1. What is Old will never be New again – elongation of life expectancy
Observations
Our Past: Family succession was usually caused by the physical and/or mental incapacity or death of family leaders. Historically, this is why Wills were the prime determinants (one can’t really say “guides”) for family succession and inheritance.
Our Present: We’re living much longer. Average life expectancy in Australia was: 68.77 years in 1950; 72.49 years in 1975; 79.44 in 2000. It’s currently 83.79 in 2022. [Data source: UN – World Population Projections (excluding effects of Covid)].
Business and Business Family leadership, and the succession plans that ultimately judge the quality of that leadership, have become much more complicated as a result of family and business leaders remaining in place far longer – notwithstanding the declining capacity to innovate and motivate that is the almost inevitable consequence of the aging process.
In many cases they slowly “fossilise” (rust on the job): they’re actively functioning fully, and creating thick smoke screens around themselves, while continuing to do what they’ve always done, rather than what the business needs them to do today, for the sake of all its tomorrows.
Which is not to say that age defeats wisdom, or that it diminishes the value of older participants in business and family affairs. Far from it. However, leadership needs to happen in the moment, and from moment to moment. In competitive business environments leaders need to be plugged in, up to date, and vigorous – or the organisations they lead, be they businesses or families, “fail to proceed” and go backwards relative to others. This tends to frustrate the hell out of rising generations that want to move the ship of state onwards.
At some time in the life of every wise leader they recognise that: (a) they’re no longer the right person to lead and, (b) it’s time to support someone else in that position while, (c) they cheer them on from the sidelines.
It’s time to selflessly sponsor the success of others, and to: teach, coach, mentor, tell stories, support when asked, and be there to help pick up the pieces if things go wrong. If they prepare their successors well, it’s less likely that things will go wrong.
Returning to our theme: the Wills that were so central to the succession process when individuals lived for just a few years after retiring at age 65, are almost totally irrelevant to the succession process if they don’t come into effect for more than two decades after succession needs to occur.
And make no mistake, succession, as a process of renewal and reinvigoration, is as essential to the preservation and enhancement of all five forms of family capital, as it is to the continuing viability of business operations.
James E Hughes (“Complete Family Wealth”) defines the 5 types of capital that comprise family wealth (which, in the original Anglo-Saxon meant “well-being”) as:
- Legacy: leaving things behind for the benefit of future generations in improved condition.
- Social & Relationship: existence of strong and high quality relationships, as a basis for collaborative, shared decision-making in the family.
- Intellectual: accumulated knowledge and capabilities of family members, individually and as a collective, plus the wisdom to use it well.
- Human: accumulated investment in the nature and qualities of family members and,
- Financial – the cash and assets that help to make it all work.
Note that financial capital is seen as an enabler of the first four categories. It doesn’t create family well-being (as in: “money doesn’t make you happy”), but it’s essential for supporting well-being.
Conclusion
Families with significant wealth need Wills and Estate Plans to help determine how that wealth will be distributed and used after the passing of an incumbent generation.
However, Wills and Estate Plans are entirely inadequate tools for helping families to manage succession and the transition of control of family business operations, and even leadership of a business family, from one generation to the next.
That requires the active application of measures prescribed by Family Business Best Practices.
We’ll address them in more detail in our next blog.
2. If we’re really advising Families Across Generations, who’s the real client?
Is it the whole family, or just the guy who pays our bills?
Most advisers’ natural survival instincts (and their practice managers), tell them to look after the person who pays their biils, then worry about everyone else.
But, if we believe we’re advising “families”, and especially if we want to be considered the family’s trusted adviser, our engagement scope needs to broaden, to cover the needs and interests of: (a) all relevant family members, as individuals and, (b) the family as a whole, as a collective.
This raises the classic question: “who’s the client?” Problem: this suggests and implies a competitive situation – where we need to promote and protect the interests of “our client” against the interests of everyone else in the family.
Although we’re sometimes engaged as “emotional bodyguards” by Business Family Patriarchs and Matriarchs facing unmanageable pressures from distressed and conflicted children, partners, in-laws, and exes, we’re more usually engaged to help steer the family through a succession and estate planning process.
If we accept the engagement from a corporate entity, representing the family as a whole, and describe our function and commitment in our engagement documentations as being: “friend to all and advocate for none” (as per a facilitation engagement), we can do everything we usually do, with less danger of driving wedges between members of the group of people we’re supposed to be serving.
3. And, what’s the job?
Is it a Short-term (transactional); Medium-term (technical advisory), or Long-term (trusted adviser), engagement?
Is it a Wealth Management assignment (tight & long focus) or a Family Success engagement (wide & long focus)? Note that if we define “wealth” as well-being (per Jay Hughes), Wealth Management and Family Success become the same thing.
Do we want to be: Technicians (complex issues), Administrators (legal/financial compliance), Advisers (best practices), and/or Facilitators (make things easier)?
You may coerce and control, but you can’t motivate and engage most family members through standard legal documents, such as Trusts, Wills and Powers of Attorney. They’re all important, but they’re just bit players in the grand drama of multi-generational Family Plans. And we know that when family members don’t get with the Plan, it’s unlikely the family has a long-term future, as a Business Family.
In contrast, it’s not hard to educate, incentivise, and excite most family members through inclusive family culture-building activities that result in legacy documents: primarily Family Constitutions and Charters of Mutual Obligations.
As core Family Business Best Practices, these activities help to bond family members more tightly together across generations, through the process of aligning them to the Family Plan. It helps to secure the family’s long-term future, as a Business Family.
4. How do we strengthen our status as Trusted Business Family Advisers?
We need to evolve from the Fixed Mindset of the accomplished professional who’s comfortable within the safe framework provided by their technical expertise to adopt a Growth Mindset, where we’re curious and open to:
- Learn about non-technical Family Business Best Practices and how to integrate them into existing technical advisory practice.
- Developing a broader range of “advanced human” advisory skills, including facilitation and negotiation.
- Broadening professional networks to incorporate psychologists, mediators, trainers, non-executive directors and Advisory Board members etc.
Case Studies – presented by Jon Kenfield MBO
Case Study #1: Relative value and impact of legal documents vs a “Charter of Mutual Obligations”.
- 3rd / 4th Generation Family Business with diversified business operations across NSW.
- Revenues of approximately $600M pa.
- Family Net worth estimated at around $80M.
- 4 siblings. 1 heading into his 3rd divorce.
- Lack of a Binding Financial Agreement led to over 5 years of Family Law delays to generational succession plans that required a major liquidity event, worth approximately $30M to the incumbent generation, before they would finally pass control to the next generation.
Case Study #2: Identifying clients’ real needs: important and urgent / important and non-urgent for Business, Family and/or Family Members (Personal).
Who is the client any way? What tasks are required?
- 1st / 2nd Generation Family Business.
- 60-year-old business, purchased from its founder in 2012. Single site commercial operation. Very labour intensive.
- Current Turnover is $3.5M pa ($1M on purchase). Borderline profitability.
- Purchased on 50/50 basis by married couple (Phil and Mary), both with adult children from previous marriages.
- Initial engagement to resolve destructive conflict between Phil’s 30 year old son Andy (working as a manager in the business with no other qualifications or work experience) and Mary (step mother, and CEO of the business).
- Phil promised Andy eventual leadership and ownership of the business, but … major relationship issues with Mary and general lack of profitability, have increased Phil and Mary’s need to use the business to fund their retirement, and their confidence in Andy as an eventual business leader.
- Applied tourniquet to relationship haemorrhage and reduced heat of conflict.
- Identified and confirmed concerns re viability of succession intentions.
- Stopped ownership transfer process and engaged psychologist/coach to work with Andy to improve his prospects, in and out of the business.
- Concerns re business performance > Strategic Review of operations > major revisions to business and family plans > totally different succession plan for business and family.
Case Study #3: Increase levels of professional engagement with Business Family clients, specifically: increase regularity and depth of contact to make each client a “high touch” client and get earlier notice of serious risks and unmet needs.
- 3rd / 4th Generation Family Business. Current generation comprises 6 siblings. 4th generation comprises 12 cousins (late teens to late 30s).
- Inherited investment portfolio worth $250M, under professional wealth management.
- 2 siblings working in “the business”, drawing large salaries, and not doing much for it.
- Highly educated family with several professionally-qualified in-laws. 4th Generation looks even more impressive in terms of educational and professional qualifications and potential.
- Sibling group appears socially strong, but non-employee family members are deeply suspicious of their two siblings’ conduct of business affairs, and are resentful of the salaries they’re drawing for little to no apparent effort.
- Strong resistance from employed family member against: (a) reviewing or revising business operations, or their involvement therein; (b) developing a Family Plan, and/or a succession plan; (c) engaging members of the family’s 4th Generation (including their own children) in meaningful discussions about the family’s legacy, and the future.
- The family’s professional advisers (Dad’s old advisers) are only engaged for major new transactional and annual basic compliance work.
- No family business best practice processes established by previous or current generation.
- No Business Plans or Letter of Wishes from previous generation.
- Outcome: Family conflict creates business deadlock; major assets are sold off; the previously close family disintegrates, as each branch takes its money and goes its own way; the professional engagement to the family of lawyers, accountants, and wealth managers who’ve served for over 50 years is terminated.