Centuries ago, a wise person wrote, “Where there is no vision, the people perish.” Certainly, any worthwhile idea or enterprise starts because someone had a guiding vision and the determination to see it become reality. Moving from the “vision” phase to the “implementation” phase, however, requires capturing and codifying that vision in a way that allows it to become institutionalized. In other words, the vision for the future needs to be in writing, and it must be shared with all stakeholders, both family members and professional advisors. The vision must also be multigenerational, and this often means that it must go beyond the considerations of typical estate planning or the current circumstances of the organization. For those who intend to institutionalize a legacy—whether through establishing a foundation, creating a nonprofit organization, or building a multigenerational family enterprise—building a structure that can thrive for the long term, beyond even the lifetimes of those the founders will live to see, requires thoughtful design of durable governance structures.
But what is involved in assembling a system of governance that can both protect the legacy and also empower its stewards to accomplish the principal goals for which the family enterprise was established?
What is included in institutional governance?
For the organization to function properly and sustainably, certain core governance components should be in place:
- A governing board of directors or trustees. This group exercises fiduciary responsibility for making decisions and providing direction that serves the best interests of the organization. The board is also responsible for establishing strategic direction, safeguarding the mission, and ensuring financial integrity.
- Executive leadership. Reporting to the board, these individuals may include a chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO), and others as needed to carry out the day-to-day functions of the organization.
- Policies and Procedures. Internal rules, codes of conduct, and regulatory compliance standards that govern daily behavior and decision-making. These documents may also include a corporate charter that establishes the organization and provides the basis for its structure, mission, and function.
Additionally, efficient governance practices will include structures for ensuring accountability, compliance with applicable law and best practices, proper risk management, and performance monitoring.
What qualities distinguish effective governance structures?
Of course, effective governance capable of sustaining the vision and mission of the organization over many years involves more than simply having the right structures in place. In addition to the basic architecture of the organization, good governance will emphasize commitment to some important values.
- Education. For a governance plan to remain effective through multiple generations of leadership, it must include professional, qualified educational resources to be provided for those who will be assuming responsibility for the legacy. This can be especially crucial for family enterprises. For example, in the case of many first-generation wealth builders, the concepts of saving, budgeting, and controlled spending are second nature. But for their children, who may have grown up with an assumption of many of the privileges wealth confers, these principles are unlikely to be as intuitive. However, when children grow up in a culture of attention to the principles of sound financial management, they are much more likely to adopt these principles when they “come into their own.” But even beyond family enterprises, any organization hoping to sustain a mission over time must build into its infrastructure a culture of educating “the next generation,” including board education, leadership equipping, mission-appropriate investment oversight, and other mission-critical areas. Communication processes designed for continuity over time are necessary to nurture both vision alignment and the ability to adapt to the inevitable changes that overtake any enterprise.
- Succession planning. Closely related to education, a good governance strategy will provide for succession planning. Every successful business leader understands the importance of succession planning. For families seeking to maintain and build generational wealth, this is especially crucial, but even in more broadly based, public settings, it is vital for leadership continuity to be built into the institution’s governance structures. Proper succession planning can help to ensure that those who inherit or are appointed/elected to leadership roles are ready for them. It can also provide guardrails against disruptions caused by the unexpected: premature death of a key individual; disputes among family members or trustees; and other events that can pose challenges to the smooth functioning of the organization. A properly designed leadership continuity plan can help to institutionalize a shared vision, providing stability amid the passing of years and the inevitable changes that come over time.
- Communication. Perhaps surprisingly, many of these governance practices have little to do with special taxation strategies, or even investment or estate planning. Instead, they often focus on effective, transparent communication with the organization’s members and other stakeholders around shared values, effective resolution of conflict, succession planning, proactive approaches to philanthropic goals, and other valuable principles. In other words, as in most other important areas of life, good communication is essential. To the extent possible, a good governance plan will “build in” processes, opportunities, and methods for passing along the most important priorities, values, and goals of the family enterprise from one generation to the next.
What resources are needed to build effective governance structures?
Especially for those just entering the arena of corporate or family governance, getting the process started can be a bit bewildering. Fortunately, resources exist for helping organizational founders and leaders build a team of advisors who can come alongside and provide guidance and insight into best practices.
In fact, engaging external consultants can be an integral part of the transition process to address the challenge of creating effective governance structures. These external experts may be able to provide various services, from effectively forming an impartial “search committee” to assist the organization in identifying the most suitable candidates to assuming leadership roles within the enterprise.
One of the primary advantages of involving external consultants in this process is the objectivity they bring to the table. By working alongside these professionals, the organization’s leaders can reduce the perception of bias and favoritism, ensuring that important processes like succession planning, establishing policy or qualifications, or electing board members appear more equitable and less influenced by corporate or family politics. Including external consultants can also clarify stakeholders’ expectations, as all parties involved share a clear understanding of the process and its criteria, which can even be formalized within the organization’s foundational documents. Aspiring leaders are encouraged to submit résumés, participate in interviews, and meet other consultant requirements. This creates a transparent and equitable pathway for those aspiring to take on more significant leadership roles within the organization’s endeavors. Such an objective, unbiased approach can instill confidence within the organization that succession, policy, leadership decisions, and other processes are fair, transparent, and based on merit, fostering a sense of unity and cooperation among stakeholders as they collectively work toward preserving and growing the mission of the enterprise.
In this regard, a fiduciary financial advisor can be of significant assistance. By acting as an objective, informed educational resource, the advisor can help organizational leaders make more knowledgeable choices as they design a plan for governance. A professional advisor can also serve as a conduit for best-in-class governance practices, coordinating with legal, tax, and other advisors to assemble a team that can help the organization develop a governance system tailored to its specific mission and needs.
At GEM Asset Management, we understand the needs of multigenerational family businesses, foundations, nonprofits, and other organizations seeking to create lasting legacies. If your organization is seeking to take next steps toward mission stability and sustainability, we can help you find the answers you need.
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