INSIGHTS AND RESOURCES
Family office constitution: A governance framework built to last
INSIGHT ARTICLE |
Authored by RSM US LLP
A family office constitution is a vital component of the overall governance framework of the office, adding a layer of stability and authority that serves as the keystone of the enterprise. While a family may feel that following existing bylaws and unwritten agreements will suffice, a family office constitution provides much-needed clarity and guidance to help keep the peace during challenging times and set future generations up for success.
Some constitutions take a broad approach, focusing only on a family office’s mission and values. Other constitutions are more robust and drill down on essential details such as hiring criteria, philanthropic efforts and requirements for family members who want to work for the office.
The rules for creating a family office constitution are not set in stone, but a good approach is to draft a living document that includes a governance and decision-making framework, criteria for internal and external hires, and conflict resolution guidelines. From this foundation, a family office can build a solid constitution that best meets its mission and goals, with the flexibility to evolve with the family.
Governance and decision-making
Governance establishes the hierarchy of authority within a family office, and the individual in charge ultimately dictates how decisions are made. While there is overlap between governance and decision-making, these topics should be addressed separately in the family office constitution.
Governance is the framework for decision-making and should be tailored around the family’s objectives, including what they want to achieve with their wealth. Over time, the governance portion of a constitution might incorporate guidelines for the following:
- Family office mission statement and core values.
- Language on philanthropic efforts and the family’s sense of civic responsibility.
- Roles and responsibilities within the family office.
- Requirements, qualifications and skills for office roles (e.g., experience level, expertise, compensation structure, clear job descriptions).
In contrast, the decision-making component of a family office constitution often starts with the establishment of a board of directors, which determines what other committees are needed to oversee anything from investments to environmental, social and corporate governance. The board sets parameters for these committees and, if necessary, provides input on the family office’s mission statement and core values, as well as helps define the office’s objectives.
Hiring criteria and family member involvement
As a family office’s mission, core values and objectives take shape, office leadership will have a better sense of the personnel needed to run operations. While each family office constitution will approach this differently, there should be parameters established around the external hiring process for crucial early hires, particularly executive leadership roles.
Hiring considerations should include:
- Who will make the decisions around new hires?
- How many family members should interview finalists?
- Should a recruiter manage specific hiring practices, such as vetting candidates and setting compensation, or oversee the entire talent acquisition process?
- What qualifications, experiences and skill sets should an executive-level position include?
Relatedly, the constitution should set criteria for family member involvement in the office and could also include ground rules for when and how a family member may work for the family office. One example is having family members reach a specific level of education or years of experience working in a particular field before joining a committee.
Creating and adhering to a family office constitution can also help prevent and resolve conflict among family office members. Conflicts can arise from misalignment around the use of family office resources, who should be granted decision-making authority, or whether investments are performing well enough.
To resolve conflict (or ideally, prevent it) a constitution should address hot-button issues such as governance, decision-making authority and the family’s voting process. A regularly scheduled review session with the family is an effective way to manage proposed changes to the constitution. In a family office less than five years old, the constitution might be reviewed annually to address growing pains, whereas more established entities can go two to three years between reviews.
Creating an effective family constitution should be a collaborative endeavor. The wealth creators of the family deserve to have significant input in drafting the office constitution to make sure their values and mission are preserved. The drafting process also presents a good opportunity to engage younger family members by having them work together on a family values statement as representatives of the next generation.
Another critical consideration is how to establish the ownership structure of the family office and divide it among family members and nonfamily members. A common practice is to link performance to incentive compensation, such as allowing the chief investment officer to earn a percent of ownership in the entity.
Navigating these types of decisions can be challenging, which is why many families turn to a trusted third party for help. A knowledgeable family office advisor should be able to:
- Share best practices around size, mix and terms for the various governing bodies within the family office.
- Make introductions to specialized recruiters, solid candidates for leadership roles and qualified service providers.
- Present tax and nontax considerations around an ownership structure.
- Observe and counsel on a wide range of operational matters, including hiring practices, compensation structures, family involvement, when and where to grant discretion to investment teams, organizational structures, and other issues.
As the keystone of a successful family office, an effective constitution documents decision-making authority, operational policies and guidelines, and steps for conflict resolution.
Establishing a governance structure for a family office makes decision-making clearer and more efficient, allowing more time and attention to be directed toward achieving the office’s mission and objectives. Upholding hiring criteria outlined in a constitution helps make sure the best and most qualified people are working for the family office. Preventing and resolving conflict supports family cohesion.
The family that dedicates the time and commitment needed to create a constitution the right way will be rewarded with a unified, sustainable family office that preserves the values and goals of wealth creators for future generations
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Bill Bijesse, Benjamin Berger, Karen Costa and originally appeared on 2021-11-30.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.