What are the lessons to be learned from prominent ultra-wealthy business owners whose family enterprises have thrived for three or more generations? Interviewing 100 100-year billion-dollar families, Dennis T. Jaffe, a leader in family enterprise consulting, dug out an illuminating trove. He discusses his five years of research in an interview with ThinkAdvisor.
Jaffe, based in San Francisco, talked with well-known families, from 20 countries, worth from $250 million to several billion dollars each. Average worth: about $800 million. His findings are collected in an upcoming book, “Borrowed From Your Grandchildren: The Evolution of 100-Year Family Enterprises” (Wiley-Bloomberg – Feb.26, 2020).
A project of Wise Counsel, a think tank, Jaffe’s work was sponsored by Merrill Lynch.
The overarching key to success for these super-affluent families is that for them, it’s not about profits for shareholders — it’s about building the business and investing in the family.
Indeed, the theme is long-term thinking, not short-term profit-taking or individual self-interest. All the families consistently reinvest profits earned.
In the interview, Jaffe, a psychologist and sociologist who advises families about wealth, governance and philanthropy, discusses a “generative alliance” each family forms, which is composed of the elders, professional business advisors and next-generation family members, who are looked to for innovation and fresh ideas.
Ensuring responsible stewardship from one generation to the next is paramount, and all members are in the business because they want to be.
ThinkAdvisor recently held a phone interview with consultant Jaffe, who works with families to build and create organization and policies. At one point, the conversation turned to the primary types of investments that the ultra-successful families he interviewed has favored.
Here are excerpts from our interview:
THINKADVIOSR: What does the old saying, “shirtsleeves to shirtsleeves in three generations” mean?
DENNIS JAFFE: It’s not that the family becomes poor. It’s that the family business no longer exists in three generations. They could have sold it for a billion dollars — so they’re still wealthy. It doesn’t make sense to say that in three generations, people tend to be poor; it just means that they tend not to be in business together.
What was your goal in researching 100-year family businesses?
I sought families that were successful over three generations to find what they were doing to be so successful. They’re a small number and have lessons for us.
What was the most striking finding in talking with these families?
That they wanted to invest their wealth in the next generation and build a great family. They didn’t say, “We’re rich; we can all go off and do what we want.” They weren’t creating and educating the family so they could make more money. They wanted to stay together. After three or four generations, they have a common identity, which is something they really work hard to make happen.
You quote a member of the Hermès family — the luxe high-fashion manufacturer — as saying: “You do not inherit the family business; you borrow it from your grandchildren.” Please explain.
These families are looking long term and thinking of their grandchildren and the legacy they’re going to leave them. They’re not thinking, “What’s in it for me in the short term?” They don’t look for how much profit they’re going to make; they’re thinking ahead at reinvesting the profits. They also listen to the next generation — who will inherit the business. So it’s a long-term perspective and about the relationship of the family, not individual self-interest.
Did you talk much about the families’ securities investments?
They tended to have an investment portfolio but were always looking for private businesses to own rather than just stock. By the fourth generation, they tended to have two, three or more businesses that they owned. And they had a lot of investment in real estate. So, definitely real estate and private businesses were very much sought after.
So much of their success relates to how the children are brought up. For example, the families have advisors for the younger generation so they’ll understand finance, business and family. The elders aren’t keeping their money a mystery to their progeny!
Right. To help the next generation, they talk about values and [financial] responsibility. It’s a whole learning process. The conversation isn’t about “How much [money] you’re going to get.” It’s about “What do you want to do with your life? What’s important? What do we expect of you as a family member?”
It’s surely not about producing trust fund babies.
Exactly. The people in these families are gainfully employed. They’re responsible and take seriously that they’re stewards for the future, which means they just can’t spend and enjoy [as the focus of their lives]. They have to be building.
Please explain what you call the “generative alliance”?
It’s the three primary groups that are involved in the family business and their roles: The older generation are usually the people with the power — the ones who keep the values and legacies. The second group is professional managers, advisors, the head of the family office. They’re advisors hired by the family who provide good business practices and discipline.
And the third group?
That’s the rising generation. So, while the power formally rests with the older generation, and the professional managers serve the older generation, the families also listen to the voice of the younger generation.
Why is that important?
They encourage the next generation to bring in new ideas. They are the innovators and come with [fresh] ideas that challenge and take the family forward. The professional advisors are experts in what good business is and how to create it, but they aren’t terribly innovative. The innovation in these families comes from the ideas and energy of the new generation moving into power and influence in the family.
Please talk about the family business “transformation” involving harvesting, pruning, diversifying and grounding.
The four are common to pretty much all 800 families. Harvesting is the first thing that happens. This is taking the wealth out of the business and reinvesting it in other places, so that the family has created a portfolio. By the fourth generation, they aren’t just running a single enterprise. Even if they haven’t sold the business, they’ve taken wealth out of it and invested it in other places.
What’s the second?
Pruning. The families have a buyout process. Some member may say, “I want to go my own way. Please give me my money.” Or it may be that the family splits in half and one group leaves and the other takes the business. So they might diversify and have several different types of businesses that they’re into. That’s the third [stage].
And the fourth?
They have a shared identity. If there are 40 cousins, say, in different parts of the country and maybe some in other countries, even if they have different values, they have a common identity of shared values, things they want to do; and they start to work together and see themselves as a single family. They tend to be the third and fourth generations, or sometimes the fifth or sixth.
What’s the work they do together?
They begin to think of new ideas because they’re the ones who will inherit the business. They discuss: Do we want to sustain the business? Do we want to go into other areas? Do we want to sell the business?
What if a member chooses not be in the family business and prefers to become, say, an actor or writer instead? How does that affect their ownership?
Each family has a policy that allows members to be artists, filmmakers, musicians, to do service work [and so on]. But that has nothing to do with whether they’re still shareholders and owners of the business.
Talk a bit more about pruning, then.
One hundred percent of the families have some mechanism for members that want to leave the business. There’s always an exit policy to sell their shares. And every family has members that want out and leave. So the members who are there, are there by choice. They all made the choice not to leave and are therefore committed to one another.
I gather that these families don’t fight very much?
They fight, but they work it out. They get to the other side. They have a disagreement and work on it. They come to a compromise or a resolution. They don’t have a fight, walk away and say, “That’s it!”
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