It's a well-known myth and belief that it only takes three generations to lose family wealth completely. Surely this can't be the case? Just as a family business can generate family wealth, it can also be the cause and reason to put it at risk. Does this suggest that the intersection between business and family is complex? In our experience, the answer is yes.
Epic family feuds
For example, the world-famous Lacoste sports brand, owned by the French Lacoste family for eighty years, was sold to investors due to a long and angry conflict between the second and third generations about the company's leadership.
Gucci, the iconic Italian luxury fashion brand, is another case of how infamous family feuds can lead to losing ownership in a family business. The good news is that if business families actively approach complexity, they can lay the fundament for long-lasting business success, wealth preservation, and harmony.
How to preserve family wealth
Family governance, family business governance, ownership structuring, and succession planning are essential pillars to preserve family wealth and businesses over generations, not just the first three. In this post, we will look at how they contribute to a comprehensive family business framework.
The starting point is to create a shared decision-making system for the family based on its history, values, and purpose. Although it is partly modeled on corporate governance concepts, formalities are not the main focus.
Family governance facilitates complex and challenging conversations in a structured setting and guides family members in integrating into and contributing to the family and business network.
Families share the ownership of their wealth. That's why approaching wealth in context with values, purpose, and belonging is essential for its long-term preservation.
The narrative, why and how
In analogy to corporate statements, what used to be a family constitution or charter has converted into powerful narratives. Each family has its story, and it can be a unique source for uncovering the family's culture, values, and purpose. This part of the family governance framework should have an emotional resonance with family members, be meaningful and draw them in. It helps individual family members better connect with their family's perspective and link its story to their experiences. Thus, personal stories align with the family's broader narrative.
Unifying family values and purpose
That's an excellent basis to communicate and unify values and purpose. There are many routes to a powerful narrative, why, and how. In our experience, including all family members and working with experienced advisors can trigger a dynamic and cohesive process for everyone involved. Experts can capture different viewpoints and stories to find a common denominator. This often reveals shared values and creates an open dialog about which values are core to the family.
Why are values so important?
Values can be the decisive factor towards a unified and robust community alignment in meaning and connection. Sounds perfect for a group of individuals that ideally remain unified over generations.
The group is close to defining its mission if there is a common understanding of how shared values translate into concrete actions.
They then need to agree on principles, systems, and processes to act consistently according to their why and how.
The power of storytelling
A wealth-owning family will include the wealth component in their approach since they usually share wealth and will be interested in preserving it for future generations. Storytelling assists in defining the purpose of wealth and illustrating correlated life concepts that inspire and empower: it represents the family's heritage and culture. It captures the past, present, and future and sets the scene for a human context and shared purpose.
The impact of written values
Strong correlation with success
The PWC Family Business Survey 2021 finds that written values strongly correlate with success. Its data reveal that 77% of family businesses with values in a written form say information is shared in a transparent and timely way between family members and that they regularly communicate about the business.
Alignment of views and priorities
Only 54% to 57% of firms without written values made such statements. 69% say family members have similar views and priorities about the firm's direction, while firms without formalized values only reached 49%. 41% of family businesses with values in a written form have a robust, documented, and communicated succession plan in place versus 20% for other family businesses.
Bridging the generational gap
Thus, business families that focus on their values enhance transparency, unify in direction and prepare for succession, all vital elements of a family firm's long-term success. The survey confirms that younger generations are strongly motivated by meaning and purpose when it comes to their career and sometimes struggle to find these qualities in the family business. Values can help to bridge the generational gap and give them the desired sense of purpose.
The family governance framework
The governance framework can become more granular on wealth preservation, the family business, and related decision-making as an outcome of the above exercise and experience. It's a system that needs to grow and develop and is probably not achievable in a weekend workshop.
On the flip side, the journey of reflecting on shared values, the purpose of wealth, and the meaning of family relationships can be powerful and impactful for everyone involved. It will make challenging discussions more comfortable if there is unity in attitude and faith, and it all can be found in a compelling narrative.
Regular family meetings
Regular family meetings are ideal for communication, exchanging ideas, new inputs, decision-making, and revitalizing and revisiting the family's narrative, why, and how. A structured and transparent approach balances business, wealth, and relationships.
Fostering the family dialog
Family meetings can have an educational component and foster a dialog about family unity, family wealth expectations, business involvement, and vision for its future.
Family meetings also help define expectations for the business and include those who are not active in it. Information should be shared transparently to allow each family member to emotionally connect to the family business and support the shared vision of its destiny.
Preventing and solving conflicts
A family meeting can also be the venue to define family employment policies and discuss succession planning. Finally, it ensures harmony, prevents and resolves conflicts, a strong family bond, and an environment of ease and trust.
Especially younger generations will appreciate being involved, understanding how family wealth is managed, sharing their views, and developing a sense of responsibility for family wealth preservation.
The family council
A family council is a gateway from the family to the family firm, allowing family members to liaise with the business across generations. A diverse composition allows for different standpoints and ensures that all family members feel represented in the family council.
Usually, decision-making regarding the family firm happens at family meetings, but the family council obtains all relevant information from the firm's board and management. It can provide recommendations to the family, but the final call should remain with the latter for joint solid decision-making.
Larger families may consider member rotation after a certain period to allow more family members to become part of the family council.
The benefits of family governance
According to the STEP 2019 Global Family Business Survey, family governance through processes and structures supports communication among family members and helps them define who they are as a group and what they want to achieve.
The level of family governance development is linked to how strong family members identify with the family business. There is, on average, good development of family governance tools compared to corporate governance tools. The global trend shows that 25% use professional consultants, followed by a family employment policy (16%) and formal family meetings (9%).
Higher performance levels
The survey observes that investing in specific family governance tools increases family members' identification with the family business if families adopt more than one family governance tool. It finds that specific governance tools such as formal family meetings, family councils, or family assemblies correlate with higher entrepreneurial orientation and performance levels.
These are all excellent reasons for family governance so let's now assess things at the business level.
Family business governance
Depending on the size of the family business, two levels of business governance may be required.
Board of directors
In such a setting, the board of directors, sometimes called the supervisory board, is responsible for the overall direction, supervision, and control.
The executive board handles the day-to-day management and operations, including the business strategy development and execution, subject to the board of directors' approval.
There are many variations throughout global jurisdictions, but we believe that a separation of supervision and management delivers robust results.
However, an executive board may be sufficient for smaller family businesses if the family can ensure overall direction, leadership, and control.
It's common in some jurisdictions to have a board with executive and non-executive members that achieve similar outcomes.
The benefits of family business governance
The aim is to professionalize the family business with clear principles, rules, and processes. This doesn't mean that family firms are not professional or eliminating the family from the business but defining a framework for consistent management and decision-making.
Not every family member is a born entrepreneur. Thus clear parameters for board members and their selection, evaluation, and compensation, a transparent recruiting process, and collaboration at all levels are essential for good governance and business continuity.
Business governance should be tailored to the specific family business, and ownership structure rather than standard models, and things don't need to be solved at once but can evolve.
Family members in management positions should compete at the same level playing field with external talent. Opening the family business to external talent will bring in new perspectives and foster meritocracy. Still, the family can retain control at the board of directors level and remain in the lead of the overall direction of the family business.
Transparency and accountability are probably the two decisive factors of business governance in the family context. Family members involved in the business know the expectations and duties, and those outside the business have clarity on how it is managed.
Finally, a robust control framework including external audits as part of the business governance provides objective data for compliance and risk management evaluations.
The firm's values and purpose
Ultimately, the family's narrative, why, and how needs to be mirrored in the firm's governance framework to avoid "more business than family" in a family business. Translating the family's culture in a business context will ensure its long-term orientation, performance, and resilience.
As outlined above, research suggests that family values strongly correlate with success, and that's a convincing argument for integrating them in business.
An active interface with the family council motivates the firm's representatives to enter into a dialog with the family and helps them better understand the implication of the family values.
A shared culture between family and business will benefit both and at the same time avoid spillover effects if the family or the family business go through difficult times since values and purpose will guide both.
With that, a comprehensive and coherent system balances family, business, and ownership.
There are various ways to structure ownership of a family business. Usually, ownership is shared by an association of persons with or without legal personality.
Corporate structures have the advantage that they shield liabilities triggered by business activities from their owners. However, they come with specific compliance requirements and transparency obligations that mean higher organizational and human capital costs.
Separation of management and ownership
Depending on the size of the family business, sophisticated corporate structures can enable an often advisable separation of management and ownership without jeopardizing professional corporate governance.
Various factors influence the choice of the ideal ownership structure, such as legal and tax aspects, the desired level of control, decision-making, business involvement, and estate planning.
Each family is unique
Family business ownership is not holding equity for merely investment purposes but an emotional attachment and vested interest in both the family and the firm. There's no standard formula.
Only an individual analysis of all circumstances and requirements will lead to the right choice.
With a structure for the business itself in place, the family needs to clarify how ownership will be regulated in the long term. While all current owners are alive, the family may think they can handle all related questions within their family governance framework. However, this is a risky approach for several reasons.
Life events are manifold, and sometimes one affected owner can limit the scope of action for all others. Shareholder agreements can tackle the issue but usually will not consider all potential events over a long-term period.
Estate planning becomes essential to ensure business continuity with smooth ownership succession. It comes down to how a family wants to hold and transfer ownership in the family business over generations.
This includes potential exit scenarios and the destiny of then converted family wealth if entrepreneurs become investors. These aspects link back to family governance as the decision-making forum around the family's business and wealth destiny.
Planning for the unexpected
How is income distributed between family members? How will family members who don't contribute to the firm be treated financially? How will spouses benefit from family wealth?
How will decisions concerning the firm be reached? What happens in times of crisis? What happens if family members want to liquidate their share of family wealth?
The lack of such discussions can lead to unexpected and unintended consequences, and since estate planning arrangements are usually not too flexible, it's essential to cover uncomfortable topics.
Trusts and foundations
Trusts and foundations are potent vehicles to secure family wealth over generations. Many global family businesses use them to keep business ownership within the family.
The case for trusts and foundations
Their goals are business continuity, long-term safeguarding of family assets, positively influencing following generations, and ensuring long-term targeting. Still, entrepreneurial flexibility and adaption to changing economic circumstances need to be assured.
Asset protection and wealth preservation
Another benefit of trusts and foundations is asset protection due to the separation of legal ownership and beneficial interests. As mentioned above, inheritance tax has an impact on family wealth preservation, although the transfer of a family businesses is often exempt or taxable at reduced rates.
Preserving a family legacy
Thriving family firms often have their multi-generational history as a primary differentiator and want to preserve it for the future. The odds of a successful business transfer significantly decrease from generation to generation.
Both vehicles maintain the firm's value system and direction, unify family members' interests, avoid ownership conflicts, and generally ensure generational wealth preservation.
Why the entire family should be involved in estate planning
Having an estate planning vehicle in place requires the pledge of present and future generations that their wealth stays within the family for the future. As mentioned, those conversations need to happen at a family governance level, and only then should implementation be tackled.
Succession planning and strategy
In our view, succession planning in a family business focuses on continuity of management and business compared to estate planning focusing on the transfer of ownership. Both approaches have to manage the generational transfer of either a position or right and ensure its smoothness.
The elements of formal succession planning
Whether the board and management are staffed with family members, external members, or both, a family firm needs to provide rules and succession processes for business continuity.
At the family level, a clear set of rules will manage expectations and motivate growth towards potential roles in the firm. At the firm level, externalities will not impact ongoing management substantially.
An ongoing conversation
Since succession planning is a process rather than an event, it should start early enough to avoid ad-hoc and stressful discussions, decisions, and potential succession dramas. An ongoing conversation enables one to adapt to changing circumstances and allows for strategic planning.
The case for succession planning
The lack of formal plans
The STEP 2019 Global Family Business Survey reveals that 70% of current family business leaders don't have a formal succession plan in place.
Despite this lack, 47% report having an emergency plan for succession in case of unexpected events, and 45% state that the family business will most probably stay in the family's hands in the future.
Emotional attachment to the family business
This tendency decreases with younger demographic cohorts, suggesting they might have a less emotional attachment to the family business.
Generation X and the Millennial family business leaders believe it is less likely that the next CEO will be a family member than the Silent Generation and Baby Boomers.
Regarding selecting the next CEO, 48% of global family business leaders declared that their choice is based on the future candidate's level of interest in the business. Around 23% said they would select the most qualified, and 12% report following the "first-born male son" logic embedded in the primogeniture cultural and historical norms. The rest of the responses include "the board will decide" (11%) and "use of external search firms."
Thus, self-commitment and competence are the core criteria on which global family businesses will select their CEO.
In our view, measurable and plausible criteria that the entire family can understand. In fact, the survey observes that family businesses globally that had a formal succession plan are associated with higher satisfaction in handling the most recent succession process.
To sum up on family business structuring and organization
We've avoided delving into the associated legal and tax issues as they would justify their own post. As the Lacoste and Gucci stories prove, the intersection between family and business is complex and challenging.
Family business success, wealth preservation and harmony
Still, the above and research show that family governance, business governance, estate planning, and succession planning are effective facilitators for long-lasting business success, wealth preservation, and harmony.
Individualized implementation process
Each business family is unique, and some of the above may already be in place. There is no unified standard but only tailored systems that develop over time.
A human approach
However, we believe that a human approach is an essential differentiator to the corporate world. More corporates may indeed have discovered the human element, but they cannot compete with a family's potential for unity and alignment in purpose due to their relationship held together by trust and communication.
The opportunity for family businesses
That's an opportunity for business families to seize since it will make their business more competitive and resilient by balancing family, business, and ownership over a long-term period.