Today’s business leaders are having to navigate an increasingly complex risk environment. Although not traditionally, a focal point in company reporting and board room discussions, risk assessment has received a renewed focus of late. This in response to the fast-evolving business landscape and emerging family office risks that include new disruptions and threats. For companies to remain sustainable and resilient, a holistic and disciplined approach to risk management is required, one which goes well beyond the traditional considerations of investment and operational risk.
Going forward, sound investment decisions will need to be informed by a more holistic Risk-Adjusted Return assessment that considers non-financial risks such as climate change impacts, as well as risks associated with reputation and succession.
Three Emerging Family Office Risks That Should be Prioritised
Although a contentious topic, the risks associated with climate change impact have now been factored into the World Bank’s risk management strategies. The UBS in partnership with Campden Wealth Research Global Family Office Report 2019 shows that 53% of family offices consider climate change the single greatest threat to the world, but only 34% are engaged in sustainable investing to support this global agenda. Moreover, family offices need to consider the economic, environmental and social risk-impact that climate change is having across all regions when it comes to making any investment decision.
Global warming is already resulting in a significant increase in disaster risk and having substantial impacts on affected businesses. Investment decisions need to be informed by an analysis of climate and disaster risk in vulnerable sectors, areas and populations. It is also important to assess levels of government commitment to managing disaster risk and maintaining economic resilience and stability through social protection measures.
When considering development investment and financing, family offices need to ensure that climate and disaster risk management approaches are prioritised, including risk reduction and response plans as well as financial instruments which provide disaster-security.
Of all the emerging family office risks, climate change impacts create uncertainty and pose a threat to investments across many regions of the globe, there is a growing need for family offices to support the sustainability agenda and respond to a global trend of increased social and environmental consciousness. The priority should be to channel investments into areas and sectors where risk can be adequately assessed and managed.
For a family business, reputation is becoming an increasingly important asset. Consumers are now engaging with brands and companies on a more personal level and the trend is to transact with businesses that share the same set of values and priorities as they do. The global community is also demanding greater transparency and family offices need to be very conscious of the fact that it is the owners and executives behind brands and businesses that tend to be targeted when questionable business practices and high-risk products negatively impact communities. Therefore, it has become critical for companies to align all decisions and actions to well-articulated guiding principles and values with adequate governance to ensure consistent applications of these principles… or risk a reputational fallout.
Family offices need to also be conscious of the reputational risk that comes with the digital age and the volume of data that is now shared and stored online through social media and other platforms. With reference to the Panama Papers which leaked sensitive information about Family Offices and their investments, it has become critical to take the necessary measures to protect the privacy and security of sensitive information which can be easily exploited and misrepresented in the public domain. This does not just pertain to business-related information but also controlling and managing the availability of personal information and how it can be interpreted by the public.
Just over half of family businesses have a succession plan and statistics show that only one in three successions are successful, making multi-generational wealth transfer a strategic priority for many family offices. However, the real commercial risk attached to succession relates to the conflict between the priority of multi-generational ownership and what the business actually needs to be sustainable. Business strategy is often undermined by the emotive agenda of family dynamics resulting in a real risk to the sustainability of the enterprise.
Often the family business is the key source of income for all family members, whether they are active in the business or not, so all members therefore feel invested and expect involvement in strategic decisions. This can be counter-productive and can negatively impact organizational results. It also makes succession planning extremely difficult as family and business interests collide causing potential break-downs in relationships.
This challenge is most evident in family businesses where the family-first approach has manifested in poor governance and incoherent decision-making structures and roles that do not clearly separate the business of the family and the running of the actual business. Therefore, formalized governance structures are essential in balancing the operational and strategic management of the business and the personal interests of the family.
The employment of an outside board of directors or the creation of a family office can ensure balance between the rational, objective processes and the need to maintain family harmony and wealth-protection. By having these structures in place, succession becomes far more seamless and the risk of a family business becoming another statistic reduces significantly.
Understand And Manage The Risks
Most family offices, especially those with a multi-national footprint, are already having to adapt to the challenges of tightening regulations, geopolitical uncertainty and the increasing threat of industry disruptions and cybercrime in an era of digitisation.
These variables are starting to receive the attention they deserve but non-financial risk factors like climate change, reputation and succession can also derail the success of family businesses. These emerging family office risks need to be carefully considered when it comes to investment decisions, information security and the set up of governance structures.