The governance issues that can arise with art investments and collections are important and a noted expert in the field, Randall Willette of Fine Art Wealth Management, examines the issues.

Editor’s note: Here is an article on the governance issues that can arise with art investments and collections. It is written by Randall Willette, managing director of Fine Art Wealth Management. Among his roles, Willette is a member of the editorial advisory board at WealthBriefing, sister website to this publication.

Family governance is a term sometimes used to describe the management of a family’s assets by a family office however rarely do you see it applied to the family’s private art collection.  Just as family governance is important to ensuring adherence to the family’s value system and successful wealth transfer of financial assets the same holds true for a collecting family’s art assets. 

Today, the private collections of ultra-high net worth families can rival those of major art institutions and private museums and foundations are being created at an astounding rate.  Unfortunately, with the exception of a small minority of major collectors, most families either never address governance when it comes to their art assets or wait until they are in the midst of a family crisis before they finally get serious about creating and implementing a sound art governance plan.  

Applying governance

It’s difficult to define “family governance,” because the term means different things to different people. Sometimes, the term is used interchangeably with “family office” - a central administrative function that manages certain aspects of the family’s affairs such as its investments. 

In academic circles, family governance is commonly defined as a process to help make better, more-informed decisions.  A sound family governance system for a collection comprises both structure and discipline. The concept of family governance for an art collection has to be rooted in the notion that there’s something worth governing, perpetuating and developing. Because each family’s needs are different, there is no real standard or template to follow.  To be most effective, however, whatever system that is ultimately developed should facilitate three essential functions:

-- Agreeing shared values for the collection and what kind of legacy the family should strive for;

-- Creating a framework for decision-making;

-- Setting expectations for the collection;

Agreeing shared values

In order to agree shared values for a family collection the process of creating governance-related documents such as a family collection policy or a mission statement can be truly valuable. If a family can come together and engage in the collaborative process necessary to produce such a document, there’s a good chance it will emerge with a set of principles that reflect what’s important to the family, what kind of legacy it would like to achieve for the collection,  and how to accomplish it.

Revisiting these principles on a regular basis and holding the family to them at all times can help family members stay connected to each other and to their collective goals for the collection. 

Creating a framework

While agreeing shared values is a necessary step in establishing a robust family collection governance system, it doesn’t create a framework within which a family can actually make decisions.  This requires the formation of a family art council, a structure that is typically the chief decision-making body for managing the collection and is bolstered by a well thought-out collection policy and set of bylaws.  We’ll talk more about the family art council later in this paper.

Setting expectations for the collection
A common complaint within families that fail to have a rule-guided, transparent system in place for their collection is that most decisions are made, or appear to be made, ad hoc. The problem with such a decision is that it is susceptible to challenge on one or several grounds including: it was not consultative; it was not deliberative; or it was too emotionally driven. By contrast, if a decision is made pursuant to a rule directed and transparent process, it will be - by definition—deliberative and consultative. Moreover, it’s much more difficult to attack a decision that results from such a process as being motivated by personal emotion. 

Families that have created a collection policy often find that each time the family art council issues a decision that the family ultimately accepts, the respect for the decision making process itself grows. And with each favourable outcome, the system acquires increasing moral and persuasive force. If the family can get to this point, the authoritative impact of a decision rendered by the family art council regarding the collection becomes almost unquestioned. 

One key to make sure a collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in the decision making process. Equally important, if the family can create a set of rules and procedures in advance and then seek to apply them neutrally to situations as they arise, it’s more likely that the decision will be a principled one. Such a decision is then likely to have greater moral and persuasive force.

The Family Art Council: A critical framework for the family collection

As suggested above, a family art council is the single most important structure a family can put in place to help address and resolve - in a systematic and normative way - issues regarding the family collection.

These may include:

-- How to conform the strategic and tactical plans of the collection to the family’s core values;

-- Determining what kind of legacy the family should strive;

-- Preserving and protecting the family’s art assets;

-- Planning for the transfer of the collection to the next generation;

-- Identifying charities the family would like to benefit through gifts from the collection and what, if any restrictions they wish to place on the gift;

-- If the decision is made to sell the collection developing an orderly disposal strategy.

Depending on the nature of the family’s concerns, the family art council also can address curatorial management issues relating to setting standards of best practice for art due-diligence, valuation and collection management. The family art council can be an extremely powerful part of a family’s strategic plan for the preservation of the collection’s legacy and culture, and for managing potential family conflict.

When creating and structuring a family art council, one of the most critical questions that must be resolved is who will be members of the council and is there a role for outside advisors and other non-family members? Part of the challenge is to find the answers that are best for the family -that’s why it is helpful to have as many family members as possible at the table initially to talk through them.

Once these questions have been thoroughly discussed and a consensus has been reached, many families will create a document that officially establishes and empowers the family art council, and delineates its role and functions.

Roadblocks

There are numerous obstacles that can hamper governance discussions regarding a family collection and the implementation of an effective system. These may include the following:

Avoidance. One classic roadblock is the presence of a first-generation wealth creator who refuses to engage in the governance-development process because it involves both giving up control of the family collection and facing the fact that their taste in art is not shared by younger members of the family.

Resistance to change. This roadblock can present itself when the wealth creator attempts to implement his or her vision of a family legacy for the collection, including too many restrictive provisions. More often than not, this kind of overzealous approach creates a legal quagmire and stalls itself in the process, so nothing ends up getting resolved or implemented. 

Lack of Experience. The qualities that brought a family business to great success are often not the same qualities that can help smoothly transition the family collection to the next generation. Decisions about its future can be quite emotional and deciding where the collection may reside after it passes from a family’s control, be it with an institution such as a museum, a family member or another collector, also is a key consideration. 

Other roadblocks can arise when a governance system is set up and then ignored, or when the governance system is difficult - if not impossible - to amend to reflect changing family needs. In the light of potential tax and other financial liabilities, deciding on the best strategy early on can be of critical in valuing and transferring a family collection.   

Best practices

Unlike the financial markets, the art market lacks professional regulation and there are not industry wide standards of best practice. Over the past few years, provenance, or the history of ownership for a particular work, has become increasingly important. Provenance can help determine the authenticity of a work, establish the work’s historical importance, and trace the work’s legitimacy.

Undertaking comprehensive art due-diligence can also help prevent or diminish family disputes. If the assets are not appraised and reviewed for proper title and provenance, distribution of individual items can result in a highly inequitable allocation to beneficiaries at time of distribution. 

Dealing professionally with art requires time and considerable knowledge. Obtaining recognition as an art expert generally requires intense study, whether theoretical, academic or practical. There are a variety of art market professionals and a family’s chosen experts should be recognized leaders in their field. 

Even for families stocked with talented and accomplished individuals, it is a mistake to attempt to develop and implement a family governance system for a collection without professional guidance and support. This process is a complex and nuanced one that calls for some independent vision. Even the most experienced collecting family can benefit from professional guidance in today’s fast paced and complex art market.

Other best practices for a family art governance system include the following:

--  Review the system annually and update if necessary—there should always be a process for changing or amending it;

-- Understand the real value of the collection and consider it as part of the family’s overall financial and estate planning;

-- Know the collection and learn about its history, availability, market trends and prices supported by quantitative, qualitative and behavioural research;

-- Plan for the future by discussing with family members early on their level of interest in the collection and what kind of legacy they want to strive for;

-- Should a family decide to gift the collection, bring in an art succession planner that can help work through the range of emotional and practical issues;

-- Be aware that the art market is becoming more litigious and retain the services of an experienced art law specialist.

Monitoring performance

Family art collections also need explicit governance practices that hold art market professionals who are advising on the collection accountable, such as pre-determined benchmarks, regular evaluations based on set criteria and clear reporting outcomes. Accountability plus objectivity contribute to building trust, a key underlying factor in the selecting the best team of art experts.

Independent and objective advice on art is not always easy to obtain. To date, this has been provided largely by art dealers, galleries, and auction houses for which conflicts of interest often exist. Families would be wise to seek advice from independent professionals who have no vested interest in the art and draw on expertise from both the academic and commercial art worlds. 

Conclusions

Like many other things in life, you’ll get out of a family governance system for a collection what you put into it. If you invest the time (it’s typically a multi month process) and some careful thought (we recommend using an expert to help guide this process), and include input from an array of voices (both family and nonfamily), there’s a good chance collecting families will end up with a reliable way to make decisions regarding their art assets that are more likely to be respected over time. As more time passes, the moral legitimacy of this system will be cemented, providing a solid foundation for the family to build upon its successes and its legacy.