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(This blog is part of the platform "Family Business Wiki's Town Square" and is not published by Pictet & Cie. Thus the Bank cannot be held responsible for information you may find by consulting it.) 

For instance, we read that King Priam and Queen Hecuba, to whom the throne of Troy had descended through many generations, were warned in a prophetic dream that their son, Paris, Prince of Troy, would one day cause the downfall of their kingdom. The prediction came true: a few years later Paris carried off the wife of the King of Sparta. He was punished by a coalition of most of the Greek kings, who tricked their way into the city in the legendary Trojan horse after a ten-year siege.

This story illustrates a problem that great families still encounter today: how to transmit and preserve private wealth down the generations. After all, as a popular puts it: "The first generation sets up the business, the second expands it and the third ruins it". Is it possible to sidestep this fate?

Clearly, the answer is yes – provided that various aspects of family governance are taken into account. Let us not forget our Greek: the origin of the word "governance" goes back to Plato, who used kubernêtikê to refer to the art of the steersman. The words "govern", "government" and "governor" all derive from this root.

Governance implies above all a decentralisation of decision-making, with a variety of different places and people involved in the process. It refers to the setting up of new and more flexible types of regulation, based on a partnership between the participants.

Before we take a closer look at this topic, it should also be noted that in Ancient Rome, as well as in Europe under the Ancien Régime, the word "familia" covered the whole household, including servants and slaves.

The phrase "family governance" thus suggests the decentralisation of decision-making on behalf of the entire household. But just try explaining to Priam and to the heads of family businesses that they are supposed to delegate their decision-making to third parties! And yet, by obeying some of the basic principles of family governance that favour this type of solution, it is nevertheless possible to transfer wealth from one generation to the next, despite a failure rate of nearly 70% according to various studies.

Today, the topic of family governance has benefited from becoming better known and more widespread. It is often classified with "soft skills" and perceived as fairly intangible and little understood, whereas in fact many financial advisers refer to it without realising that they are doing so.

"I need to pass my capital on to my children. What do you advise?" Many investment and family office professionals will recognise this kind of request. Some will reply by proposing legal vehicles and/or customised asset allocation – solutions based on aspects of family governance at one level.

Few advisers are interested in the family's non-financial capital, yet this aspect is crucial if wealth is to be passed down the generations successfully. Non-financial capital can be human (talent, health), intellectual (education, experience), spiritual (faith, traditions) and social (values, philanthropy)*. The objective is to unite the members of the family by identifying and combining their strengths and interests. The financial side is often the apparent focus of the request, but – like an iceberg – this is only the visible and tangible aspect. Successful transfer actually depends on the non-financial types of capital. The latter are therefore central to a successful transfer of wealth, and not the other way round.

Typical family businesses of the kind that exist in their millions are often the brainchild of one entrepreneur. The classic scenario is that the latter runs the company business, gradually bringing in other members of the family over the passage of time. In some cases, the company increases its business activity and value substantially. This is when the family fortune is created. At this stage, some entrepreneurs imagine that financial investments offer returns similar to the profits generated by their business.  

However, they tend to forget that the returns on capital they can expect in their own business are often higher than those they can obtain on a financial asset. After all, large fortunes are most often created by people with outstanding entrepreneurial talent. In our experience, it is therefore sometimes better to advise a client to reinvest his dividends in his company in order to attain his objectives, even if these are not financial ones.

The usual catalyst for establishing a system of family governance is the question of who is to replace the founder of the business. The latter, who sometimes has a rather dominant and forceful personality, may seek to plan down to the last detail how the wealth is to be passed on to all future generations. It then often happens that the company's management structure, just like the structure governing the family wealth, requires a thorough reorganisation to ensure that the wealth can be transferred. By starting sooner the patriarch could have planned for his succession several years earlier, preparing for it actively by means of appropriate communication and arrangements within the family. In all fairness, though, it is unfortunately difficult to plan for great success at the start of one's career…

As a general rule, the more pressing the question, the more delicate the operation of transmitting the wealth. This is because the structure of family businesses is often based on emotional decisions, particularly when it comes to promoting members of the family to key positions or roles. An independent advisory service allows the participants to consider how far decisions made on the basis of emotion actually match the reality. Indeed, it is sometimes necessary to protect a family from itself! The emotional side also needs to be taken seriously when setting up governance structures for financial assets.

A long-term consultative process is therefore required in order to strengthen the ramparts of a family inheritance so as to withstand attack by a modern Trojan horse. While managing a family's financial capital may appear to be the central issue, it is even more important to manage the non-financial capital that grows and develops over the decades. In our experience, the success and longevity of a dynasty depend on the family's ability to take its various forms of non-financial capital seriously and work with them over time. The preservation, growth and management of the financial capital down the generations will then be a comparatively easy task.

Everything thus points to the fact that independent expert advice on succession planning and governance is crucial if a family's wealth is to transferred successfully.

* This definition of family wealth was developed by James E. Hughes, Family Wealth, Keeping it in the Family: How Family Members and Their Advisors Preserve Human, Intellectual and Financial Assets for Generations.