familyownedbusinessblog

The Legacy Family ... A Family for the Generations

I attended this presentation by Dr. Lee Hausner at the Annual FFI Conference.  She has co-authored with Douglas K. Freeman, J.D., L.LM, their latest book, "Legacy Families...The Definitive Guide to Creating a Successful Multi-generational Family".

Dr. Hausner defines a Legacy Family as one which is in the 4th or 5th Generation and has shared assets.  She has found that these families have four characteristics:

1. Capacity: they have the capacity to add value to our society;
2. Competency: they have the necessary skills and education;
3. Connection: they have a connection to their ancestors, current and future descendants; and
4. Compassion: they are generous of their time, talent and treasure.

Generally, the Legacy Family has four balanced "capital deposit accounts":

1. Human Capital: this is general parenting and grandparenting skills, communication skills, values, morals, ethics, collaborative decision making, conflict resolution skills, leadership training and team building.
2. Intellectual Capital: education, career choices, mentoring/coaching, governance - how rules are made for future generations, rights and responsibilities of fiduciary and beneficiary roles.
3. Financial Capital: earn money, manage and invest assets, wealth transfer strategies, family business, financial parenting, understand the psychology of money.
4. Social Capital: philanthropy, donor-advised funds, family foundation.

The family should be engaging in activities that build each of the 4 capital accounts so that they maintain balance.  The following are suggesions that families can input to help keep balance in their capital accounts:

• Effective communication among the family and the stakeholders;
• Adopted a process for collaborative decision-making;
• Develop conflict resolution skills;
  • An example was the creation of a board to resolve conflicts among family members.  Each party chooses someone and then those selected choose a third member.  That panel then hears from both parties and submits proposed resolutions.
• Shared values: articulate the behaviors that are acceptable;
• Diversity: acceptance of non-bloodline family members and partner choices for family members;
• Manage expectations: clarity of expectations from future generations; clarity of financial support that will be provided to future generation;
• Financial competency;
• Generational leadership and governance;
  • Rotate the chairmanship of family meetings among all generations, including children, have an agenda, everyone participates
• Focused achievement: model of "work" ethic, focused on doing something everyday
  • Dr. Hausner suggested that even if the parent plays golf everyday, that the person leaves the house dressed for work, hides the golf clubs in the trunk and goes to the course at the same time everyday to demonstrate to young children the "work ethic" of doing something productive everyday.
• Accountability: specific behaviors that can be counted and measured,
  • Being "nicer" to my siblings is not something that can be counted and measured, but I will have lunch with my sibling once a month and we will not talk about business is something that can be measured.
• Heritage and Traditions: choose dates for family meetings that are not holidays, be sensitive to diversity (eg: in-laws being able to see their families of origins on holidays).

 We as advisors can use these suggestions and work with our clients to help them keep balance in their capital accounts.

Using Game Theory to solve Business and Political Disputes

Bruce Bueno de Mesquita was the opening keynote speaker at the Family Firm Institute's 2010 annual conference in Chicago.  He is the Julius Silver Professor of Politics and Director of the Alexander Hamilton Center for Political Economy at NYU, a Senior Fellow at the Hoover Institution, Stanford University.  He is the author of The Predictioneer's Game.

Mr. Mesquita uses mathematical game theory as a way of "evaluating how people interact when they are trying to advance their own interests".  During his presentation he indicated that for the most part, he believes all people are rationally self-interested (however, he excluded two year olds and those that are mentally ill).  In his method he analyzes who has a stake in the outcome, what do they say they want, how focused are they on the particular issue vs. another issue, how persuasive can an influencer be, and how resolved are the parties to coming to an agreement. 

When working with a family business, we must also analyze these issues.  It is important to know who has a stake in the outcome of any decisions that must be made.  This often includes family members who may not be present for any discussions or may not be the ultimate decision-maker.  One member of the family may indicate that they want a certain outcome, however that family member may not understand all the ramifications of that outcome or considered other options.  The adviser must determine how important is the present issue - can the family be persuaded to resolve other issues that will assist with resolution of this particular issue?  It is critical when working with family businesses that the non-bloodline family members who are influencers be included or have a place in the process. With regard to the level of resolution, family businesses will often wait until the pain of doing nothing far exceeds the pain of resolving issues. 

Whether or not you are a fan of game theory, the factors used by Mr. Mesquita can be used to assist anyone who is working with family businesses. 

The Psychology of Having Money

At the October meeting of the Oregon Family Firm Institute Study Group held in Eugene, Nancy Frisch facilitated a discussion of The Psychology of Having Money. Ms Frisch led us through exercises that gave us insight into own relationship to money then turned our attention to what she describes as the 8 characteristics of a “rich kid”.

1. Self-esteem of a rich kid is often inadequate;
2. Maturity of a rich kid is delayed;
3. A rich kid lacks motivation; and
4. Self-discipline;
5. A rich kid is bored;
6. A rich kid will use of power by either its misuse, denial, avoidance;
7. A rich kid will feel guilty for being rich; and
8. A rich kid will feel alienated.

It turns out that being rich can make a person unhappy and marginalized from the rest of society. Because we and our clients have seen these characteristics in other rich kids, wealthy parents want something else for their children. What can make the difference between the typical "rich kid" syndrome and a happy, motivated child of wealth who is a credit to his or her family and a productive member of society? Ms Frisch suggests that parenting has a lot to do with the difference. So what set of behaviors in parents will result in well adjusted rich kids?

In raising wealthy children: 

1. Understand what values you want your children to learn?
2. Understand what is important to you and your family?
3. What do you want your children to remember from your teachings and parenting?
4. What kind of relationship do you want with your children?
5. What is the mission (purpose) of the family's money?
6. What the family stands for; what are its values; how will it use wealth;
7. Develop board strategy for accomplishing these goals;
8. Create rules and procedures for interacting; and
9. Share hopes for the future and family legacy.  

Whether rich, poor or middle-class, raising children with the understanding and intention outlined in the 9 action items above would go far in creating happier, more motivated and productive adults.  It certainly will give those children who do not have to work a sense of purpose and mission so lacking when there is nothing required of them.

A Business Plan for Education

At a recent FFI Study Group meeting, we were discussing some of our challenging cases.  One of the family business consultants was asking my advice about one of her particular clients.  The grandparent wants the youngest grandchild to obtain a specific degree within a limited time frame.  However, the grandchild wants to obtain a different degree that she believes would be useful in the family business.  The grandparent is also refusing to provide financial assistance to the grandchild, so the grandchild is attending school part-time and working part-time.  If grandparent provided financial assistance to the grandchild, then the grandchild could attend school full time and complete the education within time frame that grandparent has set.

What to do?  I suggested that the grandchild develop an educational plan, similar to a business plan and present it to grandparent.  The plan would detail the proposed program of study and the educational institution where the study program is to be undertaken.  It should also include performance requirements for continued financial support.  In this case, the grandchild should make a case as to how the degree will be beneficial to the family business. 

This is a technique that can be used for any educational trust.  I have several clients who do not have children, but want to provide for the education of their family members.  They want to make sure that their funds are used to pay for education for those family members who are serious about getting an education.  In some cases, the amount of support has been limited to a certain percentage, in others only tuition and fees were covered and did not include living expenses.  In another case, the education trust was set up as a source for loans.  A family member was able to borrow from the education trust under very favorable terms, but the loan was required to be repaid so that there would be funds available for the next generation to attend college or university. 

The educational trust or plan can be tailored to fit the beneficiaries, rather than a one-size fits all plan which provides that a trustee can pay for educational expenses.

Why are family-owned business different and does it matter?

Family-owned businesses are different from other businesses and the business owning families are different from other families.  At the heart of the differences is the purpose and function of business and family. That difference causes stress and conflict which, if not understood and managed, may lead to a failed business and a broken family.

 

The purpose of a business is to provide goods and services to its customers and clients and a return on investment to its owners. Business provides employment and fuels the economy wherever it is located.  Those who rise in the business organization typically are those with talent and competence. Employees compete for better positions within the company and for higher pay and those that get ahead do so on their abilities.

 

The purpose of the family is to raise mature, productive citizens and to provide for the care and security of those less capable.  Families nurture and support all of its members whatever their abilities. Competition is minimized in favor of cooperation and sharing with those with less ability or who suffer bad luck. A member of the family who does not quite measure up is not dismissed from the family as he or she may be from a company. A member of the family remains a loved and cherished member.

 

In a family-owned business, the purpose of the business can conflict with the purpose of the family.  For example, when an unemployed family member is hired by the family business without regard to the skills needed to perform the job position, the business suffers from not having a skilled employee and the family member's self esteem is wakened.  Other skilled employees of the company including other family members are left feeling frustrated and angry.

 

This conflict and others like it are played out every day in family-owned businesses and business-owning families. And the family can never get away from the conflict. It follows the family even when getting together at Thanksgiving Dinner and other holidays. 

 

The resolution to these conflicts require a different model than is used to resolve employment problems or shareholder disputes in other businesses. It requires an approach based on an understanding of the family system and sensitivity to the dynamic of family.  It also requires an understanding of business and the workings of business.  The intersection and interplay of family and business is complex, interesting, and extraordinarily satisfying when done right. 

 

 

 

 

The Caterpillar's Question: Who Are You?

When the caterpillar asked Alice “Who are you?”, she replied “I hardly know, sir, just at present.”  The caterpillar’s simple question is not easy to answer, particularly for many family businesses.  Even if the founder has a clear sense of purpose, family businesses grow, the work changes, and the next generations can easily lose sight of the history and even core values of the business.  Many family businesses, even highly successful enterprises, do not have a tradition of recording, preserving, or even sharing the family history or the history of the business.

For a family business to succeed over several generations, the founder – and next generation leaders – must be intentional about building trust, knowledge and cultural tradition among the children, grandchildren, and extended family. There is real value to a shared family history.

As counsel to family businesses, Ater Wynne helps our clients understand the importance of tradition and history - good and bad - to the success of the business.  We know that "not all the law is in the books."  Our job, as professional counselors, is to work with our clients - often multiple generations - so that there is a shared answer to the caterpillar's question and thus a common sense of purpose for the business. This kind of understanding can lead to effective transfers of leadership, sensible liquidity events,and meaningful strategies for those family members who will not continue as active participants in the business.