Partner - Head of Family Governance & Succession
Family Governance and Succession is central to everything we do. As the leading International Family Office we have a duty to set the benchmark for excellence in this area. As a group with a strong Trustee heritage and a significant Trust business, we have a very real fiduciary responsibility. Just as importantly as a broader Family Office and Investment Management business, it is imperative that we de-risk our clients’ intergenerational handover by focusing on Governance and Succession.
What do we mean by Family Governance and Succession? This goes way beyond the traditional estate and tax planning. It is the process through which families articulate their Purpose, their Vision and their Values (PVV). It is the creation of a framework, with communication at its core, which enables consistent, good decision making on issues from Family Business to Family. It is shaped by, and shapes, all Four Pillars of Capital.
Our broad experience of working with families from around the world has reinforced our passionately held belief that successful intergenerational strategies must recognise all Four Pillars of Capital: Social, Intellectual, Cultural and Financial.
We work closely with the Next Generation to ensure that they too appreciate the Four Pillars of Capital, and encourage open conversations so they can share concerns and aspirations, build their networks and gain a broader perspective.
We understand that one of our primary responsibilities is to help equip future generations with the skills,experience and perspective to manage their responsibilities as well as the challenges and opportunities they will face.
Additionally we appreciate that each generation may require support in communicating
their concerns and aspirations as they wrestle with the responsibilities associated with being custodians of wealth.
We offer a variety of opportunities to our clients as demonstrated below which not only strengthen our relationship with them, but also offers the opportunity to develop new relationships within the family.
Our engagement with the Next Gen is calibrated to the specific challenges they will face at various stages of their lives and in the process of inheritance. Whether we provide training, experience and peer group discussion alone or in conjunction with professional partner firms, feedback from participants and often their parents evidences the tangible benefits that accrue.
“I learned a lot about the business world, the family business world and most unexpectedly about myself. Each lesson was well organised and interesting”
“Thanks so much to you and your team for organising such a stimulating and motivating programme. It has certainly provoked much thought and already created much debate. Absolutely brilliant!”
Unfortunately it seems to take major corporate failures to highlight the virtues and merits of a diversified portfolio. Naturally, investment managers who potentially held such a failure in client portfolios, also choose to trumpet the benefits of a diversified portfolio at such times.
The subject of diversification also raises the active versus passive debate. One of the growing arguments against passive (or index tracking) investing is the inherent concentration risk in particular companies. In the case of the JSE All Share Index, it is Naspers at nearly 20% of the index (with Naspers, Richemont and BHP Billiton together constituting 34% of the index). Certain longer-term investors may be comfortable with such a concentrated exposure, but index investors need to be aware that although they may no longer be at risk of underperforming a particular index, they may be significantly increasing concentration risk.
When investing in a listed company, investors are implicitly placing both their capital and their trust in the company and most importantly, in the company’s management team. Management are ultimately the stewards of shareholder capital and have a critical role to play in determining either the success or lack thereof of a particular investment.
In this regard, shareholder and management interests should be aligned in achieving long-term success. In a short-term oriented investment environment fixated on short-term peer rankings, industry awards and the pressures of chasing fickle inflows, achieving such alignment is increasingly difficult.
One important flag in the Steinhoff saga was of a culture of risk. Key management and executives entered into significant derivative positions and/or leverage to benefit from an increase in the company’s short-term share price movement. Although the argument can be made that management had material ‘skin in the game’, we view this as a misalignment of interest. Management stood to benefit from an increase in the short-term share price, despite potentially exposing shareholders to excessive risk or value destructive deals over the longer-term.
It takes time to understand a listed company’s culture. As outsiders, investors are reliant on management interaction, company disclosures or press reports and often an investor’s opinion on a particular company’s culture is based on accepting the status quo.
Paying close attention to a management team’s response to/or treatment of a poor set of results, a particular deal that may not have gone as planned or potentially unethical internal behaviour can often give good insight into the company culture. One notable example was Steinhoff management and executive team’s trading in Steinhoff shares leading up to the announcement of the acquisition of Pepkor from Brait in 2014. When later questioned on why the company was not under ‘cautionary’, Steinhoff’s response was that the ‘advice received was that no cautionary announcement was necessary’. To remain beyond reproach, and specifically to avoid after the fact questioning and insinuations, we would prefer management and companies to always take the most conservative option possible in such instances.
The ideal for the long-term investor is to find a company with a shareholder (both large and small) centric culture who understand and respect that they are ultimately custodians of all shareholders’ hard earned capital.
An even more recent example is the case of a JSE-listed retailer’s write-down of a recent overseas acquisition. Whilst the write-down was expected, the company recently altered their remuneration policy to incorporate ‘return of capital employment’ as a key metric. The write-down has the effect of boosting return on capital employed even if the company profits remain flat. Although the introduction of this metric may well be warranted on a longer-term view, the timing of the introduction in conjunction with the write-down is unfortunate. We have consequently placed our investment recommendation on the company under review.
In the same way company management are custodians of shareholder capital, investment managers fulfil the same role for clients’ capital. Just as company management are held accountable in cases of corporate failure or poor allocation of capital, investment managers should also be held accountable for poor decisions. All investment managers make mistakes. When mistakes are made, Stonehage Fleming Equity Management spend time examining what investment process refinements could be made or what may have been missed. Accepting that a particular investment decision was a mistake is, in our view, the most difficult acknowledgement for the long-term focused investment manager (even more difficult than a decision to allocate investor capital to a particular company). Analysing and assessing the merits of a new investment is a methodical and process-driven decision, accepting a mistake and taking the appropriate action requires accepting short comings in one’s research or process.
We do not agree that a failed company’s management team or lack/quality of disclosure should be blamed when investment decisions do not work out. The responsibility of the long-term investor is to understand the company where they are allocating client’s capital. As investors, we are quick to judge a management team for a poor deal and would not tolerate an excuse of ‘lack of trustworthy information’ and should therefore be held to the same set of standards as company management teams.
We believe it is essential to differentiate between organic growth and cash flows as opposed to ‘engineered’ profit growth. Companies are able to grow short-term profits through one, or multiple, acquisitions which may or may not make strategic sense or be in the best interest of the long-term shareholder. The low interest rate environment experienced over the recent past has been particularly friendly towards acquisitive companies. When companies embark on corporate activity, our preference is for management to have a track record of successful activity and for the acquisition to fall within the acquiring company’s ‘core competency’ (whether this competency is operational, technical or even regional related).
In Steinhoff’s case, the company embarked on a series of global acquisitions over the past five years. The acquisitions, in conjunction with changes in segmental reporting and a change to the financial year end in 2016, made consistent analysis of underlying ‘organic’ growth near impossible. Further to this, it now appears very likely that cash flows and even profit numbers were inflated over the past few years.
In December 2013 Fleming Family & Partners (FF&P) published “The World in 2043: Wealth Strategies for Intergenerational Success.” In January 2015 FF&P merged with Stonehage to form one of the world’s leading independently owned family offices represented in eight jurisdictions, offering a wide range of investment and family office services. This follow-on report contains the input from a survey conducted during 2015, which benefited from 85 responses from 78 families and advisers; 22 of the respondents were from the “Next Generation” (aged 18-25).
Since the financial crisis in 2008, there has been increased scrutiny of the rich and of the perceived widening of the gap between he “haves” and “have nots”. There have been moves by various governments to increase tax revenues and what might previously have been considered efficient tax planning is now regarded with suspicion and even opprobrium. In light of this public and political sentiment, families have a renewed focus on their responsibilities as stewards of capital. The findings of our new report show the majority of Ultra High Net Worth (UHNW) families are seeking to strike a balance between preserving and growing the assets they are able to hand on to members of their own family and ensuring that they do this in a socially responsible manner. Giving back to society and local communities is important to these families.
In this context, we find there have been subtle but highly significant shifts in attitudes, which suggest a change in the way families approach the long-term management of their wealth and their legacies. A substantial majority of respondents believe quite strongly that great wealth can only be preserved across generations if it has a defined purpose and is used not only to benefit those who inherit, but also to make a positive contribution to the community in which they live and to the wider society. They also believe wealth is only sustainable if the family has the skills and experience to respond to the challenges and opportunities of an uncertain environment. These views were even more strongly held by the Next Generation, suggesting they will become more central to the management of family wealth.
The impact of this change of emphasis is likely to be:
From the many responses, concerns and ideas from the families that we spoke to for this survey we have tried to group these themes around four “pillars of capital”. In addition to the purely financial pillar, we identified these as intellectual, social and cultural. As the report will show, these Four Pillars all support a family’s success and its legacy; reliance on any one, or a reluctance to embrace the benefits of all four could conversely be detrimental to a family’s long-term interests. The four can be defined as follows:
Financial Capital comprises those tangible assets, business and intellectual property of the family which have quantifiable financial value.
The Intellectual Capital of the family is its accumulated skill, knowledge, experience and wisdom, which it can apply to the management of its wealth, its contribution to society, the individual fulfilment of family members and the collective wellbeing of the family.
This is the way in which the family relates to and engages with the society and the communities in which it lives and operates. It includes social positions and the networks which help the family to use its wealth and other assets to the benefit of society and the good of the family.
A family culture brings the family together by identifying shared perspectives and themes in the way family members conduct their lives, their approach to business, the way they treat others, the way they contribute to society, their attitude to wealth and the things they value.
In our research for our “The World in 2043” report we spoke to families still reeling from the aftermath of the global financial crash and, as such, found that their primary focus was a protective, conservative one of preserving their Financial Capital. Our research for this follow-on report has taken place against a background of economies beginning to recover from the global downturn and return to growth (albeit at far lower levels than seen before the crash), and the focus of families has shifted with this growth. Despite the obvious risks in the current environment, families are now taking a longer term view and there is greater emphasis on growing capital as opposed to merely preserving it. We are beginning to see that UHNW families are becoming more entrepreneurial and willing to accept a degree of risk, where the opportunity merits it. There is also some indication that wealthy families will accept higher taxes, provided that tax rates do not create a disincentive to wealth creation.
Beyond the Four Pillars, the principal findings of our new report are:
We are grateful to all the contributors to this report for the time and insight they have given us.
In short a passive fund seeks to replicate the relevant market index, rather than select individual stocks, so that the performance of the fund will be in line with that index, less any management or transaction costs, which are generally mall. It could be one of the main stock market indices, such as the S&P 500 for US or the FTSE 100 for UK companies, or one representing a smaller subset of the investment universe based on a particular sector or investment style.
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