Successful Family Business: Developing Next Generation Shareholders

Successful Family Businesses: Developing the Next Generation of Shareholders

The following resource originally appeared on mercercapital.com.

European investment banking icon Rothschild & Co. recently announced that 37-year old Alexandre de Rothschild will be taking the reins at the firm, succeeding his father at the bank’s May shareholders’ meeting.  The new chairman is a member of the seventh generation of the family.  While the future performance of the bank under the younger Mr. Rothschild will be the ultimate barometer of success, the Rothschild family clearly has fostered a culture of developing the next generation.  Few families have the long history of next-gen development that the Rothschild’s do, but it is a task that becomes more important with each successive generation.  The long-term health of any organization ultimately depends on the quality of the rising generation of leaders, and families are no different.

The long-term health of any organization ultimately depends on the quality of the rising generation of leaders, and families are no different.

From our experience working with successful family businesses, talking with family business leaders, and reviewing relevant research, we’ve identified the following themes that are common to successful family businesses when it comes to developing the next generation of shareholders:

Successful family business owners recognize that each succeeding generation will be different, and that’s okay. As families mature and grow, succeeding generations naturally become more diffuse than their parents’ generation.  Family members move away, pursue careers and interests outside the family business, and have different personal and financial objectives.  While this increasing family diversity can be intimidating, successful families embrace the new experiences, opportunities, and challenges that this growth brings.  Imposing obligations on the next generation to do things just like grand-dad did, generally prove to be stifling and counter-productive (and, in all likelihood, contrary to grand-dad’s mindset when he was achieving his greatest business successes).  The differences between Boomers, Gen Xers, and Millennials are real and matter for family businesses.  Groups like the Center for Generational Kinetics publish fascinating research on the differences between generations and how to make those differences productive for your family and business.

Successful family business owners identify the core business and family attributes that the family wants to persist across generations. This is the counter-weight to the prior theme: families have “social ballast” that can help the business maintain its balance in the inevitable rough seas.  This “social ballast” comprises the core family and business attributes that maintain and preserve identity across generational changes.  The key is to identify the root causes of the family’s success.  Without saddling the next generation with a mandate to do things just like grand-dad did, can the family identify the core attributes underlying grand-dad’s success that can transcend generations?  For example, what are the two or three core attributes that make a Rothschild business a Rothschild business?  Identifying these attributes does not limit the next generation’s flexibility, but rather frees the next generation from having to develop – out of whole cloth – a framework within which to meet the unique family and business challenges with which it will be faced.

Successful family business owners acknowledge that experiences outside the family business promote development of next generation leaders. While growing up in the family business provides development opportunities that are not easily replicated, many successful families are recognizing the benefit of gaining professional experiences outside the family business.  Family employment policies often mandate that before becoming eligible to work in the business, family members must have three to five (or more) years of external professional experience.  Such policies have multiple potential benefits, not least of which is exposing the next generation to the ideas, processes, and strategies of other successful businesses.  As noted in the article linked above, the younger Mr. Rothschild spent the first five years of his career working at other financial firms before joining the family business.  Furthermore, even in the context of non-employee roles (shareholder, family council member, director), successful families value and encourage the “outside” experiences of the next generation.

Successful family business owners provide development opportunities for both employee and non-employee shareholders. Regardless of the current family composition, the likelihood that rising generations will include a mix of employee and non-employee shareholders is high.  Next generation development is not limited to future employees, but should include members of the rising generation that do not plan to work in the business.  Development opportunities include both education and service.  No one is born knowing what has made the family business successful, how to read the company’s financial statements, or how to think about the tradeoffs between current distributions and investment for future growth.  Successful families are intentional about providing ongoing education on these and other topics for the next generation.  With regard to service, rotating membership on a family council can create great opportunities for non-employee members of the next generation to actively contribute to the success of the family.

Successful family business owners allocate resources to fostering next generation innovations. The next generation is a natural source of innovation necessary to keep the family business relevant in evolving markets.  Successful families consider multiple potential strategies for accomplishing this goal.  Some families follow a corporate venture capital model, providing seed capital to fund new ventures headed by members of the next generation (subject, of course, rigorous vetting procedures).  If there is some organic connection between the proposed venture and the family’s core operations, such investments may be made by the family business itself.  If the proposed venture is a bit further afield, a holding company structure may be used to make the investment.  Or, if the risk-return preferences of various family members do not all accommodate venture investing, the family may explore setting up a captive venture fund in which family members may, but are not obliged to, invest.  Still, other companies view significant ongoing distributions as the seed money for the next generation to put into new ventures of their own choosing.

Successful family business owners use philanthropy as a tool in next generation development. Perhaps the most effective way to develop the next generation is to provide for active involvement in the family’s philanthropic efforts.  Having a voice in the family’s giving and other charitable activities can be a great way for the next generation of the family to develop a sense of the responsibility for managing and stewarding the wealth created by prior generations for the benefit of their communities and other worthy beneficiaries.  For many families, this is such an important component of developing the next generation that they include even teens and pre-teens in their philanthropic efforts.

At the risk of sounding overly sentimental, a family’s most valuable asset is its next generation.  If the current generation of business leaders is focused on the long-term sustainability and health of the family business, developing the next generation of family shareholders must be viewed as a strategic priority.

 

About the Author

Travis W. Harms, CFA, CPA/ABV, leads Mercer Capital’s Family Business Advisory Services Group. Travis’s practice focuses on providing financial education, valuation, and other strategic financial consulting to multi-generation family businesses. The Family Business Advisory Services Group helps family shareholder, boards, and management teams align their perspectives on the financial realities, needs, and opportunities of the business. To learn more about Mercer Capital or read additional articles featured in their Insights section, visit mercercapital.com.