Raising risk at the next family meeting
Risk management feels like trying to boil the ocean, so we must redo some of the thinking around it. We will never be able to fully risk-proof the family or company, but building resilience is the most powerful way to manage risk, because it allows us to handle the difficulties we haven’t predicted.
– Family business owner
We heard this prophetic quote at a conference a few years ago. As family enterprise risk experts, it struck a chord and unfortunately, recent events have only reinforced the message: Successful families must discuss risk and resiliency. Fortunately, though, we are well versed in the ideal time for such conversations—the family meeting. Much like a traditional board meeting, many families who own substantial assets together, gather annually to connect and plan around issues like trusts, estates and wealth management planning. But that effort will fall short if risk, and the protection of that wealth, through a properly structured insurance program isn’t addressed too. Having helped families prepare for discussing risk at such gatherings, we created the following overview to both help family enterprise executives and family owners incorporate these elements into the agenda to raise awareness of commonly overlooked risks.
Why families should talk about risk
Family meetings are when everyone gathers, senior members and younger descendants alike, to discuss matters that impact the family across generations. This helps head off potential communication problems while, most importantly, strengthening family bonds. It’s also the most optimal time for risk and insurance discussions – as this might not otherwise come up at more casual family gatherings. One way we’ve seen this done successfully is by canvassing the family about concerns or by bringing in an outside expert to speak about the specific risk or insurance area with the family. This ensures that risk management is not only a dedicated discussion topic, but also that all involved family members hear one coherent message.
Why talking about risk is important
Talking about risk is one of the keys to building family resilience due to families facing ever-more-diverse risks ranging from a global pandemic to hurricane season or even cyber incidents. Being open about risks at the annual gathering will help build awareness. Personal stories are the most effective tool during these initial discussions. For example, so that everyone may better understand the catastrophic potential of climate change, those individuals who have already had adverse experiences—having to evacuate a beloved home in a hurricane, or frantically rounding up horses in the wake of an encroaching wildfire—should be prompted to share. These discussions should then prompt talk about risk mitigation and appropriate proactive actions, like working with an insurance professional to assess relevant concerns and suggest proper protection.
Commonly overlooked concerns
Even vigilant families often glide past three distinct risk areas in their discussions. They are:
1. Liability inherent in roles and responsibilities: Family members who serve as director, officer or trustee—or are being groomed for such a role—are unaware of the legal obligations and potential liabilities placed upon them by the fiduciary standard. Those risks are not too different from those of counterparts in large corporations.
2. Education of younger generations: Many families have not instituted a process in which its younger members are educated about the risks that come from being part of their family. As families grow into new generations, risk exposures can lead to potential liabilities. We counsel families to speak with teens and young adults to outline risks and protocols, so they better understand the potential problems of posting on social media, for instance, or how to handle something as simple as a fender bender (which could lead to major liability claims).
3. Managing collections: While family estate planning often addresses ownership (or gifting) of family heirlooms or art and jewelry collections, we often see a disjointed approach to managing risks of these items. In some cases, appraisals have become outdated over time which leads to inaccurate values for insurance protection. We also see the number of items owned by the family has grown over time and the family loses sight of the overall collection – in which the risks and insurance protection of their investment is also impacted.
Identifying and mitigating risk
Any conversations pertaining to risk must ultimately lead to the development and maintenance of a holistic insurance solution that ensures that the family’s wealth is sufficiently protected. Every family needs to make this an action item, with someone in the family office charged with keeping the collective focused on it. Unfortunately, family members may well set and forget insurance policies, resulting in outdated coverage. It’s important that a risk professional review existing policies and procedures around every contingency, from flood concerns to art handling and transport.
With open discussions about risk and proper mitigation guidance, family meetings can be a source of great development for family members and help nurture, as well as protect, the family legacy. As always, we are available to assist your family enterprise however we can, whether that means ideas on how to discuss risk for a first family meeting or making sure risk is properly addressed at the 20th gathering. ...
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Risk management takeaways for successful families
The most successful family enterprises, namely those with single family offices whose wealth results from the private ownership of a business, have managed to sustain significant holdings through multiple generations. This feat necessitates navigating many different risks over long periods of time which offers valuable risk management lessons for any successful family, enterprise or not.
Recently, we conducted our Family Enterprise Risk Index, a landmark survey of 145 family enterprises across the country, to better understand their current outlook on risk, along with what risk management practices are in place. We compiled the findings for the most relevant lessons that can help you and the many successful families, who are not part of a family enterprise, better improve their risk resiliency. The learnings below are based on our comprehensive analysis and include best practices for risk management that all high-net-worth households should consider.
Takeaway 1: The person who oversees risk management is too often not a risk management expert.
Our index uncovered that most of the family enterprises surveyed do not employ a risk management specialist, despite the challenging and changing landscape. In fact, 70% put risk management in the hands of an executive who also provides services such as tax preparation, bookkeeping and administration, insurance purchasing, investment management, philanthropy and trustee services. While we certainly don’t expect you to hire a full-time risk manager, it is still important to note based on this finding, that whoever is working with your insurance broker, whether that is a family member or an advisor, likely has many other tasks on their plate as well. From our experience, that means things like annual reviews, scheduling collectibles and updating beneficiaries may be delayed or could be overlooked.
The solution: We send out regular communications about risks and insurance matters to keep you informed and we also encourage setting up annual reviews with your insurance advisor. Having an expert that you rely on, and that you can consult regularly, is invaluable.
Takeaway 2: Family risks and educating the rising generation are not necessarily priorities.
Among the most concerning findings of our study: more than 76% of respondents had no systematic or regularly scheduled risk-review process for the family. Furthermore, 41% conducted reviews on an ad-hoc basis only, and another 30% failed to conduct them at all. This leaves the family (and the enterprise) vulnerable.
Even more concerning, of those respondents that conduct either an ad-hoc or annual risk review, we found that 63% do not have an education process in place for the rising generations. And yet, as risk experts, we know that children, especially teenagers, bring specific challenges to the intergenerational table: problematic social media presences, unsupervised parties, car accidents, even issues related to apartments or hazing incidents in college. If such a lapse in focus occurs even in enterprises with the most to lose from it, we feel it is essential to remind every one of our clients to find time to discuss risk as a family.
The solution: Rising generations need to be educated about risk and the potential impact of their indiscretions not only to their own lives but to your family’s well-being, too. In our experience, these conversations are the best way to improve risk resiliency. Families should meet each year to review coverage and make sure all is accounted for. (Your insurance advisor will always be happy to lead this conversation.) Likewise, parents should discuss with their children the various exposures they can, unwittingly, subject the family to, periodically at the dinner table and pointedly around life milestones, such as getting a driver’s license.
Takeaway 3: Even when families do talk about risk, they often miss key vulnerabilities.
Of the eight family-related risk areas surveyed, most respondents only had a plan in place for managing domestic staff. In fact, just around one-third of respondents had a plan in place for all other situations, which include concerns like travel emergency preparedness, emergency preparedness for natural disasters and family reputation management. These findings could potentially leave families within the enterprise vulnerable to a number of risks.
The solution: When you are assessing your risk with family members or advisors, be sure you are looking holistically at all areas of risk. Additionally, confirm your insurance program adequately considers your current situation and covers all your exposures. Has your property become more susceptible to natural disasters? Have you sufficiently shielded yourselves from reputational damage? Are you covered if someone gets into trouble or falls ill while traveling abroad?
These days, every successful family should understand that they are navigating a more diverse and complex set of risks due to the increase in natural disasters, cybercrimes, public health crises and the like. Even those who you would expect to be best positioned to deal with the evolving landscape, such as family enterprises, fall short in some areas. We can all learn a lot from their reality. Please contact us with any questions or concerns about your own risk management program. ...
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A guide to protecting your family office from a cyber breach
In the wake of the massive Equifax breach—which exposed the personal information of nearly half of all American adults—along with the numerous smaller breaches that occur each year, many family offices have raised concerns about how best to protect their data. And for good reason: criminals target and obtain wealthy individuals’ information in order to open high-limit credit cards, borrow directly from banks or hack into the target’s email for nefarious purposes.
That’s why we see an even greater need for family offices to systemically review their management of sensitive information and ensure that standard protections are in place. Because there is no one-size-fits-all fix—even with a cyber liability insurance policy in place—we believe peace of mind is best accomplished through a multi-pronged approach that incorporates education, risk mitigation and a judicious mix of coverage.
Step one is to ensure that all family office staff and family members are trained to avoid clicking on so-called phishing emails (a.k.a. scams) that infect computers with malware or link to a page designed to steal private data. While this sounds simple, even the savviest fall prey. After all, phishing emails were responsible for the hacks at the Democratic National Convention and Sony Pictures, and a Gmail scam was so sophisticated that it fooled techies. Accordingly, we suggest hiring a reputable, white glove security firm to conduct a full review of both the family office staffs’ and family members’ devices and accounts, including social media networks. The best firms also provide in-depth training to any individuals who repeatedly engage with potentially harmful emails, and run educational sessions for the entire family. They’ll even make it fun for the know-it-all 8-14-year-olds, who are almost certainly not as careful as they should be.
Meanwhile, family offices should update their own security processes. Regularly scheduled software reviews by an IT expert are, of course, a minimum requirement. Equally important, and sometimes overlooked, is instituting a process for the movement of cash. Currently, the best practices include creating a pre-established list of employees authorized to transfer funds or initiate payments, and implementing client identification methods. A callback confirmation provision, which is akin to the protocol typically employed by financial institutions, is one example. We’ve seen many cyber criminals use a family member’s hacked email account to send a fraudulent money wire request, and without a verification process that transaction is likely to go through.
Formalizing protocol for voice and electronic transfer requests is essential, as insurance companies will require detailed explanations of these actions before issuing fidelity bonds and newer social engineering fraud coverage—both crucial. The fidelity bonds cover losses—property or financial—incurred through fraud, forgery and employee dishonesty. Social engineering fraud coverage is now considered a standard element in any private insurance policy and is specifically oriented to mass or targeted email hacking schemes. Although you might expect otherwise, these thefts are usually not covered by cyber policies.
Family offices should still consider obtaining a cyber liability policy because it provides customized assistance should a hacker steal data or hold it hostage for ransom. A breach coach, usually a law or forensic accounting firm, move quickly to a) identify what happened; b) assess the impact to the server; c) restore or repair the network; and d) do what is required to make future attacks unlikely. Without such a policy, family office officials are left to find their own experts and answers, which is not easily done nor an ideal circumstance during a crisis.
Unfortunately, those policies won’t protect the office, or family members, should the breach happen to a third party like Equifax. These companies generally have their own cyber policies and are prepared to notify those impacted, but these services were significantly overtaxed and thus unresponsive after the Equifax news. Because high-wealth (and especially high-profile) individuals often need to take immediate action, family offices should also consider obtaining identify theft coverage for each family member. Personal Insurance carriers offer a range of coverage as a supplement to homeowner’s insurance policies. Coverage features range from data restoration, cyber extortion, cyber bullying to crisis management and reputation restoration with a variety of coverage limits available. This specialty coverage can also include credit monitoring and credit freezing if—or more likely when—the next major breach happens. ...
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Liability protection for family enterprise directors & trustees: strategies to attract and retain talent
Families that have grown wealth through ownership of a business over multiple generations have experienced the necessity of utilizing complex entities for planning purposes, including trusts, partnerships and corporations.
A family office is a common example of a corporation that families establish to manage wealth from the sale of their family business, or to preserve wealth outside of their family owned company.
Today in the United States, family businesses have created significant wealth to preserve: family businesses account for 64% of American GDP and comprise 35% of Fortune 500 Companies. Approximately $10.4 trillion of net worth will be transferred by 2040, according to a recent study by KPMG.
Until recently, many families filled key governance roles associated with their trust and estate planning with trusted friends, colleagues, or advisors who were flattered to be asked and honored to serve. But many are now ready to retire and we’re witnessing a shift in who is recruited—and willing—to take over. The new candidates are often seasoned professionals with a greater understanding of key roles and their responsibilities—and also of the potential liability exposures they may face. Not surprisingly, top-caliber directors and trustees very much want to be certain they’ll be protected from any personal liability before they’ll even consider serving in such a role.
For directors, liability exposure arises from a strict fiduciary duty (a legal obligation for one party to act with the highest standard of care for another party) to family members and family operating entities. Directors have obligations and standards of care for their decisions where their exposure to legal liability is similar to that of Directors of larger corporations.
For trustees, liability exposure comes from the administration of a trust and the fiduciary duty to act solely for the benefit of the trust’s beneficiaries.
On a larger scale, families of significant wealth that form a private trust company essentially own a corporation created to provide fiduciary services to their generational family, not to serve the general public or unrelated clients. Such trust companies are overseen by professional boards under a formal corporate structure and require different but nonetheless tailored liability protection. They are also subject to oversight by a banking regulator and are established within jurisdictions such as New Hampshire, Nevada, South Dakota, Tennessee or Wyoming that may have compulsory insurance requirements. All of these factors make risk and insurance evaluations essential.
To manage this increasing variety of liabilities, we suggest a thorough review of indemnification both through contractual language and the purchase of insurance. Contractual language may help, but it is often not sufficient. The best risk management approach is to have both.
We often hear directors and trustees say, “I’m indemnified, so I don’t need to worry”. Alas, indemnification is inadequate if it is not backed with sufficient financial resources. A director or trustee relying upon his or her legal defense costs being provided through an indemnification clause may find there’s no agreement on or availability of the amount of funds available for defense costs. Outside of funding, we suggest consulting legal counsel to ensure indemnification provisions provide the maximum protection permitted by law by the corporate charter or by employment contract.
Most family enterprises buy insurance or may be required to buy it as part of establishing their private trust company. We suggest using a holistic approach to understand the complexity of the family enterprise, and its organizational structure. This approach allows us to articulate the risk profile to insurance underwriters and give us the ability to maximize liability protection for our clients. If an insurance program doesn’t incorporate different corporate structures and tailor the program to specific roles and protect the liability of the role, a potential gap in coverage will occur.
With the heft of family businesses and their contribution to America’s economy comes significant wealth creation and the necessity for insurance to fulfill the role in helping family enterprises attract top directors, officers and trustees. As boards and roles become increasingly professionalized, a careful review of liability protection is essential. ...
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