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Family enterprises account for 54% of the U.S. private sector GDP ($7.7 trillion) and 59% of its workforce (83.3 million jobs. Despite their influence on the economy, there has been limited information about the risk management practices of this group.
Accordingly, Alliant Private Client developed the Family Enterprise Risk Index, based on a survey of 145 family enterprises across the United States, the majority of which represent multi-generational families. Respondents included those with a primary role as a member of the management team, executive of either an operating company or of a family office and/or a shareholder. Family members and non-family members were part of the sample.
The responses revealed that while executives within family enterprises are ever-vigilant about business-related risks, they pay significantly less attention to equally important family-related risks, such as reputation management, personal threat assessments and emergency preparedness for natural disasters. In short, the findings shine a light on some very significant risks that family members and enterprises face – perhaps unknowingly – and on a need to address the situation.
Family-Related Risk Scenario
The following statistics depict the family-related risk scenario. A relatively large number of respondents (62%) have definitive plans in place for managing domestic staff, and 48% have a plan for preparing family trustees for their roles. But, only about one-third have a plan for communicating a code of conduct; 35% for conflict management; 38% for natural disaster preparedness; 41% for travel emergency protection, and 32% for family reputation management. Most surprising, only 29% of respondents have a plan in place for personal threats to family members.
Among the enterprises surveyed, 76% have no systematic or regularly scheduled risk review processes for the family itself, and 41% conduct them only on an ad-hoc basis. On a related note, of those respondents that do conduct either an annual or ad-hoc review, 63% don’t have a process for educating rising generations about the unique risks associated with being part of a prominent family.
Call to Action
We view these insights as a call to action and an opportunity to build both awareness in the short term and resiliency for generations to come. We believe these families and enterprises should institute annual conversations about risk management – with the rising generation included.
In contrast to the findings related to family-level risk, the study found that family enterprises are on top of business-related risks. The majority (86%) of respondents task the highest levels of leadership with risk management, and 76% regularly communicate issues that could significantly impact the enterprise to the board, executive committee or other governing body. They also take cyber risks seriously, with 77% saying their management teams have instituted controls to identify and mitigate potential issues. In fact, 14% of them credit money-movement best practices with having prevented fraud attempts.
Steps to Take
To help improve the risk resiliency of family enterprises, family risks should be reviewed holistically during annual planning conversations with all family generations.
This is especially true, as family enterprises are faced with ever-more-diverse and complex risks, including increasing natural disasters, cybercrime, global instability and public health emergencies. We believe the following concrete steps can put family enterprises in a much better position to manage those risks:
- Introduce a conversation about risk and risk mitigation at the next family meeting, where you engage the family for their questions and comments;
- Assess the family’s risk footprint and profile each year;
- Develop an action plan in which the insurance strategy matches the family’s particular risk profile; and
- Regularly adjust the insurance program to cover the evolving risks attached to growing assets and changing lifestyles.
With those steps and a recognition of where more family-level risk management rigor is needed, these important enterprises will enhance their resilience for generations to come
Linda Bourn is a Senior Vice President and Family Enterprise Risk Practice Leader at Alliant Private Client, which manages the insurance needs of affluent individuals and families.
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