Frank, Inter-generational Discussion Is Key To Responsible Stewardship

The pandemic has been a key factor in shaping our current economic and political landscape. Family offices are no doubt already aware of a ‘Covid paradox’ relating to the wealth of the world’s richest families. A report by Swiss bank UBS found that billionaires increased their wealth by more than a quarter (27.5 per cent) from April to July 2020, just as millions of people around the world lost their jobs or were relying on government schemes.

The power of the richest to responsibly pass on wealth came under increased scrutiny against a backdrop of rising inequality. The disruption and uncertainty have led to diverging opinions about how to pass on wealth, therefore families must increasingly confront difficult decisions when meeting short-term needs and preparing for long-term sustainability and success.

Evolving concepts of wealth among younger generations may cause inter-generational friction that can impede long-term family governance and succession planning.

Meanwhile, ever increasing transparency through technology and regulation may expose perceived family scandals to adverse publicity and criticism that can damage reputations.

Increasing numbers of people are wondering how their wealth can better contribute to the public good. How can advisors best help such families to successfully navigate these circumstances in ways that are not only consistent with legal obligations, but with what is right?

Applying Stewardship Principles

A frank discussion is needed among advisors on responsible stewardship of wealth and what it means for wealth holders in modern times. A recent STEP report, Family Dialogues On The Responsible Stewardship Of Wealth: A Guide, makes the case that applying stewardship principles based on well-defined family values will help build a strong foundation and steer better decision making. Responsible stewardship can align immediate and long-term needs while maintaining the agility to cope with changing environments, whether caused by pandemics, the social zeitgeist, regulation, or climate change.

We believe this approach should be an essential tool in planning and everyday decision making. We are calling on advisors to consider how they can help families cement relationships within themselves across the generations, by identifying a common purpose, building succession plans, protecting family reputations, and contributing to the public good, whether through investment or philanthropy. This final point is something we’re seeing increased appetite for among wealth holders in the wake of the pandemic.

A shared commitment to stewardship principles is the ultimate test. It anchors a family in how it operates and acts as a compass, embedded in every thought process, decision and action. Responsible stewardship is about demonstrating authenticity and developing trust. And it means that short-term decisions align better with longer-term goals, with direct and indirect consequences considered simultaneously.

Why should this matter to advisors? Because it is our role to initiate the stewardship discussion with clients and to guide them through an exploration of what is important, helping them bridge gaps and form bonds. Cultivating communication, understanding and achieving clarity, will help advisors better help clients, supported by a foundation of tried-and-tested stewardship principles embedded into the planning process. 

Applying Circular Economy Principles

STEP has also produced a further resource to help with conversations about the governance of wealth- and business-owning families. It is entitled: Circular Economy Principles for Family Business and Wealth Stewardship: A New Governance and Sustainability. Circular economy principles, when applied to family business and wealth stewardship, can provide a new approach to governance frameworks for wealth- and business-owning families.

Circularity, in broad terms, means both avoiding and finding value in ‘waste’. This refers not only to natural resources but also to the human resources within families. It includes family members not directly involved in the family business but who have a stake in the future and who need to support those in more active roles.

Such family members highlight the kind of paradoxes families face. Should a family member be channelled into working in the family business? Or should they be allowed (and encouraged) to pursue their own career, reflecting their personal interests and aspirations? Are there ways to achieve this that add meaningful value to the family and its wealth and business interests?

This book suggests the answer may not be ‘either/or’. Perhaps a ‘both/and’ option can be a solution. Family members can be supported on the path to self-actualisation. They can be excited about supporting and taking advantage of the opportunities the family business offers. They can also contribute their personal knowledge, skills and experience to enable the business to expand into new areas.

Circularity principles, as defined by the Ellen MacArthur Foundation, are eliminating waste and pollution; ensuring products and materials are kept in constant circulation; and regenerating nature. The authors of this new resource believe that through the application of circularity principles to the assets and investments owned by families, and by the application of these same principles to the families themselves, we can help realise the vision of a circular economy – and one that works for all.

The rising next generation should be encouraged to listen, learn and act as needed. To make the choices that are right for them. To take responsibility for their futures by engaging with their families’ expectations. The next generations are the future of families and of our world. They should be better understood and supported, so that family human capital is not taken for granted, wasted or overlooked.

This, in our experience, happens too often and with the proper intervention can be avoided. It is critical to have dialogue within families. The encouragement of the next generation to listen, learn and act does not mean that there is no need for lifetime listening, learning and action by all generations in the family. Learning within the family is a mutual undertaking.

It is also important to develop clear roles for ‘family elders’, whose experience can help in mentoring the younger generations. Families define themselves in different ways, some narrowly driven – perhaps by the family constitution – and some much more broadly. Circularity encourages inclusion and optimal deployment of all family members, irrespective of whether  there is a family business.

One of the main objectives of a circular approach is not only to ensure that there is no waste (meaning that a family elder and their experience are channelled into effective roles). It is also to ensure that the family and its business and wealth interests truly regenerate as a result of the combined strength and resilience that a more effective younger and older generation can provide. This allows families to focus on their business and wealth creation, alongside maximising their impact on communities and society.

Where there is alignment, there is potential for much more than continuity and stewardship. There is potential for true self-actualisation of all family members, ensuring emotional wellbeing and aligning to the objectives of the family for their own businesses and wealth, and for how these can benefit all stakeholders for the very long term.

As the Covid crisis has shown, change is the only certainty in an uncertain world. Acting today with tomorrow in mind is always a challenge, particularly when fear and uncertainty are rampant. The coming decades will see further upheavals. Families must be agile and adaptable while remaining loyal to their core values and beliefs. It is up to us, as advisors, to start the conversation on how that happens.

You can find the resources mentioned in this article by visiting: step.org/research-reports/responsible-stewardship-wealth 

Emily Deane
Emily Deane TEP is technical counsel and head of government affairs at STEP. Emily has practised as a private client and trust solicitor in the UK, Bermuda and the Cayman Islands and she specialises in all aspects of the private client industry including wills, property, tax planning, estate administration, onshore and offshore trusts and litigation. Emily leads the policy and technical work at STEP informing public policy in relation to trust and estate-related issues.