Family Enterprises Evading The "Shirtsleeves To Shirtsleeves" Destiny: G1 To G2 - White Paper

Eliane Chavagnon

12 August 2013

A new white paper points to “widespread sense” that around 80 per cent of families with significant wealth or businesses will succumb to the “shirtsleeves to shirtsleeves” phenomenon, as shared ownership by more and more family members presents new challenges.

The paper, written by Dr Dennis Jaffe and entitled Good Fortune: Building A Hundred Year Family Enterprise, uses the term “generative family” to denote the successful transition of a family enterprise across several generations. Its insights are based on a sample of 38 families, of which all but two had a self-reported net worth of over $200 million, with the median value being between $600 million and $800 million.

The family enterprise, it says, is a “complex social system” in which family members are both relatives and business partners. Each generation is unique and must review and update practices to reflect new realities. As the paper highlights, the second generation - having usually grown as a single family office in one household - separates into a group of individual families with various roles, perspectives and concerns with regard to the family enterprise. It is likely at this stage that many family members work in the business - and almost everyone expects to inherit some of it.

Indeed, siblings across all generations face different challenges than that of the family wealth creator. But the transition of G1 to G2 is the first time that G2 siblings may ask themselves if they want to be partners in the family enterprise. They may, for example, question if they want to keep or sell the business (the paper stresses that the decision to sell “does not necessarily lead to family dissolution”).

The insights provided by the paper resonate with a recent SEI report - Enterprising Families: The emergence of a new breed of investor - which said that the 2008 financial crisis has affected the way wealthy families view their investments and make important decisions, as the patriarch adopts a more inclusive approach to managing family assets. The implication for advisors, Jeff Ladouceur, director, SEI Private Wealth Management, told Family Wealth Report, is that - regardless of a family's level of wealth - relationships are no longer “just with the patriarch.” Advisors must educate all family members so that everyone has a certain level of knowledge in order to participate in the discussion.

G1 to G2: challenges and resolutions

All of the family enterprises interviewed for Dr Jaffe's report were founded by a man, and this is a challenge, the paper says, because these founders - by nature - don’t share enough information and control. “In many cases, the G1 father took care of everything and the next generation, sometimes very suddenly, had to discover what the family enterprise contained and decide what they are going to do with it, how to run it, and their ultimate goals.”

While it was most frequently the case that a second-generation family member (often the eldest son) was named “expected successor,” having a designated successor does not, the paper says, guarantee a smooth transition: the second generation must find new, more effective ways to communicate, make decisions and build up trust.

Another hurdle boils down to “sense of purpose” and values, as a family enterprises “cannot easily remain unified and connected over generations” if these are not shared. Meanwhile, the paper stresses that if siblings cannot see a reason for remaining partners, this outcome should be viewed as an “affirmation of individual freedom” and not a failure should they choose to manage their assets as individuals and remain connected as extended family.

Accordingly, it outlines three practices it says contribute to successful transitions from G1 to G2. They can be summarized in the contexts of: collaboration, transparency and governance.

Firstly, many of the families interviewed enjoyed cross-generational apprenticeships between G1 and G2, and this usually started when G2 members began working with their father. But equally, the G1 mother was an “active participant in preparing members of G2 to work together,” the paper says.

It adds: “Siblings have to get beyond their competition and rivalry to identify their shared interests and different skills, interests and abilities. This does not happen by chance, but entails a commitment to work together and to learn the skills of collaboration and teamwork, which are not natural to siblings.”

On the part of the founder, they must also share all basic information about the business and ﬁnances to equip the next generation so they can learn to work together.

“Several of our families made clear that along with sharing relevant business, ﬁnancial, and legal information there is a need to learn ‘what it all means’,” the paper says.

To clarify - as defined in the paper - governance relates to the “skills and structures that enable the growing family to deﬁne values, mission and policies; maintain connections; oversee the business and the family participation in it; and distribute consistently and fairly the ﬁnancial and other rewards.” The second generation must establish policies and make decisions together - often a period when governance enters the family’s life in “a conscious form.” This is a crucial - and indeed new experience - for G2 as the founder of the family enterprise “usually has little idea of what this is or why it might be important to his children,” the paper says.

The white paper, published this month by Wise Counsel Research, pulls together the experiences of 38 successful family enterprises spanning four successive generations. Dr Dennis Jaffe, author of the report, is on the judging panel for the inaugural Family Wealth Report Awards 2014 (view details here).