Family Office Constitution: A Governance Framework Built to Last

INSIGHT ARTICLE | November 30, 2021

Authored by RSM US LLP

A family office constitution is a vital component of the overall governance framework of the office, adding a layer of stability and authority that serves as the keystone of the enterprise. While a family may feel that following existing bylaws and unwritten agreements will suffice, a family office constitution provides much-needed clarity and guidance to help keep the peace during challenging times and set future generations up for success.

Some constitutions take a broad approach, focusing only on a family office’s mission and values. Other constitutions are more robust and drill down on essential details such as hiring criteria, philanthropic efforts and requirements for family members who want to work for the office.

The rules for creating a family office constitution are not set in stone, but a good approach is to draft a living document that includes a governance and decision-making framework, criteria for internal and external hires, and conflict resolution guidelines. From this foundation, a family office can build a solid constitution that best meets its mission and goals, with the flexibility to evolve with the family.

Governance and decision-making

Governance establishes the hierarchy of authority within a family office, and the individual in charge ultimately dictates how decisions are made. While there is overlap between governance and decision-making, these topics should be addressed separately in the family office constitution.

Governance is the framework for decision-making and should be tailored around the family’s objectives, including what they want to achieve with their wealth. Over time, the governance portion of a constitution might incorporate guidelines for the following:

• Family office mission statement and core values.
• Language on philanthropic efforts and the family’s sense of civic responsibility.
• Roles and responsibilities within the family office.
• Requirements, qualifications and skills for office roles (e.g., experience level, expertise, compensation structure, clear job descriptions).

In contrast, the decision-making component of a family office constitution often starts with the establishment of a board of directors, which determines what other committees are needed to oversee anything from investments to environmental, social and corporate governance. The board sets parameters for these committees and, if necessary, provides input on the family office’s mission statement and core values, as well as helps define the office’s objectives.

Hiring criteria and family member involvement

As a family office’s mission, core values and objectives take shape, office leadership will have a better sense of the personnel needed to run operations. While each family office constitution will approach this differently, there should be parameters established around the external hiring process for crucial early hires, particularly executive leadership roles.

Hiring considerations should include:

• Who will make the decisions around new hires?
• How many family members should interview finalists?
• Should a recruiter manage specific hiring practices, such as vetting candidates and setting compensation, or oversee the entire talent acquisition process?
• What qualifications, experiences and skill sets should an executive-level position include?

Relatedly, the constitution should set criteria for family member involvement in the office and could also include ground rules for when and how a family member may work for the family office. One example is having family members reach a specific level of education or years of experience working in a particular field before joining a committee.

Conflict resolution

Creating and adhering to a family office constitution can also help prevent and resolve conflict among family office members. Conflicts can arise from misalignment around the use of family office resources, who should be granted decision-making authority, or whether investments are performing well enough.

To resolve conflict (or ideally, prevent it) a constitution should address hot-button issues such as governance, decision-making authority and the family’s voting process. A regularly scheduled review session with the family is an effective way to manage proposed changes to the constitution. In a family office less than five years old, the constitution might be reviewed annually to address growing pains, whereas more established entities can go two to three years between reviews.

Other considerations

Creating an effective family constitution should be a collaborative endeavor. The wealth creators of the family deserve to have significant input in drafting the office constitution to make sure their values and mission are preserved. The drafting process also presents a good opportunity to engage younger family members by having them work together on a family values statement as representatives of the next generation.

Another critical consideration is how to establish the ownership structure of the family office and divide it among family members and nonfamily members. A common practice is to link performance to incentive compensation, such as allowing the chief investment officer to earn a percent of ownership in the entity.

Navigating these types of decisions can be challenging, which is why many families turn to a trusted third party for help. A knowledgeable family office advisor should be able to:

• Share best practices around size, mix and terms for the various governing bodies within the family office.
• Make introductions to specialized recruiters, solid candidates for leadership roles and qualified service providers.
• Present tax and nontax considerations around an ownership structure.
• Observe and counsel on a wide range of operational matters, including hiring practices, compensation structures, family involvement, when and where to grant discretion to investment teams, organizational structures, and other issues.