With good governance, the devil is in the detail

In the January edition of Transmissions Private's - The Lede, Private Wealth Partner, Simon Rylatt reflects on the common reasons for, and consequences of, strained relations arising within wealthy families and their businesses.

The existence of wealth itself is not (always at least) the trigger for acrimony and dispute, but it does lead to different threats and dynamics both before and after troubles unfold.

As ever, prevention is better than cure, but in the context of multi-generational wealth it would be foolhardy not to expect some bumps along the way, irrespective of how well-advised the family or business concerned may be.

Where tensions arise
Reasons for strains and disenchantment are manifold, but frequently disputes arise as a result of several reasons.

Firstly, the consequences of second (or subsequent) marriages and difficulties arising between the multiple families of a single person.

Secondly, a poorly communicated, or outdated, estate plan leading to disappointment on the part of an expectant family member or contingent.

Thirdly, a wrangle for control or direction of a business as between family members, both at an executive and shareholder level.

Fourthly, disenchantment between those in control of a business and those reliant on its fruits. This scenario commonly involves a powerful family member leading and having responsibility for the management of the business (and receiving compensation for doing so) and other family members who are not part of the business’ executive, but are dependent on the dividend or return it generates.

Additionally, expansion of a family over time, such that some of the family is less connected to the business, together with a “family pie” that has become too small for the many mouths it is now expected to feed.

And lastly, matrimonial breakdown.

What can go wrong
Even where a dispute does not formally arise (e.g., by way of litigation), tensions can lead to reticent communication, information flow and decision-making, the stymying of business plans or simply a souring of relations that leads to a seriously uncomfortable working environment for family members, employees, and business partners alike.

The implications of a formal dispute can be more serious still, particularly if public. Family ownership of a business is often looked upon enviously in that it can offer long-term stability and outlook, loyalty and flexibility to management in a way that is hard to replicate for a publicly owned company. That position, and associated reputation, can have a significant bearing on brand strength, customer base and relations with suppliers or business partners.

Consequently, news of disquiet or dispute amongst principal shareholders can lead to uncertainty, paralysis, loss of opportunity and revenue and, in the worst case, business failure. Any issues that do arise therefore should, insofar as possible, be carefully managed so as not to injure or kill the golden goose.

What you can do
Careful communication with the “outside world” can therefore be critical when it comes to dealing with problems so that damage can be avoided or mitigated – perhaps in the best case, resolution of any such difficulties can even be turned to the business’ advantage and conveyed as providing future certainty, support and improved governance.

As with the reasons for difficulty, the mechanisms for their resolution can be varied. However, constructive resolution to long-running or festering problems within a family and its business tend to involve one or more of the following:

Firstly, giving the opportunity to those who are disenchanted to be heard and to engage in reaching the ultimate resolution. In the absence of this, the risk is simply that the problem will return in the future.

Secondly, buy-in or buy-out. For the future to be functional, either all parties have to buy in to the solution and be willing to respect it or they need to accept that the time has come to part ways and some suitable exit needs to be agreed.

Thirdly, good governance. Having an architecture that provides for timely, appropriate and sufficient information flow and discourse can frequently help in resolving both historic and prospective problems amongst family members and / or professional management. As ever though, the devil is in the detail: time, effort and investment will be required if an approach is to be more than a temporary sticking plaster. Obtaining help from “outsiders” in benchmarking what is to be viewed as objectively reasonable in such circumstances can be invaluable.

This article was originally published in The Lede, Transmission Private’s monthly newsletter that tracks the future of reputation management. Featuring interviews with leading private client advisers from the worlds of law, finance, and accountancy, sign up today to receive the newsletter in your inbox every month.