Family Enterprises Evading The "Shirtsleeves To Shirtsleeves" Destiny: G2 To G3 - White Paper

Eliane Chavagnon

20 August 2013

Families passing on significant wealth or a business from the second to third generation face a different set of challenges than those experienced during the G1 to G2 transition, as G3 family enterprises “do not rest on the pre-existing policies or practices that have got them this far,” according to a white paper published this month.

The paper, Good Fortune: Building A Hundred Year Family Enterprise, is written by Dr Dennis Jaffe and uses term “generative family” to describe the successful transition of a family enterprise across several generations .

It highlights that around 80 per cent of families with significant wealth or businesses will succumb to the “shirtsleeves to shirtsleeves” phenomenon, as new complexities arise when more and more family members take a slice of business ownership. But it is at the G2 to G3 stage when numbers “increase exponentially,” and this is driven by a number of factors, the paper outlines.

While siblings usually grow up in one household, cousins belong to several family entities: their “nuclear” family, their “branch,” and the larger extended family.

Meanwhile, third generation households will have different values and expectations about money; they are often geographically dispersed, too, and grow up in separate households with other members who are, essentially, strangers to the family enterprise. And while G2 siblings differ in their ages by “only a few years,” G3 cousins may differ by “one or two decades,” Dr Jaffe writes.

The family enterprise must strive to keep cousins “aligned and connected,” as said family members may not be sure why they are associated with the business. “They need to make a new commitment to it, and as such move from being a blood family to a family of affinity, a family by choice,” the paper says.

Securing family ties during the G2 to G3 transition involves motivating members to want to do the work to remain partners. While this can be achieved by building personal relationships across family branches and developing a shared, extended identity, families must be able to anticipate the difficulties - and adapt accordingly.

Dr Jaffe's report gives the following example:

“After his G2 father died, a G3 family leader found that several of his cousins expected to join the board to direct the family real estate company. However, he anticipated that some of them were not ready for the job, and appointed some of their more qualiﬁed spouses to the board instead—a move which previous generations would likely not have taken. Because of his position in G3, he knew that he had to defend these choices to the family. He thus convened sessions to educate the rest of the family about the challenges facing the business and about the role and responsibility of the board. Despite bruised feelings, his siblings grew to accept his decision. He also reached out to involve G4 members in these sessions.”

Building the family network

Dr Lilli Friedland, president at Executive Advisors, last year wrote that whilst family leaders have “multiple expectations for the next generation,” oftentimes they have not shared their thoughts with family members, or integrated them into in parenting practices.

“Family members have a much greater opportunity to succeed when they know others’ expectations of them,” Dr Friedland said. “As a result, family wealth and financial advisors are increasingly introducing family systems experts into the transfer of family wealth process, particularly at early stages,” .

Meanwhile a report earlier this month argued 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 findings resonate with Dr Jaffe’s report in that, regardless of a family's level of wealth, relationships with advisors are no longer “just with the patriarch,” Jeff Ladouceur, director, SEI Private Wealth Management, previously told Family Wealth Report.

“The advisor’s role has shifted to include not only providing his position and point of view but also facilitating the discussion among the family members and helping drive them towards making an informed, collaborative decision,” Ladouceur said.

Good Fortune: Building A Hundred Year Family Enterprise - published this month by Wise Counsel Research - is based on a sample of 38 families, of which all but two had a self-reported net worth of over $200 million; the median value was between $600 million and $800 million.

Dr Dennis Jaffe, author of the report, is on the judging panel for the inaugural Family Wealth Report Awards 2014 .