A new white paper points to “widespread sense” that around 80 per cent of families with significant wealth or businesses will succumb to the “shirtsleeves to shirtsleeves” phenomenon, as shared ownership by more and more family members presents new challenges.

A new white paper points to “widespread sense” that around
80 per cent of families with significant wealth or businesses will succumb to
the “shirtsleeves to shirtsleeves” phenomenon, as shared ownership by more and more family members presents new challenges.

The paper, written by Dr Dennis Jaffe and entitled Good Fortune: Building A Hundred Year Family
Enterprise, uses the term “generative family” to denote the successful
transition of a family enterprise across several generations. Its insights are
based on a sample of 38 families, of which all but two had a self-reported net
worth of over $200 million, with the median value being between $600 million
and $800 million.

The family enterprise, it says, is a “complex social system”
in which family members are both relatives and business partners. Each
generation is unique and must review and update practices to reflect new
realities. As the paper highlights, the second generation - having usually
grown as a single family office in one household - separates into a group of
individual families with various roles, perspectives and concerns with regard
to the family enterprise. It is likely at this stage that many family members
work in the business - and almost everyone expects to inherit some of it.

Indeed, siblings across all generations face different challenges than
that of the family wealth creator. But the transition of G1 to G2 is the first
time that G2 siblings may ask themselves if they want to be partners in the
family enterprise. They may, for example, question if they want to keep or sell the
business (the paper stresses that the decision to sell “does not necessarily
lead to family dissolution”).

The insights provided by the paper resonate with a recent SEI report - Enterprising Families: The emergence of a new breed of investor - which said that the 2008 financial crisis has affected the way wealthy families view
their investments and make important decisions, as the patriarch adopts a
more inclusive approach to managing family assets. The implication for advisors, Jeff Ladouceur, director, SEI Private Wealth Management, told Family Wealth Report, is that - regardless
of a family's level of wealth - relationships are no longer “just with
the patriarch.” Advisors must educate all family members so that
everyone has a certain level of knowledge in order to participate in the
discussion.

G1 to G2: challenges and resolutions

All of the family enterprises interviewed for Dr Jaffe's report were founded by
a man, and this is a challenge, the paper says, because these founders - by nature - don’t
share enough information and control. “In many cases, the G1 father took care of everything and
the next generation, sometimes very suddenly, had to discover what the family
enterprise contained and decide what they are going to do with it, how to run
it, and their ultimate goals.”

While it was most frequently the case that a second-generation family member (often the eldest son) was
named “expected successor,” having a designated successor does not, the paper
says, guarantee a smooth transition: the second generation must find new, more
effective ways to communicate, make decisions and build up trust.

Another hurdle boils
down to “sense of purpose” and values, as a family enterprises “cannot easily
remain unified and connected over generations” if these are not shared. Meanwhile, the paper stresses that if siblings cannot see a reason for
remaining partners, this outcome should be viewed as an “affirmation of
individual freedom” and not a failure should they choose to manage their assets
as individuals and remain connected as extended family.

Accordingly, it outlines three practices it says
contribute to successful transitions from G1 to G2. They can be summarized in
the contexts of: collaboration, transparency and governance.

Firstly, many of the families interviewed enjoyed
cross-generational apprenticeships between G1 and G2, and this usually started
when G2 members began working with their father. But equally, the G1 mother was
an “active participant in preparing members of G2 to work together,” the paper
says.

It adds: “Siblings have to get beyond their competition and
rivalry to identify their shared interests and different skills, interests and
abilities. This does not happen by chance, but entails a commitment to work
together and to learn the skills of collaboration and teamwork, which are not
natural to siblings.”

On the part of the founder, they must also share all basic
information about the business and finances to equip the next generation so they
can learn to work together.

“Several of our families made clear that along with sharing
relevant business, financial, and legal information there is a need to learn
‘what it all means’,” the paper says.

To clarify - as defined in the paper - governance relates to
the “skills and structures that enable the growing family to define values,
mission and policies; maintain connections; oversee the business and the family
participation in it; and distribute consistently and fairly the financial and
other rewards.” The second generation must establish policies and make
decisions together - often a period when governance enters the family’s life in
“a conscious form.” This is a crucial - and indeed new experience - for G2 as
the founder of the family enterprise “usually has little idea of what this is
or why it might be important to his children,” the paper says.

The white paper, published this month by Wise Counsel
Research, pulls together the experiences of 38 successful family enterprises spanning four successive generations. Dr Dennis Jaffe, author of the report, is on the judging panel for the inaugural Family
Wealth Report Awards 2014 (view details here).