Family business: a portrait

Tuesday, 01 April 2014
The second STEP Journal roundtable, sponsored by Northern Trust, saw family business advisors gather together for an animated discussion about philanthropic trends, how best to achieve an orderly succession, and wealth-structuring strategies.

Family business advising has emerged as a distinct multi-disciplinary field of practice. Peter Leach, of Peter Leach & Partners, widely thought of as the founder of family business consultancy services in the UK, believes this is because family business advising goes to the root of the family and how it deals with money and business, at the same time as keeping the family harmonious.

This STEP Journal roundtable brought together a group of advisors whose roles involve servicing family business clients. They discussed the issues, challenges and concerns of their clients, covering three broad themes: intergenerational planning; structuring and alternatives to trusts; and administrative issues. A wide variety of topics were discussed, from philanthropy and succession planning to the head-over-heart matter of prenuptial agreements and the intricacies of benchmarking. Below is a snapshot of some of the issues that arose.

Philanthropy and family businesses

Philanthropic initiatives aimed at encouraging people to give more to good causes have emerged in various countries. In the US, Bill and Melinda Gates and Warren Buffett initiated The Giving Pledge, a commitment by the world’s wealthiest individuals and families to dedicate the majority of their wealth to philanthropy. In the UK, the Legacy10 initiative aims to increase the number of people leaving money to charitable causes in their will.

The panel discussion kicked off with an enthusiastic debate about the reasons behind client giving, with Chair Martyn Gowar asking if clients are influenced by these new initiatives.

A US phenomenon

It was largely felt the Gates/Buffett philosophy of giving was very much a US phenomenon. The panellists noted, though, that this doesn’t imply all US families are inclined to give to good causes, or families outside the US aren’t inclined to do so, but rather that the rationale behind giving differs depending on where the family lives, and the stage of the family business.

In some families, philanthropy was used as a tool to train the next generation of the family business to appreciate money. In India, philanthropy was used as a marketing tool – a way of branding the family name – while, in the Middle East, business families used philanthropic structures as a way to circumvent Shariah law and allow women to participate in the family business. However, some panel members characterised the current era as that of the ‘über-wealthy’, and felt that ultra-high-net-worth business families were under pressure to be seen to be doing something positive.

An ulterior motive wasn’t identified in all client giving: some clients were acting with a sense of higher purpose and had given away at least 75 per cent of their wealth to exclusively philanthropic structures. ‘I think clients are warming up to the idea of greater philanthropy, as people realise that, however much money they have, they don’t need it all. Money has no value other than what you ascribe to it,’ commented Piers Barclay. In Europe, the philosophy behind giving was often of the help-yourself variety. Ashley King-Christopher explained that European clients often looked to invest in assets that will have a nominal bond-like return, but that fund initiatives to help people to help themselves.

Stage of the family business

The decision to give or not to give also depended on where the family’s wealth had come from, and the stage of the family business. When the first generation of a family business is extremely successful and the time has come to move on to the second generation, there is often the feeling of wanting to preserve the business and pass it on. In these cases, philanthropy isn’t as high a priority as capital preservation. However, where there is no successor generation, the position is different. Claire Evans explained: ‘When there isn’t a next generation of children that can take part in the business, philanthropy may take the form of the  owners looking to pass the business on to their employees.’

Succession planning

Russell Cohen had a different view. He felt that it wasn’t so much the stage of the family business, or the motivation behind giving, that determined if clients would give to good causes, but rather whether clients had really engaged in succession planning. ‘When they are engaging in succession planning, philanthropy will generally play some kind of role,’ he commented.

The importance of looking at philanthropy and succession planning together was highlighted. Alexandra Sharpe put forward the case for ‘Philan-therapy’ – the use of philanthropy in succession planning to create family alignment and increase understanding of family members’ aspirations.

Martyn Gowar summed up the general view as one in which charity begins at home: ‘Until we can afford to be charitable, we look to the family first. That’s the way life has always been. So we are seeing no change [in clients’ charitable giving], but no change in a world where the strictures and structures encourage people to do more.’

Engaging the next generation


Techniques for maintaining confidentiality in relation to the family business structures, to protect the next generation, were the next point of discussion. Some clients prefer the extent of the family wealth and assets to be withheld from the next generation until necessary. Panellists pointed out that it very much depends on the type of family wealth being managed. Is it a family business that’s going to continue, or wealth that has already been created and passed down, or is it investment-generated wealth? ‘If it’s the first case, there is often an embracing of the children to try and foster an interest in the business to take it forward,’ commented Claire. However, where the wealth has come from investment activities, it was felt secrecy around the family wealth was maintained.

It was also felt that the draw to secrecy depended on the jurisdiction and the type of family business. Ashley Crossley explained that, in Russia and the CIS, the chance of intergenerational trading companies surviving is quite limited because often these businesses are built by one founder and their success was due to the founder’s connections. ‘In these situations, you want an orderly exit out of the business – to extract money to go into other things. In these cases, confidentiality is more important because the risks are different.’

Alexandra noted that many Middle Eastern families wanted to involve the next generation from a young age, but that was coupled with secrecy around the family’s assets. Dan Lindley explained that, in the US, the state of Delaware adopted a law allowing trustees to withhold information about a trust, including knowledge of its existence, as long as the agreement directed the trustees to do that. Dan explained: ‘These silent trusts proved popular, the idea being that the beneficiaries should go out, make their living and become productive citizens, and then they get their wealth.’

The panellists felt that this piece of legislation played into the hands of the stereotypical controlling patriarch, and agreed that transparency is key. It’s when affairs aren’t transparent that conflict arises, as patriarchs may promise one thing but trustees then deliver another.

Techniques for engaging the next generation

Discussion progressed to the techniques used successfully to engage the next generation in the oversight and operation of the family assets. There was unanimous agreement that, in order to avoid litigation, advisors should try to engage all family members as early as is reasonable both in the family business and in other family wealth.

Martyn pointed out that trusts are commonly used in the structuring of family assets, but the very nature of these instruments creates problems. ‘This point is perhaps encapsulated by Robert Hunter [co-founder of the UK’s National Trust], who said that trusts are fundamentally inflammatory at two levels: one, that, when the next generation finds the money, there is resentment that the patriarch didn’t trust them in the first place with the money outright; and, two, that beneficiaries have unrealistic expectations, particularly in a world where trusts are so often built around discretions rather than fixed interests.’

Konrad Friedlaender suggested that family constitutions present a solution: ‘You need an arrangement that the whole family buys into; you couple that with a trust arrangement so that the constitution envelops the family wealth structure, which can then be dealt with in accordance with the buy-in that you have from the family.’

Family constitutions are a useful instrument to engage family members. From the discussion around the table, it emerged there was no such thing as a model family constitution: they can range from a one-page summary of the family values to a 60- to 80-page document in legalese.  Alexandra recommended family constitutions be reviewed by the family every five years. ‘Amendments should be made as part of the journey. If you have something that is too rigid, you can end up binding yourself in knots, which creates the kind of conflict you first sought to avoid.’

Arbitration clauses within family constitutions were also raised as a technique to minimise conflict, but there were mixed feelings from the panellists about their effectiveness in practice.

Alternatives to trusts

Is there a demand for structures, aside from trusts, to protect the interests of the next generation? It was felt that life insurance was commonly used, particularly in European jurisdictions. Foundations are also used in the offshore financial centres. In the UK, there is a lot of interest in family investment companies. However, in Russia and the Middle East, it was felt that trusts had not lost their gloss at all.

The topic of whether clients were becoming more distrustful of trustees was raised. Dan felt, from the US perspective, there had over the last 30 years been an erosion of trustee control over trust assets: ‘Delaware allows outside advisors, so the family has much more
involvement through these proxy mechanisms over the disposition and investment of the trust assets.’ Martyn noted the whole horizon shifted in the UK when s5 of the Trustee Act 2000 came into force, stating that the duty of a trustee is to take advice. Martyn felt, on the one hand, there was an erosion of powers but, on the other, additional duties were imposed.

Raising standards

The conversation then turned to jurisdictions for trust administration. Did any of the advisors feel a new jurisdiction was gaining attractiveness in comparison with the traditionally favoured jurisdictions? 

While some of the panellists felt that offshore financial centres had shrugged off their previous reputation as ‘patchy’ in terms of the standard of administration given, others felt standards still had to be raised. Chris Groves, however, said that that the stigma attached to certain jurisdictions was unfair, as there were instances of very well run structures in jurisdictions that might not be rated so highly and, equally, instances of badly run structures in good jurisdictions, and sometimes in good trust companies.

It was pointed out that the OECD’s new standard on the automatic exchange of information would raise the game further. The topic of regulation was animatedly discussed among panellists, with a split between those who felt regulation was the wrong way to go, and those who believed regulation would improve standards.

Administrative matters

The third strand to the roundtable discussion revolved around administrative matters, and considered why custody of family assets has become such an important issue.

Dan explained that family offices of ultra-high-net-worth families are seeking consolidated information about their assets. ‘They want to know how their assets are performing, how their managers are doing relative to appropriate benchmarks, and what risk is embedded in their assets – and by using a global custodian they have the ability to assimilate all of that information.’

Piers felt the trigger for this desire for information was the credit crunch. ‘After the credit crunch, people became aware of words like “rehypothecation” and “counterparty risk”. We have seen a marked increase in interest in who is holding the assets, what they are doing with them, and what the terms of the custody agreement are.’ Other panellists thought it was part of a wider cultural trend, whereby everybody wants access to information all the time.

It was agreed there was an increasing trend of families looking at the overall cost of management and assets. Charlotte Denton suggested the transparency element of having a global custodian was very important. This is largely down to concern on the part of clients about the scale of fees and the cost of running assets.

The roundtable concluded with a discussion on whether the custody issue is becoming part of more controlled management of assets by families. Martyn asked whether families are changing the way in which they run their affairs: are the families really getting more involved in monitoring the performance of the managers? Lesley Hodgson felt the issue was very family-specific. Piers felt there was a desire to do more in-house and to be more involved in that process: ‘It also ties in with what we talked about earlier – giving roles to young people in the family; giving them something to get their teeth into.’ 

Meet the panel

Martyn Gowar TEP

Partner at McDermott Will & Emery UK LLP, and an editor of the STEP Journal. His practice covers estate planning; inter-generational business transfers; and cross-border taxation issues

Piers Barclay TEP

Partner in Private Client at Macfarlanes, specialising in succession, tax and estate planning advice for individuals and their families, as well as related advice for trustees and other private client service providers

Russell Cohen TEP

Partner at Farrer & Co and Head of the International Private Wealth Group. He advises on all aspects of tax planning, estate planning and trust structuring

Ashley Crossley TEP

Chair of Baker & McKenzie’s Europe and Middle East Wealth Management Practice Group, and Head of the Wealth Management Department in the London office

Charlotte Denton TEP

Managing Director of Northern Trust’s Global Family & Private Investment Offices in London. She was previously appointed to lead the London Wealth Management team, in 2011

Claire Evans

Partner at Deloitte’s tax practice in the Midlands, with over 20 years’ experience of advising high-net-worth business owners on all aspects of their personal and company-related tax affairs

Konrad Friedlaender

Partner in Carey Olsen’s Trusts and Fiduciary Group, specialising in contentious and non-contentious trust matters, pensions, employee benefit schemes and share option schemes

Chris Groves

Partner at Withers in the Wealth Planning Department, with a focus on advising both UK-domiciled and non-UK-domiciled high-net-worth individuals in relation to their personal, business and philanthropic affairs

Lesley Hodgson

Managing Director of Northern Trust Fiduciary Services (Guernsey) Ltd, which is responsible for asset administration and custody for Northern Trust’s family office, personal and institutional client base

Ashley King-Christopher

Partner at Speechly Bircham. His tax practice covers the structuring of international private wealth holding and operating structures – in particular, advising corporate groups and family offices

Dan Lindley TEP

Managing Director of Northern Trust’s Global Family & Private Investment Offices Group, EMEA & APAC. He is also Chief Fiduciary Officer for Northern Trust’s international private client business

Alexandra Sharpe

Partner at Peter Leach & Partners, working with business-owning families around the world, supporting and advising them through generational transitions and on governance issues

Thank you to our sponsor

The Global Family Offices Group is a boutique practice within Northern Trust, providing highly customised solutions exclusively for ultra-high-net-worth families, their family offices and family foundations. Today, the group works with roughly 400 families globally, including 20 per cent of the Forbes 400.

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Hannah Downie

Hannah Downie is Managing Editor of STEP Journal and its supplements.

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