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:

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- The family art council
The family art council provides an organised forum within which to make decisions and to articulate the family's values and vision for the collection. It can also serve to educate the family about the history of the collection and its heritage in a certain time and place, along with the responsibilities and obligations tied to both. Most importantly, it is a vehicle within which to anticipate, air and resolve family conflict regarding the collection.

A forum which is separate and distinct from the curatorial team, the family art council can be an extremely powerful part of a family office platform for the preservation of the collection’s legacy and for managing potential conflicts of interest. Depending on the nature of the family’s concerns, the family art council also can address collection policy issues relating to setting standards of best practice for art due diligence, benchmarking collection care, and digital asset management.

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, strategic issues regarding the collection.

The list below defines important family art council tasks:

• Serve as a vehicle for transparency and timely communication on preserving and protecting the family’s art assets;

• Provide an opportunity to update family members on the state of the collection;

• Discuss how to conform the strategic and tactical plans for the collection with the family's core values;

• Engage family members in discussion on what kind of legacy the collection should strive for;

• Inform and educate family members on the estate plan and transfer of the collection to the next generation;

• Identify charities the family would like to benefit from the collection and what, if any, restrictions they would like to place on the gift;

• Present a time for problem solving and conflict resolution regarding the collection;

• Create a safe harbour for planning the collection's future development.

Because family collections tend to grow more complex with the passage of time, the need for a family art council tends to be a lasting one. 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 can be a key part of a family’s strategic plan for the preservation of a collection’s legacy and for managing conflict.

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Family art council members
When creating and structuring a family art council one of the most critical questions which 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.

The important questions to be addressed include:

-Will spouses participate on the family art council?

-At what age do younger generation family members participate in the deliberations of the council?

-Will all members have a vote on matters before the council?

-Will council members be representative (e.g. family members vote to elect representatives to the council, but only representatives vote on matters before the council) or democratic (e.g. one vote per family member).

-Is there a role for outside advisors and other non-family members? If so, what provisions should be made for removal and succession?

-How will decisions be made regarding the collection, by consensus (whereby every family member must agree or no action can be taken) or by majority?

There are no wrong answers to any of the questions above.

In terms of spousal participation, some families might conclude that the family art council should reflect the fact that all members have a stake in the resolution of issues related to the collection - and therefore should include spouses as full members. Other families may wish to create some separateness by allowing spouses to participate in some but not all collection deliberations.

Family art councils should not exceed 10-12 members. While the educational and informational tasks of a family art council can accommodate larger numbers of participants, family members may experience difficulty working in large groups in policy-making and decision-making tasks.

Family art council meetings
Family art council meetings can educate family members on art succession planning and guide next generation members in the management of the collection. They may also allow for policy making on issues such as:

1) Incorporating changes in collection policy, processes, and practices;

2) Developing performance measures for the curatorial team;

3) Digital preservation of the collection;

4) Unlocking equity in the collection;

5) Gifting works of art or lending to important museums.

The benefits of family art council meetings are outlined below:

-Understanding the family values and traditions that underlie the collection and family's commitment to the collection across generations;

-Appreciating more deeply the history of the collection and its importance to the family legacy;

-Understanding the estate plan, ownership transfer plans, and the gifting to museums;

-Understanding, over time, the nature of family participation in the collection decisions;

-Provide ongoing family problem solving and conflict resolution mechanisms regarding the collection;

-Professionalising collection management by inviting key art market professionals to attend family meetings as resources, teachers, and mentors;

-The existence of ongoing family meetings as a forum for family members reduces the likelihood that family concerns will be ignored or inappropriately delegated to a curatorial team;

-Attendance at these meetings represent an investment in increasing trust and respect for all work on behalf of the family collection.

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.

Renewing the family's commitment to this document, a natural outgrowth of family meetings, builds a sound collection. As family art councils with their attendant meetings develop their experience and mature, their ability to address conflicts improves. Because some of the problems are based on feelings rooted in different perceptions about the aims of the collection, the educational mission of family art council meetings can go a long way to create common ground and ameliorate conflicts rooted in misinformation or misunderstandings concerning what kind of legacy the collection should stand for.