Here is the first part of a two-part feature examining family governance where it applies to management of fine art collections.
As wealthy individuals have an interest in acquiring and selling art for investment as well as aesthetic enjoyment, one issue that arises is how to create a strong structure for keeping fine art collections in a family. Randall Willette, founder of Fine Art Wealth Management, and a regular commenter in these pages on such issues, goes into the details of what is at stake. This publication is grateful for being able to republish this material. This is the first part of the article; the second will be published later this week. To see previous examples of Willette's views, click here and here.
Family governance applied to art assets
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 a family’s private art collection. Just as family governance is important in ensuring adherence to the family’s value system and successful wealth transfer of financial assets, the same holds true for art. Unfortunately, with the exception of a small minority of major collectors, most families either never address governance when it comes to their collections 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.
Today, the private collections of ultra-high net worth families can rival those of major art institutions, and private museums are being created at an astounding rate.
We are also seeing the rise of art in the modern day investment portfolios of family offices as well as the need for financial and legal know-how in relation to art assets due to the expansion and professionalisation of the art market.
By their very nature, single family offices are customised vehicles that are built around the explicit wealth management needs of a family and all its members. Each family office is designed for the level of wealth, types of assets, complexity and objectives of the family. It is therefore only natural that collecting families who devote great care to cultivating their collections should integrate their art portfolio into the family office platform supported by a sound governance framework.
As collectors actively make decisions and choices that shape their collections they must continually assess how best to care for and preserve the results of their efforts for future generations. Eventually, they are faced with what to do with their collection when they are no longer able to maintain it. Some collectors decide to either transition their collections into museums, continuing to play a key role in their development, or donate them so that they can enjoy them displayed at other institutions.
Whatever the decision, a sound governance structure for the collection is required. Once a collection passes a certain threshold, a wide range of financial planning considerations come into play. Careful planning can yield significant benefits in the future including financial security for the family, an opportunity to minimise potential tax liability, and the chance for the family to leave a lasting legacy for the collection through proper preservation.
Equally important, as families seek out opportunities to engage wider audiences by sharing their collections with the public they will need to adopt professional standards of best practice in collection care.
In order to evaluate governance options for a family art collection it can be helpful to understand the fundamental issues related to museum governance. These include the governing body under which museums are organised and the legal and fiduciary responsibility of the museum.
Ultimately, as museum standards impact private collections more directly we will see a growing number of collectors seeking advice from professionals, resulting in collections better prepared to survive after their creators are gone.
One key to making sure a collection doesn’t damage family harmony is to work towards open communication and look for creative ways to include family members in the decision-making process. 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 must comprise 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:
1) Agreeing shared values for the collection;
2) Creating a framework for decision-making;
3) Setting expectations for the collection.
Agreeing shared values for a family collection
In order to agree shared values for a family collection the process of creating governance-related documents such as a family collection policy and mission statement can be truly valuable. If a family can come together and engage in the collaborative process necessary to produce such documents, 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.
Creating a framework for decision-making
Creating a decision-making framework while agreeing shared values is a necessary step in establishing a robust family collection governance system, although 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 management policy and set of bylaws. We’ll talk more about the family art council later in this article.
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 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, 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 sound governance structure for their collection often find that each time a decision is made 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 such a structure becomes almost unquestioned.
It also can be helpful not to burden family members with the unnecessary expectation that the governance system you create for your collection has to be perfect from the outset and set in stone for centuries to come. Rather, any system you create should offer the opportunity to revise and reconfigure it in the face of change.
Art governance structures
A sound family governance system for a collection often comprises both structures and documents. Each of these two categories has a number of possible components that we describe below: