How Functional, Rather Than Legal, Governance Can Help Families

Bryn Monahan is a consultant for Relative Solutions. She is also a fourth-generation family member who looks at her own family’s governance with a consultant’s eye. She talks about how a move toward functional governance can benefit families:

A challenging situation 

We have four branches of the family in the family office, and after this many generations, the shares are not evenly divided. In addition, when one family member passed away without children, all the shares were left to one branch of the family rather than being split equally. This created a large inequality that was unexpected. The number of board seats each branch gets is based on their ownership percentage. After that death and redistribution, a very small branch of the family had two board seats, and a very large branch lost a seat. That created a lot of unhappiness. 

No one branch has a majority of shares, but one small branch has a large percentage of ownership compared to two of the branches that are much larger. Because of how our governance is set up, despite the fact that these branches have more people, it makes them feel that their voices are less meaningful.  

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Considering governance adjustments 

Our board has six family members plus two outside members and the nonfamily CEO. Right now there are four members of my generation on the board and two G3s, but the G3s are chair and vice chair, so they still hold a lot of power.  

It will be interesting to see what happens with our governance – we will need to make some adjustments with the transition to my generation and G5. As a consultant, I firmly believe our family needs to be thinking about that. Our governance structure does not, in my opinion, support the direction our family is headed.  

Moving toward functional governance 

When our family created the current governance structure, it made sense for our family as it was at the time — that’s what the best practice was. There was not a big separation between legal governance and functional governance, which is actually the reality of how decisions are made.  

Now, more and more families are moving to functional governance as the way they really govern their families, and using the requirements from the legal side to dot their I’s and cross their T’s. It’s similar to having an advisory board that functions almost as a fiduciary board: What the advisory board says goes, but then they do what they need to do legally based on what the advisory board said.

Similarly, more and more families are separating the idea of functional governance and legal governance: You can structure the governance how you want to, and then follow the letter of the law when you need to. I see this with my clients, and I think it’s the kind of shift we’re going to end up making in my family. You have to make some shifts – otherwise people will leave.  

If we had an advisory board rather than a fiduciary board and then an investment committee that functioned like the current board does, the advisory board could have an equal number of people per branch. Then those voices that can kind of get lost in the larger branches with less ownership would have more of a platform. We’re not doing it that way now in my family, but I’ve seen other families move to that structure. It gives those branches more opportunity to have agency and feel like their voices are being heard. 

About the Author

Margaret Steen

Margaret Steen is the editor of FO Pro, The Family Office Professional. Based in Silicon Valley, she has written for Family Business Magazine for more than 15 years.


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