An inevitable transition of the wealth created over the last fifty years by the first gen to their children, or NextGen, is currently underway.
Planning carefully for a transition of wealth between generations is well recognised as a key requirement to ensure any transition is efficient and successful. Whilst there are many core pillars to a successful transition strategy, in this article, Daniel Channing, Group Head of Private Client focuses on one important pillar; the need for defined and effective communication channels between generations and the frameworks to support that.
In order to develop and implement these effective frameworks, there are six key aspects for any family to consider as explored further below.
1. Identify the necessary channels
Each family has a different hierarchy and demographic structure. Most typically the bulk of the wealth will be transitioning on a vertical pillar (from older to younger).
The vertical (or up and down) framework of communication is therefore perhaps the first to identify. This seems obvious. However, it is common for a wealth creator to focus on the downward flow and less on the upward flow. The upward flow enables the Next Gen to feedback to the first gen; such feedback being critical intelligence to ensure the wealth creator is providing sufficient and frequent enough detail as to their expectations, timings and perceived responsibilities. The absence of an effective vertical framework can often lead to misunderstanding and the failure of an effective, and disciplined, wealth transition. This is true across all the framework referenced below.
A less often identified channel of communication is the horizontal channel. This is the framework which ensures open communication between members of the same generation. This can appear at the first gen layer in the form of the flow of communication between mother and father or, in some cases, between other first gen family members (such as siblings if the family business was founded by more than one first gen family member).
This horizontal channel enables individuals at the same level to communicate and ensure clarity around the roles they will play individually but also as a collective to give effect to the successful transition of wealth.
The third communication channel to clearly identify is the internal to external channel. This can be the channel of communication between the wealth creator and their family office (who often manage the financial wealth of the family). It can also be the family office communicating with the NextGen. The establishment and articulation of responsibilities is key to the success of this communication channel.
2. It is necessary to define the flow across channels
Once the important channels have been defined clearly and identified the focus can turn to determining how and when communication between these parties should occur. This perhaps, once again, seems obvious but, in reality, how communication should occur can be specific to each family and each channel (vertical, horizontal, external).
Taking the time to identify the correct and most appropriate forum (in person, in writing, verbally,) for the circumstance is a very important consideration. The saying ‘it’s not what you say but how you say it’ has never been more true, and effective communication relies not just on the content but the forum and medium by which it is transmitted.
Once the right mechanism and medium for each channel has been determined the second important aspect is to determine the appropriate and necessary frequency of flow across each channel. Too infrequent and the counterparties may feel they are not receiving enough information or, worse, a perception that information is being retained or hidden may develop. Too great a flow across any channel and the impact of the information may be lost or the receiving parties may be unable to process and digest the information being received adequately. Importantly it is often about finding a balance that ensures frequency is suited to respective parties and, critically, this is defined formally such that both parties signify agreement to that flow rate at the outset.
3. Agree the content of communication
Once the frequency and medium of information flow across each channel has been determined the specific parameters of the content should be set out formally.
Defining what information each party is expecting to receive early means there is no unintended disparity where information is expected but is perceived not to be forthcoming or (worse) withheld by the other party.
This phase can also pre-determine whether there are any “off-limit” topics or, conversely, whether there are any mandatory topics that must be communicated.
It is also important to ensure communication styles are adapted to the audience. Assuming technical or pre-requisite knowledge, when it is in fact lacking, can be a common mistake meaning communication content is pitched too high and, therefore, not understood fully by the receiving party.
Finally, constant assessment of the appropriate content is critical as this can evolve and develop over time as the channels become more established. Implementing a mechanism to ensure that content across all channels is periodically assessed for effectiveness is an important pillar to cement in place.
4. Keep accurate records of all communication
The ability to record all forms of communication accurately (including verbal communication and in-person meetings) allows any individual in the channel to revisit this at any point.
Revisiting can be important for several reasons:
- Firstly it might be that it is useful for an individual to go back to refresh their understanding or the recollection of information retained;
- Secondly it can be prudent to make reference to the content of historic communication to help inform the making of future decisions;
- Thirdly accurate records can help to avoid any dispute if personal recollection is not aligned across stakeholders;
- Finally it reinforces the adherence to the agreed communication protocols and frameworks as any departure from these will also be recorded.
The records can take a form specific to the type of content and the preferences of each individual. However, it is important to nominate specific persons to take responsibility for this aspect of the plan as otherwise there can be a tendency for accurate record keeping to fall by the wayside easily.
5. Ensure the information flows are adequately and securely protected
Most channels will inevitably contain sensitive, personal or highly restricted data about the family. For this reason, it is imperative that adequate controls and protections are in place for this data at all phases.
Some common protections to be employed can include:
- Using protected data rooms instead of sending information to family members over email to personal email accounts (which can be hacked);
- Using Non-Disclosure Agreements if any non-family are party to any channel (such as third parties, family office executives, spouses);
- Employing encryption and data security software to help protect the data channel and platforms used; and
- Ensuring only the necessary data is transmitted (with reference to the determinations made by the family under point 3 of this article) and ensuring surplus or unnecessary data is not included if there is no obvious need or reason for it to be included.
6. Harness structure to efficiently operate these channels of communication for the long term
Families have busy lives and identifying and implementing the important plethora of communication flows, frameworks and channels sounds great in practice but, in reality, it takes continued effort and energy to maintain these effectively for the long term.
Using a legal structure to formalise the channels can be an invaluable support framework to facilitate and maintain the channels. These legal structures can include formal committees, formal boards, family councils and company or trust arrangements to provide a structure within which these committees, boards, councils or channels can operate.
Separately, a family governance exercise; including a family charter, can be a very beneficial structuring framework for any family to harness as part of the overall structure. This exercise often uses a combination of workshops with the family, individual discussions and legal drafting to produce a governance charter that can include significant detail on communication frameworks and information flows formalising these even further.
Professional administrators can also be engaged to support formal operation by taking the responsibility burden for calling and organising meetings, recording minutes and tracking the outcomes and actions as well as managing data rooms.
Conclusion
Adequate informal communication has long existed within most family structures. However, as these families move toward a substantive transition of wealth and power within the family, seeking to formalise the flow of communication is imperative to support this transition being orderly, efficient and effective. By identifying the important and necessary channels which need to exist and seeking to formalise the regularity and content flowing across these channels a family can avoid the many pitfalls (and expense) associated with communication breakdown.
Whitmill provides administration, company secretary and family governance support services to ultra-high net worth families and single-family offices. To find our more please contact daniel@whitmill.com
