Family wealth can decline over generations for various reasons. In particular, if a family business is involved, wealth preservation becomes challenging.
According to Credit Suisse research, family-owned businesses significantly outperform non-family-owned companies considerably over time. One of the main reasons for such outperformance is their long-term focus. However, there’s another critical element to consider.
In many cases, the long-term success of a family business is strongly impacted by the complex nexus between family and business. The lack of a systematic framework can put the continuity of the company and the family at risk.
Read on to learn more about what families can do to strengthen their business and their relationships across generations.
The importance of family goverance, heritage and succession planning
Family governance, heritage, and succession planning increase the resilience of family businesses over generations.
Although family businesses are better prepared to survive than other businesses, prominent stories show that stability is not assumed in any case but needs to be developed.
The Lacoste Story
Sophie Lacoste is the owner of a French luxury ski apparel brand and the granddaughter of René Lacoste, a former tennis champion and founder of the iconic sports brand.
Her story goes like this: her father Michel preferred to sell the shares in the Lacoste family empire to Swiss investors. He deemed his daughter incapable of running the business after taking over the company's leadership without his consent.
A feud over the years resulted in the sale of a world-famous sports brand and eighty years of family heritage. And undoubtedly in trauma for all family members involved.
This is just one of the examples of family businesses where the third generation loses ownership. Let's assess how to prevent this trend with some practical steps.
Family heritage
Before we look into the specifics of a family business, a first step is assessing the family's heritage. What does the family stand for? What are the values? What unifies the family?
All too often, the family leaders skip this step. They may think that family heritage is self-explanatory and that actual and future family members have sufficient guidance to uphold it. The Lacoste story proves them wrong.
The family values assessment is essential. It's about looking back and also at the present to determine the DNA of a family. Family leaders should involve everyone in this process; in particular, younger generations may add a fresh perspective and challenge the status quo for better.
External support can guide families through the process and moderate the discussion to reach a broad consensus on essential principles.
Family heritage is comparable to the culture of a business. A top-down approach may not cause the organic transformation of a bottom-up developed and lived culture.
The best examples have one element in common: everyone involved is aware of the family's values and heritage and the required actions to preserve it. Culture guides and empowers family members in many ways.
Values, identity, and purpose can become the Northstar for people. And a clear distinction between family and family business avoids dependency from the latter.
The power of storytelling
A compelling narrative connects the author emotionally with the target audience.
As David JP Phillips, an international public speaker, author, and coach, says: "Few things are as powerful as a story. A story penetrates the brain and convinces in a simply impressive way. Storytelling are hormones that are waiting to be distributed. They include dopamine to stimulate focus, motivation, and memory, oxytocin for generosity, trust, and bonding, and endorphins for creativity and ease."
With his TEDx talk holding more than 3.5 million views, he's an authority in the field.
Storytelling has the potential for unique discoveries: maybe a family has an ancestor known for exemplary actions and values in its community.
Such an original story can assist 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.
A powerful narrative helps individual family members better connect with their family's perspective and link its story to their experiences. They are more likely to remember the family's purpose of wealth based on its history and how it made them feel, rather than a static and generic definition of why it may be valuable to them.
Family governance
With a clear understanding of the family heritage, family governance can be defined and is the framework for communication and collaboration. Family governance should capture more than rules regarding the family business.
There are academic family governance models, but we believe that a practical approach delivers the best results. With clarity on values and heritage, a first step can be drafting the family's mission statement.
Family mission statement
What's the purpose and envisaged destiny of the family? How is the family supporting education of the next generation? The mission statement does not need to be necessarily related to the family business and its wealth.
It may deal with the more general role of the family in the community. Again, all family members should participate in elaborating on the mission statement to foster unity and support.
The benefits of family governance
Communication and trust hold the family together, and family governance enables both. The alignment of individual and family values and objectives in an inclusive framework leads to a dialog of preserving the family's heritage and wealth.
Shared meaning and positive connection motivate the younger generation to contribute actively and choose their path responsibly. Preserving the family and its wealth based on principles is an ongoing process to develop sensible and resilient relationships.
Family business governance
With a specific business involved, family business governance will clarify roles and decision-making.
Things can become more formal here with family assemblies for information exchange and decision making and a family council following matters related to the family business and wealth.
We recommend regular meetings, a common communication channel, and results-oriented discussions. The granularity of principles, rules, and processes depends on individual circumstances. We advocate for pragmatic solutions supported by all family members rather than a complex arrangement that lacks support.
As a minimum requirement, it should be clear how the family takes decisions and who executes them. This framework can then evolve with family members getting used to it.
Ultimately, the family business needs to support the vision and heritage of the family. As such, it requires a minimum ruleset, e.g., for the business involvement of individual family members with guidance for the younger generation on the requirements for roles in the family business. Also, the distribution of proceeds should be covered to manage expectations and avoid conflicts.
Succession planning
Within a family business, there might be nothing more frustrating for aspiring future leaders than uncertainty about their professional development opportunities.
It's essential to have a clear structure and ruleset around career opportunities, the selection process, expectations, compensation, and retirement ages for family members active in the family business. Again, this is work in progress, and the family can elaborate on this over time.
The discussion should also cover topics such as external management and potential exits of the family business. It's the focus on uncomfortable issues that will strengthen unity and support within the family.
Succession planning is not a legal exercise but a collective vision of the family business's future destiny.
If a family follows the above steps, it lays an excellent foundation for its heritage. Yet today, many entrepreneur families still do not adequately tackle governance and succession and risk following the Lacoste family's destiny.
Research showed that a third of the worlds' most prominent single-family offices don't have a succession plan in place. It's precisely the current generation in their 60s and 70s that does not provide for sufficient clarity in the change of control.
That the matter is complicated should not justify its avoidance. Instead, to start the discussion and involve all family members will trigger results-driven conversations and often lead to an unexpected and positive dynamic.
Shaping the family's future
Actively shaping the future of a family based on its values and shared understanding is the first step to ensure that heritage will develop and last over generations.
It's also about enabling family members and defining the role of the family's wealth in their lives. There's no need to solve everything at once, and external support can assist in the process and moderate the discussion.
It's an ongoing process to leave a lasting legacy, and every family member should have its voice and active part in it.
A compelling narrative connects emotionally with present and future family generations to avoid a corporate feel and let the hormones do the work. We would avoid calling it family constitution, which may activate cortisol and adrenaline responsible for intolerance, impaired memory, and unfavorable judgments.
And to close with a quote from Sophie Lacoste: "It's more important to teach the next generation entrepreneurial spirit than transferring the family business to them."
FREQUENTLY ASKED QUESTIONS
Why are family governance, heritage, and succession planning important for family businesses?
Regarding family businesses, having proper governance, heritage, and succession planning is crucial for long-term success and resilience. These elements provide a structured framework for navigating intricate family and business relationships.
Family governance promotes collaboration and communication, creating a clear framework for decision-making and implementation.
Understanding family heritage helps establish the family's values and purpose, serving as a guiding light.
Succession planning ensures a smooth leadership and ownership transition across generations, clarifying career opportunities, expectations, and retirement.
These components are essential for family businesses to avoid instability and potential decline. They are important and necessary for the continuity and prosperity of family businesses.
How can storytelling be used in family governance?
Storytelling is a powerful tool for family governance and succession planning.
It creates a compelling narrative that emotionally connects family members to their shared heritage and values, fostering unity and support within the family and strengthening the family business.
A well-crafted story can help individual family members better understand their family's perspective and link its story to their experiences.
This connection helps family members remember the family's purpose of wealth based on its history and how it made them feel, rather than a static and generic definition.
The goal of family storytelling is not just to tell a story but to create a shared understanding and a sense of belonging that can guide the family's actions and decisions for future generations.
What are the benefits of having rules for career opportunities in a family business?
A family business must have a clear structure and rules regarding career opportunities to ensure proper succession planning.
This will provide aspiring future leaders within the family with clarity and certainty, reducing frustration and potential conflicts.
The structure should include aspects such as the selection process, expectations, compensation, and retirement ages for family members actively involved in the business.
It should also address external management and potential exits of the family business.
By fostering clarity and transparency, unity within the family can be strengthened, supporting the business's long-term success.
Addressing these issues proactively can prevent misunderstandings and disputes that disrupt business and family harmony.
Updated 27-07-2023