Courage, Capability, and Confidence… usually, it’s the eldest in the family who is very much like the entrepreneurial parent, whereas the younger children are not that interested in business. There then gets to be an internal rivalry between the eldest child and the younger children, where the younger children are then accused of resting on their family’s laurels and being too dependent on the eldest child. The hands-on approach to philanthropy can access the unique abilities of these other family members, so that advances can be made in philanthropic and cultural purposes as well, such as music, arts… or anything to support the values of the family. Within the family values, you should find what is very important to the family members, the shared or uniting commonly agreed-upon principles that guide the family. Usually, it’s education and social aspects, and not making money. Very few people would say “the purpose of life is to make money.”
How does a family council work?
In its simplest form, the family council is a gathering of family members. Age and availability will be a bit of an issue. Ideally, you wouldn’t necessarily do this at the kitchen table, but you would have a dedicated time frame where you get yourself out of your usual surroundings and in a workshop-like environment, work through the issues. We provide this template and organization in our family council module. It should be done with an advisor on hand, to be a facilitator and moderator. How often? At a minimum, they should take place once a year. Due consideration must be given to the fact that family members may have to travel from far away to have a family council meeting, so it might only be possible once every six months or once a year. You can coordinate the meetings with family council video calls once a quarter. Ultimately the question is, how often do your children want to see you, and how often do you want to see your children? It’s an individual decision about how often these meetings should take place. You need to define milestones along the way, to see if everybody is working together in the same direction. You do need to have a ramp-up phase, so in the beginning, you might have it once a year, and once people are acquainted with it, ramp it up to twice a year or three or four times a year.
Unique abilities and the 5 C’s
Coming back to unique abilities, what are those abilities? How can we leverage those strengths? From a family council perspective, you can imagine that a family can measure itself against other families, map what you do against what they do, and have an outsized impact on an issue by doing something completely different from all the others. By going through the 5 C’s of a philanthropic purpose, you can have a much deeper impact on a particular issue than if you just hand over a check, and that’s it. How can you take one dollar of our money and turn it into ten dollars of value for education? There’s a lot you can do in terms of media attention etc., that can make an issue more visible to the public and magnify the effects of your giving tenfold if you take a more active approach to philanthropy.
Keeping wealth together over generations is not only possible but can be a rewarding and bonding experience for everyone involved if the process is managed by a family council. The family council is not there to make decisions that will affect shareholders; rather, it is a unity-creating beacon that strengthens the purpose of the family as a whole, by validating each family member’s point of view and being sure that all voices are heard and the points they bring up are discussed. This can most effectively be done with the guidance of experienced financial mediators.
If you are considering forming a family council, contact The Cecily Group for a personal appointment.
A family council is a group of family members who come together to discuss important matters related to the family’s wealth, philanthropy, and values. The council is designed to provide a forum for all family members to have a voice in decision-making, promote unity and togetherness, and create a shared vision and set of values for the family. The council can help prevent the natural tendency of wealth to dissipate over generations by involving all family members and listening to their perspectives. The council operates differently from a board of directors, it focuses on aligning the family on shared vision, values, and goals. The “tenth man principle” is also emphasized in the council, where dissenting voices are heard and taken into account, to prevent groupthink and manage risks. The family council aims to keep the wealth together, which can lead to better performance and lower risk due to the scaling effects of wealth. In this way, it is a way for the family to manage wealth, philanthropy, and values in a cohesive and intergenerational way, that brings families together and makes decision-making more inclusive and effective.