Joe Reilly, a regulator contributor to these pages, talks to an author of a book looking at how family-run firms have developed over the past 100 years, and what lessons they offer.

Family office consultant and regular Family Wealth Report commentator Joe Reilly recently caught up with Dennis Jaffe to talk about his book Borrowed from Your Grandchildren: The Evolution of 100-Year Family Enterprises. We thank Joe Reilly for conducting this interview with an important writer and thinker on issues in the North American wealth management sector. 

Joe Reilly - First of all this a real magnum opus, you have brought a great deal of the best work in the family business field together and given it form and structure that is useful.  I know you have been working on it a long time.

Dennis Jaffe - Well yes, it is true. It has been seven years. I’ve been in the industry a long time and I was seeking to move the field forward from a comfortable place, but also challenge some notions as well. I believe that the 21st century family business is evolving in some new ways and that the field needs to open up to realize that. The current crisis just accelerates what was already happening. 

How did you get started on the project, and when did you know you had had enough?

Jaffe - With all the information that we read about dysfunctional families, we wanted to study the quieter and less public families that were successful, to learn from them. We interviewed in depth two family members from two generations of business families that had thrived for more than three generations, as both a family and business or portfolio of family enterprises. Since we were studying hundred-year families, we decided that our goal was to interview a hundred. I read a lot of social science, and I am suspicious when people report from ten or twenty interviews or else “thousands.” Given the great diversity of business families, we thought a hundred was a good size sample. I have all the interviews transcribed, and we are still continuing to interview and build our database. I also wanted to get beyond the US. I wanted to see how families contribute to the economy of the world, and how are they different from a public corporation with non-family owners.

Why study long-term family business?

Jaffe - Well, recent research tends to offer only a snapshot, a one-time view and what we want to know is what are the good things to do to preserve and develop the business, how did they emerge and develop over time? The way to do that is to get the families who have been successful over a long time to look back and say what did we do to get where we are, and what are the things that worked? So, it seems like selecting the best families, the long-lived families that have a shared identity as a family and see if they can tell us what is helpful in sustaining a family business. I didn’t want to study families that were falling apart, I wanted to study families that were together and use positive, appreciative inquiries. 

Do you think family business fills a special role in the world, outside of patient capital?  

Jaffe - If you look at global business you see that families are investing and becoming major contributors to private capital, venture capital and start ups and globally they are becoming very important investors in the future. Infrastructure projects, environmental projects, new food, as well as technology. They are very important. In fact, global families are significant players in providing investment capital for new ventures. 

I was pleased to see George Marcus quoted in you book. (Marcus is a cultural anthropologist who wrote a unique book about family fortunes called Lives in Trust.) The great idea of the book is that wealthy families look more like corporations. They are a fortune with a ring of advisors around it.

Jaffe - Yes, it is a great book. The model I formulated in the book to describe family resilience, the Generative Alliance, actually came from his insight about what happens in a wealthy family when advisors come between the generations and become a factor. Professional advisors and non-family executives can even become their own interest group, because they want to survive and stay trustees and keep their livelihood. They enter large successful business families in between the older and younger generation. The Generative Alliance notes that the family just can’t succeed if they only develop a professional business with great advisors. They also have to keep nurturing the creativeness and the energy of the new generations for new energy, ideas and opportunities. The family can get unbalanced when they only listen to the advisors or the business professionals who are not innovation-oriented, rather than listening to the new generation and their new ideas and blending them with the professional discipline of advisors.

Is there any way for families to prevent this bureaucratic class from becoming a barrier?

Jaffe - Well, if you look at the big foundations like Ford and Kettering and Kaiser, they had all eventually forced family members off the board. The advisors don't feel that the family is professional enough to contribute, and in so doing the advisors can alienate the family from the next generation and view them as seekers and takers rather than partners, and that is the problem.  

What about the agency problem, that groups become entrenched and try to preserve their own position?

Jaffe - That is a challenge. The way you deal with the agency challenge in the family is by opening it up to greater engagement and inclusiveness, not by just turning control over to the agents. You have to work with them. The challenge that each new generation of a successful family has is that they have to build the capability and commitment of each new generation before they turn power and control over to them. There is a long period of shared learning and apprenticeship. They have to develop the next generations’ ability through educational programs and development programs and junior boards to encourage them to develop responsible behavior.  

You mentioned that you wanted to challenge the field a bit. What are the notions you are challenging?

Jaffe - First of all the idea that professionalization is all you need to do. Ten years ago, researchers started noting that entrepreneurialism was also emerging in long-term business families. If you look at these directions - professionalization and entrepreneurialism - they are both important, but they don’t play comfortably together. The challenge of the family is to integrate these two strains into the business. Discipline, which I call the craftsman orientation, and entrepreneurialism, are hard to link together with the legacy of ideas. The family business can’t just be professional. Then it basically becomes like General Electric, an entity that will work itself out of business because it becomes rigid and loses its energy. The families that I interviewed have recaptured the excitement by renewing their vision and moving in new directions. It is not the professionals and non-family CEO who do that, it is the new generation. So that is one, rediscovering the energy and redefining it. But it is a huge challenge for the family to do this successfully. 

Second is what I call building a great family. The families in my research used their resources and wealth to engage and invest in the growth and development of the family over generations. Because otherwise the family business is just a bunch of people who happen to be related. But when they see the family business as a creator of non-financial value, as the family’s path changes in the world, then these families become vital and generative and stewards, and can do wonderful things. The book shows how each of these 100 families shifted from external wealth creation to internal development of a new generation of the family. One of the problems is that most of the research is done in business schools, and they focus on the business at the center, not the family. So unlike Marcus, who is in sociology, family focused research does not exist in a business school. I am really writing about families, and how the businesses evolve and shift while my focus is the family and how it evolves and changes.

I am curious to hear more about this generative alliance. 

Jaffe - One of the myths that I talked about earlier that the advisory profession has is that the wealth creator creates the wealth and then the second generation just stays in place and the third spends it. The generative families in my study didn’t create their only wealth with the wealth creator, they continually added to their wealth. The other thing is that they add value and wealth in non-financial forms, in social and human terms. I call them generative families, meaning that they generate wealth that is financial and also non-financial but it is also as an ongoing activity as a family in every generation, not a one-time event by the business founder.

What is a simple way to understand this generative alliance?

Jaffe -  There are three interest groups. The Elders who hold values and have wisdom and they have an impact, but they can’t dictate and have all the power. Then there are the selected non-family advisors and trusted advisors, that professionalize the business and create the discipline, but they are not innovative. The third group is the most dynamic, which is most interesting to me, says ‘we got this wealth, and we have been successful, what are we going to do now.” And they come up with all kinds of interesting ideas about what they want to do and that is the different ways the new generation redefines the family mission and recommits it to something important. So, they are third leg of the stool. The third generation really completes the family, the vitality and forms its future. No group alone, or two groups alone can accomplish the mission of the family enterprise.  

You often use the word resilient for these families. What does that mean exactly?

Jaffe - It means they don’t all have the same crisis, but they continually change, adapt and redefine themselves. They sell the legacy business, they have business reversals, or through war or nationalization have their money taken away from them, or they lose all their money with a poor decision, but they are resilient in the sense that they use their capability and their shared wisdom to keep reinventing themselves. They are doing new things and selling businesses and buying businesses and asking what do we want to do now? They are always questioning and asking, and rarely coast. By the second and third generation we are dealing with mature businesses with technology challenges and global competition and diminishing returns and they have to take action.

How do these families build innovation into the family culture?

Jaffe – There is a lot of media attention on entitled rich young people, and these families all contain some entitled people but by and large the people in the next generations of these families were expected and trained to do something important in their lives. Many of them work and have substantial salaries and are professionals, and others are in positions that are socially relevant, art, music and teaching. Warren Buffett’s son is a successful composer. They encourage each new generation to find things that they are passionate at and good at and the family develops out of this positive ethic a support system that encourages people to do the things that they do well. The family particularly finds ways to support the family entrepreneurialism and new ideas without making foolhardy investments. This is where the older generation and the younger generation work together. They don’t just rush into sustainability; they work on how to do it. A family that had an oil company, and the next generation decided they didn’t want to be in the oil business.

What are some practical ways to develop leadership in the younger generation?

Jaffe - Development programs where they learn about the business and encouraging people to go to programs outside the family business in different areas and then inviting them back to share what they know. Having a sense of accountability, families say nobody gets totally supported to do nothing, and if a family member is not doing anything to regard that as a challenge and not just support them. The other important thing is to offer roles in the family business so that people can get involved in a positive way. So, they can teach and raise their children and also serve on boards and be involved in family philanthropy. And the family invites them into different roles in the family, so they stay connected. The family can also create task forces. I was talking to one family and their business is doing well, but not as well as it has in the past, and they are creating a task force for next generation family members who are working in all kinds of different jobs to consider opportunities for the family. They have formed a strategic development group for the family to discover what they are going to do in the next generation.  

What kind of advice would you give to a Jeff Bezos or Mark Zuckerberg?

Jaffe - What I see those new billionaires doing is educating the next generation to become philanthropists, to give back, rather than just go into the family business. We can go back a couple of generations and see how in the Rockefeller family the third generation saw their future to be not just wealth creators but to also be socially engaged in building a good society. They knew that most of their lives would be about philanthropy so that is what they study, that is what they learn about. A good path to be on. The generative families by the third generation find that social entrepreneurship and responsibility are as important to the family as creating new financial wealth.