In financial reports, key performance indicators (KPIs) are essential tools for families and family offices managing multi-generational wealth. These metrics offer critical insights into financial health, performance, and risk, enabling informed decision-making and alignment with long-term objectives. For family businesses and offices, KPIs bridge financial clarity and strategic planning, to ensure that wealth preservation and growth are sustainable across generations.

According to Anirban Bose, Financial Services Strategic Business Unit CEO at Capgemini, “The industry is experiencing a leapfrogging of digital adoption and a fundamental shift in customer expectations. The new age of investors is increasingly digital-first, demands access to a wide array of asset classes, and is ESG-conscious. Investors today want to take charge of their wealth management journey and demand intelligent insights into their investments” (Capgemini, 2024). Amongst increasing complexity, acquiring data alone does not provide a sufficient basis for financial decisions. Advisors need to develop a sharper focus on KPIs to deliver valuable insights.

Why KPIs Matter

KPIs in financial reports provide families with a structured way to measure success, mitigate risks, and make informed decisions. For family offices, these indicators are crucial tools for achieving financial clarity and transparency, as they offer a comprehensive view of performance, liquidity, and risk exposure.

Recent research demonstrated how KPIs improve decision-making in family businesses, identifying logistics systems, liquidity management, and cost control as priority areas for KPIs (Kowala and Šebestová, 2021). Well-defined metrics ensure better resource allocation and strategic alignment.

For family offices, KPIs serve three core purposes:

  1. Performance Measurement: Monitoring portfolio returns and assessing the success of financial strategies.
  2. Risk Management: Identifying vulnerabilities and implementing mitigation strategies.
  3. Strategic Decision-Making: Guiding decisions on asset allocation, tax planning, and long-term investments.

Frameworks for Designing and Applying KPIs

Stewardship and agency theories provide valuable frameworks for designing and applying KPIs in family businesses. While stewardship theory aligns with long-term reinvestment and legacy-building, agency theory ensures accountability when external managers are involved (Kowala and Šebestová, 2021).

Stewardship Theory-Based KPI Designs

Stewardship theory emphasises the role of managers as stewards, driven by loyalty and shared purpose. This framework aligns with family businesses that prioritise long-term goals, sustainable growth, and legacy preservation. Metrics such as reinvestment ratios, intergenerational wealth growth, and philanthropic impact reflect these values.

Emotional returns (ER), such as pride in sustaining a philanthropic foundation, and emotional costs (EC), like resource allocation conflicts, influence how families value their wealth (Astrachan and Jaskiewicz, 2008). Stewardship-driven KPIs account for these qualitative dimensions, to ensure that financial strategies resonate with both economic goals and shared values. For instance, ESG metrics, such as carbon footprints or governance scores, link investment decisions with family values to enhance the impact of stewardship-based strategies.

KPIs for Stewardship:

  • Reinvestment Ratio: Measures the percentage of profits reinvested into the business or other ventures, ensuring future growth.
  • Generational Participation Rate: Tracks the involvement of younger family members in leadership or strategic planning roles.
  • Social and Environmental Impact Metrics: Reflect how the business contributes to sustainability or community development, ensuring alignment with the family’s values.

Stewardship-driven KPIs often prioritise qualitative outcomes that preserve the family’s identity and long-term vision while fostering a sense of purpose across generations.

Agency Theory-Based KPI Designs

Agency theory focuses on the relationship between principals (family owners) and agents (external managers) and seeks to mitigate potential conflicts of interest. The theory assumes that agents may not always act in the best interests of the principals, necessitating robust mechanisms for accountability and oversight.

KPIs under agency theory are designed to monitor performance, minimise inefficiencies, and ensure alignment with the family’s strategic goals. These metrics emphasise objectivity, quantifiability, and comparability. For instance, external managers may be evaluated based on financial performance indicators like return on investment (ROI) or cost efficiency metrics.

Agency theory highlights the importance of monitoring and controlling risks. Family businesses often use KPIs such as expense ratios or risk-adjusted returns to evaluate whether external managers are meeting performance expectations.

KPIs for Agency:

  • Return on Investment (ROI): Tracks the financial performance of individual investments or portfolios, ensuring that returns meet benchmarks.
  • Expense Ratio: Measures operational efficiency by comparing costs to revenues, highlighting areas for potential savings.
  • Manager Performance Index: Evaluates the effectiveness of external managers, incorporating metrics like adherence to investment guidelines or consistency in returns.

Agency-driven KPIs often focus on quantitative performance metrics and are paired with clear reporting systems to maintain transparency and trust.

Integration of Stewardship and Agency Theories in KPI Application

Family businesses often operate in a hybrid environment where stewardship and agency frameworks coexist. By blending stewardship-driven KPIs with agency-based metrics, they can achieve a balanced governance structure that aligns long-term values with measurable performance goals.

For instance, family councils might focus on stewardship metrics, such as legacy-building initiatives and reinvestment rates, to engage family members and preserve the family’s broader vision. Meanwhile, boards rely on agency metrics like ROI and cost-efficiency ratios to evaluate the effectiveness of external managers.

This dual approach is particularly valuable during leadership transitions. Consider a family business transitioning to an external manager: stewardship-driven KPIs ensure the new leader adheres to the family’s legacy goals, while agency-based metrics track short-term financial performance.

  • Blended Goals: A family business might use stewardship-driven KPIs to ensure alignment with long-term values while incorporating agency-based KPIs to monitor short-term financial performance.
  • Balanced Governance: Governance structures such as family councils or boards can use stewardship metrics to engage family members and agency metrics to evaluate professional managers.
  • Transparency with Purpose: By integrating both frameworks, family businesses can maintain accountability without undermining the collaborative, trust-based culture that defines their success.

This integrated approach allows family businesses to create a governance model that supports both legacy and performance.

The Role of Technology and Advisors

Modern technology has transformed financial reporting prospects. AI’s predictive capabilities enhance the utility of KPIs by simulating future scenarios under varying market conditions. This allows family offices to test the resilience of their strategies, identify potential vulnerabilities, and adapt investment allocations proactively. Nonetheless, expert advisors remain crucial in interpreting KPIs and aligning them with a family’s long-term goals regardless of their preferred framework. They provide holistic strategies that integrate financial, tax, and legal considerations, to ensure that decisions reflect both the short- and long-term priorities of the family.

Conclusion

Key performance indicators are indispensable for aligning financial practices with strategic objectives in family wealth management. By integrating stewardship and agency theories, families can address both long-term legacy goals and immediate performance needs. Modern technology and expert advisors enhance KPI utility, while the inclusion of emotional returns and ESG metrics ensures alignment with family values. These practices empower family offices not only to preserve wealth but also to foster resilience and intergenerational success.

References:

Capgemini Research Institute for Financial Services. Wealth Management Top Trends 2024. Available at: https://www.capgemini.com/insights/research-library/wealth-management-top-trends-2024/

Kowala, R. and Duháček Šebestová, J. (2021) “Using stewardship and agency theory to explore key performance indicators of family businesses”, Forum Scientiae Oeconomia, 9(4), pp. 9–30. doi: 10.23762/FSO_VOL9_NO4_1.

Astrachan, J.H. and Jaskiewicz, P. (2008). Emotional Returns and Emotional Costs in Privately Held Family Businesses: Advancing Traditional Business Valuation. Family Business Review, 21: 139-149. https://doi.org/10.1111/j.1741-6248.2008.00115.x