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Collaboration, division of leadership key to preserving family business

By James Beech

Successful families are able to collaborate and divide leadership and responsibility among all generations says award-winning family adviser and author Dennis T Jaffe.

The author of his latest book Borrowed From Your Grandchildren: The Evolution of 100-Year Family Enterprises made the recommendation in conversation with CampdenFB this week.

Dr Jaffe, a member of Wise Counsel Research, is a San Francisco-based adviser to families about family business, governance, wealth and philanthropy. His insights have led to teaching or consulting engagements in Asia, Europe, the Middle East and Latin America.

For his new book, Jaffe interviewed family members from 100 global families who have succeeded for more than three generations as both a thriving business or financial entity, and as a connected family. He calls these families “generative families” because they continually develop financial and non-financial value in each new generation.

CampdenFBasked Jaffe what it takes for families to become “generative” and about the impacts of the Covid-19 pandemic on family relations and business. What are the common mistakes for families to avoid in succession planning and how should they approach the delicate topic of transferring power between generations.

What are the essential ingredients for a family business to prosper for more than three generations?

Given the great diversity of the families we studied, we were pleasantly surprised to discover some strong commonalities. Most strongly, these families made a consequential decision in their second or third generation: to invest in the development of their extended family as a community, by initiating family activities and governance that build the family legacy, created community gatherings for the whole family, to educate and develop the rising generations, and to express the families values beyond the family in their business and in the wider community. Each generation created new activities to engage across generations in each new generation.

The families developed a sense of family through their shared values and culture. Each generation got to know each other and were invited to become part of the family community and reaffirm their commitment to each other. They decide that they want to continue to add financial as well as non-financial value together as a community and ask the new family members to actively agree to become part of these activities.

These families are highly resilient in that they find ways to continually develop business competence and capability in their legacy business, while also allowing innovation and new ideas to emerge mainly from their rising generations of young people. They reinvent themselves every generation and offer free choice for family members to remain partners or leave the enterprise (pruning the family tree). The elders work with professional advisers and the next generation to collaborate together to adapt and change in each new generation.

What are the changes and similarities you’re seeing in how next-gens regard and manage family wealth compared to elder generations?

While families have some shared legacy values that continue across generations, generative families are always updating how they pursue them and what they do. We see great differences arising in different generations, and the success of these families rest in their ability to engage these differences and find ways to move forward that satisfy each generation. They work hard to achieve alignment and shared strategic visions with family owners, including owners-to-be in the conversation.

Every generation has differences in style and values, based on their life experience. Today, the younger generation has grown up in a digital world and has usually benefited from a broader education and more travel—until recent months—and global focus. As a group they desire greater transparency and engagement with the various family enterprises, and they want to have an active voice. When they become involved in the family enterprise, due to their education and work experience, they often have a more global and digital approach to the business.

Because they are young and energetic, they also are more expansionist than their more cautious elders. And as they look ahead years into the future and raise their children, they often feel more urgency and want to be engaged in philanthropic and social ventures about global social justice and environmental sustainability. They want to see the family have positive impact on the community and for the future of the world, and they are willing to be directly involved in these ventures, and they want this to include the family.

How is the coronavirus pandemic re-shaping family business, for better or worse?

Preceding the pandemic, wealthy families tended to be in continual motion all over the globe—traveling for education, business and fun, and feeling as if they were global citizens. Suddenly the pandemic has cut people and businesses off from direct contact with their global networks. Increasingly, they conduct commerce and family activities using online platforms.

Many family businesses disrupted by the pandemic are struggling to adapt and survive. Family enterprises that embody values about stakeholders and community responsibility maintain this a shared commitment by developing practices to ensure long-term survival and enact their concern not just for their immediate business, but with the lives of employees and the wellbeing of their communities.

Generative families report several positive trends in the pandemic. For example, families that had a hard time scheduling in-person family meetings, find it easier to have shorter and more frequent gatherings online. Disperses family members are more in touch, using social media and online platforms. They have used this connection to step back and look at their businesses and financial activities, and their philanthropy and social responsibility, in new ways. Every family has had a reset conversation—where they talk about how to survive lean times in business and reaffirm their vision and plan for the future. The family wants more information more frequently and want to understand and even express opinions about how to meet the unprecedented challenges.

What are the biggest mistakes family businesses keep making when planning succession?

Succession has been an issue in family enterprise since the dawn of time. Societies have rules and customs about how wealth in land and ownership is passed to the next generation. Today, these policies are being questioned and rewritten as families increasingly see success not selecting one individual new leader, or deferring to the oldest male, but as passing responsibility to the entire new generation.

“Succession” in a family enterprise is no longer about selection one person to inherit a role that is quite similar to the leader of the previous generation. A great mistake of elder generations is to think that they are passing leadership to an individual. In fact, when they look to the rising generation and succession see that there are many responsible family positions to fill, and they must cultivate and develop several family and also non-family members to take on these roles.

For example, growing family enterprises often contain more than one business that needs leadership. There may be a chief executive or chair for a legacy business, but the family also needs experienced and capable leaders who will take on other board seats, and maybe different business initiatives. They often have a family office that needs its own leaders and may have several operating businesses. A family and community foundation may need leadership. And a generative family also needs leaders for non-financial activities, such as a family council, family education, family meetings and celebrations, and shared real estate and vacation places.

A generative family develops what is called “stewardship”, the willingness to devote time and energy, and develop capability in many leadership roles. With all these leaders, the family has to learn how to work together to align them all, make decisions, fill different roles, share information, face conflicts and differences, and create a shared commitment to the future. The new generation is very different, more collaborative and complex, than the style of the older generation.

How can a next-gen tactfully encourage the family principal or founder to transfer control and wealth when it is the right time of life?

This too is an age-old struggle. Today, it has some new wrinkles. The lifespan is greater, and we can see vital and creative 80 plus year olds in a family who want to continue to work and serve. So, they look down over not just one generation, but two or three younger generations reaching maturity. Successful families are able to collaborate and divide leadership and responsibility among all these generations. Successful families have elders that make decisions about their tenure that take into account the needs and respect the emerging talents of young leaders.

There are dangers to a family if the younger generation is not engaged in leadership roles, even if their elders are still feeling vital and able to serve. Young people may conclude there is no future for them in the family enterprise, and the best and the brightest may leave and pursue their lives elsewhere. Family members who are not allowed to step up to responsible roles may find that they have become passive or uninvolved. The older generation must be aware that their choices have deep impact on their children and successive generations.

Inheritance is another issue for every successful family. Many families sign up for The Giving Pledge and give the bulk of their money away. But considerable wealth still remains for the next generation. While elders often try to exercise control and force responsibility on their children by limiting how much they get, trying to control children to be responsible more often backfires and does not have its desired effect. We found that generative families were more likely to have cross-generational conversations about what the family expects from the next generation, and to reach shared agreement rather than keep intergenerational choices a secret or undiscussable for the family.

The resolution of this conundrum is that generations work together in dynamic, changing roles. For example, while some families enact age limits for board and management roles, others find ways to engage generations in new roles. Some grandparents find meaning in acting as mentors for young family members, or in serving in community, government or professional leadership roles. Some elders decide to start new businesses that may involve their grandchildren, while they transfer business leadership to their children.

What works? Asking the elders to step back and consider what they want from their children, and in turn engaging the children in conversations about what is fair and right. If the elders do not want to engage in such conversations, the wealth adviser can bring them into contact with other families who have successfully held such conversations. They may also help the elders try an experiment with giving wealth or a responsible task to their youngers, and see what the outcome is.

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