A family business, by its very nature, is often envisaged as indefinite and lasting. Families may initially confuse the original business, in other words the family’s wealth, as the legacy of the family. It becomes clear, with time, that the true wealth of the family, is the family itself. The business forms the capital base on which the family build.
An unsurprising fact from research show that the original motivation to generate family wealth, is found in the need to provide financial security for the members of that family, both now and the future. Planning the family’s business with the aim to ensure lasting wealth, must therefore be deliberate, with a strong emphasis on leadership development.
Creating successful family wealth across multiple generations is a rare and special event. According to the Family Firm Institute which surveyed families across the world, less than one-third of family wealth are able to survive as they cross generations. Less than 10% of these survive into the third generation. We refer to them as the 10% Families.
Most families' wealth is generated through a family business. Future generations build the family’s wealth further by diversifying the family business into other assets. The second generation of many families are uncertain whether to retain or to sell their legacy business and/or to diversify into other areas. A family with a clear family governance plan, has specific guidelines that provide a framework to empower future leaders in their decision-making. This framework ensures that future generations can grow from a single family to a family enterprise consisting of multiple family units.
A family that wishes to be a member of the 10% Families (retaining family wealth into a third generation) must ensure that they can deal with the increased complexity found in the generational ownership of the family’s assets. Generational families grow continually in numbers. Dealing with the growing number of members requires a robust governance system, a well-established identity and practices that align the interests of multiple family units with the operations of the business. The family must continue to develop its culture so that it is able to manage the ongoing emerging realities. These challenges will either re-inforce the family’s identity or destroy the wealth that the family is working to protect. The risk of not surviving the generational transition, is a strong motivation to invest more and more into the family itself.
The family and the growth of its business interests remain completely dependent on the quality of leadership the family produces. Leadership succession is one of the most critical and daunting tasks a business family can face.
According to Egon Zehnder there are five common steps that successful family owned companies follow in their approach to leadership succession:
- Understand the organization’s unique “family gravity”;
- Establish a strong and structured leadership succession process;
- Have a clearly defined corporate governance process;
- Understand what is needed in the family business leader;
- Carefully manage the integration process.
Zehnder defines “family gravity” as the values and priorities that endure across the generations of the family and includes how those values and priorities affect strategic decision making and the management of the family’s business.
We define the family gravitas as the Family Principles. The Family Principles are determined by considering:
- the intention of the founder of the family wealth,
- the thinking of the previous generations, and
- the understanding that the current family members have of the Family Principles.
These Family Principles, once determined, are the non-negotiable and never changing foundation framework on which the leadership of the Family is built.
The investment for a family in determining the Family Principles ensures a generational leadership sustainability, and a level of identity and cohesion within the family, that is then supported and reflected in its governance.
Should a family wish to ensure strong generational leadership, it should reflect on who they are, then clearly define and communicate their findings to the family as a whole.
The leadership model described compliments the Family Advisory Services provided by Turnstone. Dölberg and Turnstone work together to ensure that the family is well positioned to make a success of the next sixty to ninety years.
Advocate Heinrich Odendaal
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