I have a friend who I will call Gordon who owned a company which I will call Artus Limited. In accordance with good corporate governance, he appointed a non-executive board and invited his friend Martin to chair it. The company did not do as well as he expected and the bank of Artus asked Gordon to cut his salary and bonus; Gordon refused. The bank then approached Martin to tell Gordon to cut his salary and bonus; Gordon again refused.
After some time of negotiations and cross words Martin asked the board to vote on Gordon’s removal, they did and Gordon was removed from his own company. He was left with shares of a company but at the mercy of a board of which he was not part.
Compare this to the situation I came across recently. A wealthy man Mark made a Will and appointed three of his five children as Executors together with a family friend. The decisions of the Executors needed to be unanimous. One of the three children Harry, was obsessed with calling in a loan, whereas the others were more relaxed about letting it lapse. Harry flatly refused to renounce his office as executor. As a result there ensued three years of litigation.
This is a problem which wealthy families have faced for centuries. Jarndyce v Jarndyce the chancery court case referred to by Charles Dickens throughout his book Bleak House is about a family fighting over the fortune of a deceased. Miss Flite had long since lost her mind when the narrative begins. Richard Carstone dies trying to win the inheritance for himself after spending much of his life so distracted by the notion of it that he cannot commit to any other pursuit. John Jarndyce, by contrast, finds the whole process tiresome and tries to have as little to do with it as he possibly can. The court case goes on interminably and finally ends up with the entire estate devoured in legal fees so there is nothing further over which to fight!
Sadly the case of Jarndyce v Jarndyce has not given succession and estate lawyers a good name. Many UHNW families are suspicious of professionals putting in place structures and plans which in due course feather their nest rather than that of the family. I set up Garnham Family Office Services to provide families with independent, neutral advice without any conflict of interest since I instruct, monitor and report on the process of lawyers to implement the best solution for the family. All solutions are designed with the aim of saving money and resolving conflicts without the need for legal dispute resolution.
Family Governance is a term I coined with this aim in mind. Many years ago I took the time to study the Cadbury report, the Greenbury report and then latterly the Combined Code of Common Conduct to see what lessons families could learn from good corporate governance to avoid conflicts turning into a costly nightmare.
In many offshore trust structures private trustee companies have been set up to take decisions with a board appointed who know the family and the settlor’s intentions and wishes. However if there is boardroom within the private trustee company, can a troublesome director be removed and how can they stop that power being abused? A settlor does not want his chosen board sacked by a stranger in favour of their own officers.
This was the discussion I had with the head of one of the wealthiest families in the Middle East Mohammed. He wanted to have the same checks and balances he had in his corporate structure in his private structure, but did not want it weighed down with compliance for which he resented paying. I suggested we went to see the Bahamas Financial Services Board to see if it would be prepared to consider creating a new entity to hold the shares of his private trustee company in Jersey which would act in the same way as a non-executive board, but with the protection of limited liability. After numerous meetings and discussions I drafted the Executive Entity Act which became law in 2011 and operational in February 2012.
The beauty of the Executive Entity is that because it does not hold any value it does not need to have the full weight of compliance which other structures need. A private trustee company although it may be holding billions of dollars of assets in trust does not itself have any value. The assets which are held in trust are not on the balance sheet of the company. The only assets of the company are those needed to pay its directors and to run the offices which are relatively insignificant.
Mohammed was one of the first families to have the shares of his Jersey private trustee company held by a Bahamas Executive Entity. He was delighted. He now did not need a complicated Governance memorandum which he was concerned would fuel disputes rather than avoid them. He was confident he had the right people in the right place who knew him well enough to take the right decisions at the right time taking into account changes of law and circumstances. Furthermore, while alive he could chair the board of the private trustee company so that he could watch over those he had appointed to make sure they knew his wishes and his way of doing things. Mohammed is not alone in wanting private succession plans simplified, easy to manage and to save on fees and running costs. He was delighted to be able to save thousands of dollars annually simply by making a few changes in the holding structure which we instructed lawyers to implement.
Bahamas Executive Entity (A Modern Day Bleak House)