Family offices – step 21/11/16 Clare Archer

1. Introduction - structure Classic saying about family offices - when you have seen one family office…. Structure depends on circumstances and priorities of family: Geographical Where is business in cycle? Where family in cycle? What services the family office to perform?

2. What else determines the structure? Revolutionary vs evolutionary Choice of structures Style depends on: Size and scale Employing people in house or outsourcing Privacy Control Cost

3. Types of structure Administration Hybrid Full range Family office undertakes basic administration / bookkeeping / coordination but outsources many functions Hybrid Certain functions in-house – often strategy – but choose whole of market approach to buy in the best assistance Full range Family office performs all the functions to be carried on in house Specialised activities may be outsourced

4. Legal Structure – key considerations Families wealth and wishes Location Managements and control Cultural issues Where are they in the wealth cycle? Governance structure must be implemented along with the legal structure of the family office NB Can have informal governance structure but recommend a robust governance structure is put in place

5. Informal Family Constitution Reflects the family’s beliefs and attitudes in relation to a wide variety of important matters: Wealth Leisure Education Work relationships and marriage Privacy Danger of accumulation of false assumptions, misunderstandings and expectations. This may work for first generation family but it is unlikely to work as wealth becomes more spread across families and down the generations.

6. Formal Family Constitution A statement of intent or agreement entered into by family members in relation to the family office Sets out How the family wishes the family office is to be run The family’s goals and long-term strategy How different members of the family will interact with the family office How the family will communicate with the business

7. Creating a Formal Family Constitution Understand: what is the purpose of the family office e.g. “why the family want to be in business together?” Shared purpose in a family office is usually a combination of financial and emotional reasons: Providing the desired level of financial security for a growing family Achieving a lifestyle Pride in a brand or a reputation for being a family enterprise Creating, preserving and/or extending a legal or family ownership to pass to the next generation Process leading to the family constitution can facilitate the success of the business/investments for the benefit of the next generations. Beware of dominant family member and/or hidden emotions, illness or agenda. Danger it will build expectations if not properly managed

8. Contents of the Family Constitution Section 1: Our Shared Purpose A statement of why there is a family office – vital for buy in Section 2: Ownership Governance The role of owners Bloodline or spouses Working or non-working owners Return on investment/dividend policy Transferring ownership Decisions reserved for owners (including how these are made) Section 3: Family Governance The role of family members Family Assembly and Family Council – act as advisory board Family policies (e.g. employment/remuneration of family members) Is there a need for other committees eg audit, investment, education Resolving disputes

9. Contents of the Family Constitution (Contd) Section 4: Corporate Governance Role of the board Composition of the board Selecting and appraising board members The role of non-executive directors Communication between the board and owners of the wider family Remuneration and incentives Decisions reserved for the board The responsibilities of any board committee

10. Key Points Problems can arise in family offices and considering them from the outset can prevent them. Family governance must be able to evolve as infrastructure of family changes Financial Reward is a notoriously difficult area to address from a family perspective when some involved in management and others on outside. Communication between the family office, the business and the family, often through the Family Council, can ensure expectations are managed. A well drawn up Family Constitution can help to reduce conflict and aid the future success of the family for generations to come. Legally binding? Have to give the family the opportunity to meet and contribute Importance of Exit Arrangements – the ultimate safety valve!

Shareholders’ Assembly Corporate Governance Family Governance Bloodline only Reserved matters Shareholders’ Assembly Bloodline and Spouses Remuneration Family Assembly Executive Board Social Educational Formal ED1 ED2 ED3 NED Management

11. Infrastructure Investments Risk Employees Tax compliance Policy, Audit, Ring fencing, Accountability Risk Confidentiality / security, insurances Employees How funded – does it charge or require funding Employment contracts / incentivising / retention Tax compliance Service agreements Technology

12. Family office – ownership structure Variety of ways in which they can be structured but often through a private trust company – PCT PCT can provide Continued administration for the future Reduce liability of family members if on board Can provide fiduciary services directly to family Family may wish to consolidate family office in existing structure Simpler for administration Reduce cost But combined holding structure greater risk in the event of claims More usual to have a stand alone structure

13. Family Office within existing Structure

14. Family Office within new Structure