The Best Practices Of Successful, Multi-Generational Families - New FBN, FOX Study

Harriet Davies

17 August 2012

The world’s most successful, multi-generational families routinely adopt best practices on maintaining personal relationships, family governance and next-generation development, a new study by the Family Business Network and Family Office Exchange finds.

The study, authored by Dr Dennis Jaffe of Saybrook University, along with Jane Flanagan of FOX, defines and compares the best practices used by 192 of the world’s most successful families, drawn from the two organizations’ pool of members. The study characterized the families as successful due to the high proportion of third- and fourth-generation families present in the sample.

One of its key findings is that successful families make use of best practices “significantly,” and expect to increase their use of them over time. The findings are also consistent across families around the world, with participants drawn from North America (57 per cent), South America, Europe, Asia and Australia/Oceania. They are also consistent across families who still own a legacy business and those who don’t.

In terms of assets, 87 per cent of the participant-families have over $50 million and 23 per cent have over $1 billion. Some 68 per cent still own a legacy business.

“The major insight is that a family has to plan and be conscious not just about their financial safety but also about their family's communication, connection, trust and teamwork,” said Dr Jaffe. “We found in this survey that the most successful families were doing these things; the question now for a family is not whether to do them, but when and how.”

As is often said, the generational transition is a pitfall for many families: the FBN/FOX report cites the Family Firm Institute in saying that only a third of family businesses survive as they cross generations; of those, under 10 per cent manage a successful second transition.

Once a family has sold its legacy business it can still operate as a “family enterprise,” the report lays out, with shared investments and a shared wealth-creation function. Many families, however, “do not survive the generational transition,” because they do not adopt internal governance practices and manage emerging realities.

Three pathways

One of the biggest challenges is the way families sprawl over time to include several related households, so governance practices must counter a tendency toward dissipation and fragmentation. To do so, the paper found that families adopted practices that spanned the inter-connected worlds of family, business and finance.

The critical practices for success are distributed along three overlapping pathways, it says.

· Path one: “Nurture the family”

In this pathway, the business is sold within the first generation but substantial wealth is passed on, with second-generation siblings starting their own families. As such, cousins grow up separately, and to maintain a family enterprise the family must actively build communication and shared values.

Best practices on this path include sharing philanthropic activities, ensuring regular and extended family gatherings, as well as fostering a climate of openness and trust, and respect for the family’s history and legacy.

· Path two: “Steward the family enterprises”

In the second scenario, the family still owns a business together. In this case, as the family base grows, expectations for ownership of the business need to be addressed.

Best practices include having a strategic plan for family wealth and/or enterprise growth; an active, diverse and empowered board; ensuring transparency about financial information and business decisions, and being explicit about shared shareholder agreements governing family assets.

· Path three: “Cultivate human capital for the next generation”

The third pathway is focused on developing the human capital of the younger generation and preparing them for their roles within the business and family, ensuring they feel connected with the family’s legacy.

Best practices include employment policies for younger members within the family enterprises; agreement on values about family money and wealth; financial education for the younger gen, matched to their age as they grow; and, crucially, support to develop the next generation of leadership.

“Highly engaged” in best practices

The families involved in the report are highly involved with best practices and the trend is for greater use of them over time, say Jaffe and Flanagan, who developed a composite index to measure how important families believe these practices are now, and how important they will be in the future.

These indexes allowed the researchers to identify areas where the most work was needed to bring the use of practices in line with families’ vision for their future use. By this measure, families will be looking to increase their use most of the following practices:

1) Support for development of next-generation leaders;

2) Exit and distribution policies for individual shareholder liquidity;

3) Strategic plan for family wealth and/or enterprise development;

4) Climate of openness, trust and communication;

5) Clear, compelling family purpose and direction.

What kind of model for wealth management?

The report also delved into how families managed their wealth, and found that even in cases where the legacy business was still owned by the family, it had often branched out to make use of other forms of wealth management.

Over half (57 per cent) reported having a single family office; 11 per cent relied on staff advisors within the family business; 10 per cent used a private bank or wealth advisor; 5 per cent were part of a multi-family office, and 4 per cent used a private trust company.