Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe. Coming up on today’s podcast is Dr. Donna Finley, Founder and Senior Strategist at Calgary-based Finley & Associates and Family Office by Finley, discussing why governance is so important to a family’s long-term success.
I should mention that our conversation with Dr. Finley is going to move away from the typical focus on wealth management and take a look at family dynamics. Welcome, Donna.
Donna Finley: Thanks for inviting me today, Murray. I think this series of podcasts that you’ve got underway is a great resource for industry, and I appreciate being invited to speak on a slightly different topic.
Murray Bender: Thank you for being here. To start, right from the beginning, how do you define a family office?
Donna Finley: This is a great question because when I’m speaking with sort of financial managers or wealth managers, they quickly jump, I find, to the conclusion that a family office is a family that has investments and they’re looking to expand those investments.
Our team comes from a very different perspective. And the perspective about a family office for us is that wealth management is only one component of a family office. And really, until a family has formal structures in place, such as a family council maybe, or they might have an advisory board, then our team doesn’t really consider them a family office.
For example, one of our clients that has net worth of over $50 million, we would consider them not to be a family office. Because although they might have an administrative support, maybe an accountant, maybe they have a contracted lawyer, that’s really for family administrative support. It’s not how we view a family office which really has these more formal structures for decision-making, professional development of the family’s succession planning conversations, policy development. I find that there’s lots of confusion about this word family office, and it’s used very liberally but not always correctly, in my mind.
So some of these families have no investment portfolio whatsoever and what their worth is really tied up in is in a family business or a corporation of some nature. And some of these family offices have very highly skilled teams of accounting, lawyer, governance, administrative support, and they’re very sophisticated in how they approach things.
So for me, two definitions: there’s a family office, well structured, with governance structures that are recognised by the family; or maybe they’re just a family administration. So that’s how I kind of view that definition.
Murray Bender: Interesting. So you mentioned governance a couple of times. What is family governance? And why is there so much focus on the area of governance?
Donna Finley: Yeah. I think about governance as the way that decisions are made and, in this case, the way decisions are made by family. And there’s different types of decisions they make for different purposes at different times of the year. But in creating a formality about who makes these decisions and how those decisions are made, the importance of it is that it really creates transparency for a family. It eliminates conflict before it starts. It really promotes what I see as regular, scheduled, targeted communications between family members, and they’ve got agendas of which they’re trying to respond to.
So the importance of this family governance is really to focus on the issues to resolve prior to conflict emerging. And a lot of the personal conflict arises because some of the other issues can’t be dealt with.
Again, in good family governance and the importance of it, in my own experience, it’s also been that, if you have a third-party facilitator, it can be quite objective and help the family move through this decision-making process.
Murray Bender: How does wealth management fit into the family governance ecosystem?
Donna Finley: It’s an important part for sure. And I view it as really four different types of governance.
Wealth management or wealth governance is one aspect of four. And really, it’s probably guided—if you look into a family, it’s probably guided by an investment circle or investment council made up of a variety of family members and maybe some external people.
But there’s also three other types of governance that we work with quite closely. There’s corporate governance. And what I mean by that is, it’s how does the family set up the corporate structure, board of directors, maybe advisory board? Do they have management, senior managers? It’s how their businesses are structured and managed.
And then there’s ownership governance, which is really the whole conversation around which family members are shareholders or owners. We have lots of blended families these days. Do blended family members become part of that? Do adopted kids become part of family ownership structures? There’s a lot of governance, pros and cons, and different strategies to use in that area.
And the fourth area would be what most people would think about as governance, which is the family governance. And this is really usually guided by a family council. But again, it has lots of conversation about what’s the philanthropic direction of the family; what family members get to be on that body if the family is quite large; and what kind of policies might they develop, for example, on the recreational property that they all share.
So, these four types of governance, only one part do, really, the financial managers and wealth managers really see—the wealth management governance component. But there are these other three at play. And in my experience, what has happened here is that from the other three governance conversations, some decisions are made that maybe are not the most optimal in the wealth governance side but really fit the family values and what they’re trying to accomplish in some other areas.
So these four interplay all the time. And the broader view helps people who are helping families make wise decisions in their financial side.
Murray Bender: Why, in your view, is the transition from entrepreneur to entrepreneurship so important to a family’s long-term success?
Donna Finley: This is the central point, I think. Thank you for asking that question, Murray. I think the reason why moving from entrepreneur to entrepreneurship within a family is so critical because that’s where creative new wealth is generated.
You often think about the saying, shirt sleeves to shirt sleeves in three generations, and we see that again and again. It’s because you’ve had an entrepreneur who’s generated a considerable amount of wealth and then the next generation kind of manages that wealth. And the third generation, as you keep parsing it out to the next generation, it gets more and more dispersed, they basically are able to maybe live on that wealth, and then it’s gone.
What we work on and think a lot about is nurturing this whole idea of entrepreneurship. So you’ve had a successful entrepreneur, they’ve been creative, they’ve taken a risk, and oftentimes, they risked everything. They start with nothing and they create something quite large.
What we’re trying to build in the successive generations is this same drive for creativity, like taking a risk, making growth. Because you have a portfolio of funds and money, that in my view, is more managing the wealth. But where does the new creation of new wealth come from?
And there’s a lot of very interesting conversations happening right now. One of them is, how long in the generations do you keep the core family business? And at what point might you sell that business and reinvest that money in a new idea, in a new area that really fits the next generation’s ideals and interests and values?
The second area really is teaching this idea of being creative, taking a risk, because risk means you might fail. And what does failure look like? For a lot of the next gens, it’s very interesting; they’re almost intimidated by the generations that come before them because those generations before them looked so successful. And yet, they also had failures.
A lot of the work that we do with families in this governance realm is to appreciate and teach what entrepreneurship is, but what it also—the implications of it for the family are as well, which is, you might fail. Failure’s not bad. You learn from that failure, and you grow the next idea. But how do you grow an idea, and helping them through business cases, presenting those business cases to try and get investment capital into those ideas and those kinds of things. That can start at a very early age. And the importance of that to the family, again, is this recognition that that’s where new wealth comes from and new growth.
One of the guidelines that we work with, with our families is the notion of reinvesting about 30% of their portfolio into new ventures; not keeping it reinvested in current ongoing concerns, but really understanding where the next generation might want to invest and grow and think. So that’s why I think moving from entrepreneur to entrepreneurship is so important for ongoing family success.
The only other caveat I would kind of add to that is, if you’re working with a family of considerable wealth, the risk that is taken to start a new business is so much less than if you have nothing and you take a risk and you put everything you own into starting a business. So there is a tendency towards, not complacency, but maybe not the same kind of drive. It’s very hard to instil that drive and commitment to growing this creative side of businesses.
So I’m very interested to see. There’s lots of new businesses starting to emerge, and new wealth is being created in unexpected places. I know that we had a couple of families that we’ve worked with with considerable wealth, and the entrepreneur in the family was the least thought of person to have those creative ideas and take those risks. So I find this a fascinating area of governance.
Murray Bender: So continuing on this line just for a moment. Based on what you’re seeing out there, can you provide us with a bit of a glimpse into some of the successes and also the challenges that families have been experiencing in transitioning from entrepreneur to entrepreneurship?
Donna Finley: Yeah. Great question, Murray. I don’t see a lot of emphasis helping families really appreciate the importance of developing entrepreneurial skills. And it’s almost like, because you’ve sat around the kitchen table, you, through osmosis, bring in some of the ideas of the original entrepreneur. But it’s actually a taught skill as well. So the challenge is how do you teach that skill; how do you really commit family resources to developing those skills?
And so, I mentioned this idea that maybe 30% of a portfolio always goes into creating a new business. It’s making those kinds of commitments and sticking to them, recognizing that you might have failures.
And then the other challenge I would see there, Murray, is the family really should always keep asking themselves, is this family business—whatever it is—is this family business for us to the next generation? Or do we sell this and go into something quite differently? So it’s thinking about that’s a big emotional decision to make.
And we worked with one family who had been in the resource sector, actually, forestry, for several generations, and the family did get together. And after about 18 months, the decision they made was to sell out of all the forestry, which was not so sustainable, and move all of their family wealth into a new area of e-commerce and other things. So, the challenge is to really take over those conversations and be objective and move yourself through the emotion of some of the legacy that often plagues a family as they go through and think about future.
And then really, the other challenge I would say, but also a success, is recognizing that the next generation coming up, the 30-somethings, the late 20-somethings, the 30-somethings have great ideas. And I know when I was that age, we had key leadership roles; so can these. But the founder letting go to the next generation is often a very difficult one to manage. So I would say that’s probably one of the key challenges that I see.
Murray Bender: Some great insights on family governance, Donna. Thanks very much for your time today.
Donna Finley: It was a pleasure, Murray. Thanks. Have a great day.
Murray Bender: For additional insights on topics relevant to corporate investors and financial institutions across the globe, including our previous podcasts, visit rbcits.com/insights. I’m Murray Bender. Thanks for listening.
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