Family businesses should break the paradigm of ‘shirtsleeves to shirtsleeves in three generations’ by focusing on good governance in the family business.
That’s according to Rupert Phelps, director of family office services at BNY Mellon Wealth Management, who was speaking at a conference in London last week.
“Research has shown that about 60% of all family businesses fail due to failure to communicate. There are five steps to ensure good governance of a family-run company - communication, education, focusing on family values, philanthropy and governance within family members,” he said.
Citing the example of the famous Vanderbilt family, which built its wealth in the shipping industry in the 1800s but lost most of its fortune by the 1970s, Phelps reckons the family’s “failure” at governance was, in part, responsible for its downfall.
“It is important to build flexible family teams and empower them to break the paradigm of ‘shirtsleeves to shirtsleeves in three generations’,” he said.
When it comes to communicating, family members should make decisions as early as possible on the best time to tell the next generation about the business and its fortunes, reckons Phelps. “Only about 3% of family firms fail due to poor financial planning. Most of the rest is due to lack of preparedness.”
Adam Wethered, co-founder of Lord North Street, a London-based multi family office, added that what wealthy families really want is to “talk about themselves and what they want [from their advisers]”.
“It is about control, advice, protection, performance and flexibility,” he said, adding that wealth advisers should understand their clients’ objectives and circumstances.
Wethered reckons communication helps families set “realistic expectations” about their investments.
This article states the obvious as an insight about families based on "research." There is only one cause for failed family functioning in any family and that is communication and it doesn't matter whether it is a wealthy or business family. Governance is important for business families because it formalizes communication about the family and business thereby creating Fair Process in the family.
While governance is an important tool the larger challenge is helping families develop a systematic approach to working together in the parallel for family and business addressing values, vision, strategy, investment and governance. A discussion about governance sounds important but if the governance processes do not reflect the family's values and vision for the business and themselves it is of new real value.