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Family Office – Family Anchors and the Challenges of Wealth to Family Governance (2)

Affluenza

Another significant challenge from wealth to multigenerational families is the entitlement culture, a symptom of affluenza, which can be defined as an unsustainable culture of acquisition for acquisition’s sake. Warren Buffett is credited with a principle that aims to curtail its harmful effects on families: “Give each child enough money so that they can do anything, but not so much that they can afford to do nothing.” Families that develop a list of principles that guide their relationship to wealth and enterprise and capture them in a family constitution are also proactively governing the family and leading it towards responsible stewardship of its wealth and enterprises.

Dilution of wealth

Besides the erosion that may result from unnecessary expenses, taxes and a culture of entitlement, distributions and the break-up of the enterprises or the pool of family capital can negatively affect the family’s access to new investments and to the financial resources needed to take advantage of these opportunities. A smaller capital base is presented with fewer investment opportunities. Distributions motivated by needs for current consumption and the break-up of business interests fueled by family conflict – as happened with Reliance Industries in India – prevent families of wealth from reaping the benefits of patient family capital; that is, capital that stays together.
Lack of transparency 

Neither boards of directors nor professional managers can make their valueadding contributions to family enterprises without good metrics and clear scorecards. Shareholders themselves can seldom act as responsible shareholders in the absence of financial knowledge and financial controls. While entrepreneurial cultures often resist the call for greater transparency, after all the founding entrepreneur stayed on top of everything, next generation leaders are well served by investing in professionally assessing the pulse of the enterprise in real-time terms. Lack of transparency can also give rise to an absence of caring for the enterprise within the extended family. Absent caring, continuity is threatened.
Lack of oversight and keeping it in the family

Publicly traded firms, through their capacity to create a market for corporate control, hold management accountable. The market for corporate control makes top management accountable to all shareholders. The absence of the equity markets’ influence prevents this disciplining function in privately held family firms. Even family enterprises that are publicly traded, by definition, have an overriding measure of family control. Lack of oversight often breeds complacency and resistance to change. It may also lead to self-dealing and giving some shareholder’s interests priority over those of all shareholders, as in the case of Adelphia Communications in the U.S. and Gome Electrical Appliances Holdings in China.
Family Governance, then, is an essential discipline for the long-term well-being of the family enterprise and the family’s wealth. It refers to a family’s ability to optimally discipline and control the nature of the relationship between family members, shareholders, and professional managers in such a way that the enterprise prospers and the family promotes and protects its unity and its financial, human and social capital— as much for the family’s sake as for the company’s. After all, a family’s unity and its human and social capital are the source of long-term comparative advantages of the family enterprise form. Patient family capital, reputation, and influential knowledge and networks represent unique resources that family enterprises can translate into competitive advantage.
The current CEO or president of a family office can hardly leave a finer legacy and contribution to family-business continuity and continued family wealth across generations than the creation of an effective governance structure.

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