Slide 1

Business Family Dynamics

Monday, November 2, 2015

The Relevance of Game Theory to Succession in Family Firms (Part II)

The second half of the paper provides many examples of the application of theory to the process of succession, which, without the expertise of a mathematician, appears visually in the form of many complex equations and is somewhat challenging to read. But even the authors note that although “the equations may seem a bit complicated, the real idea is to understand the outcomes of the analysis,” and therefore professional family business advisors need not wade through the equations in the paper in order to understand the relevance of the application of game theory to succession.

Looking at management succession as a series of rational choices made by individuals, game theory identifies the actors directly involved, estimates their “payoff functions” – their incentives and payoffs for their choices – and identifies their possible strategies. This provides a platform for understanding the nuances and intricacies of the succession process and its related events. As a result, “[g]ame theory addresses two of the three major problems related to understanding management succession: that the actors have no (or limited) experience and that succession involves emotions as much as it does rational decisions (Duh et al., 2009).”

Particularly because “harmonious successions are the exception” rather than the rule, the authors point out that game theory is especially useful because it recognizes the interdependency and interconnectedness of the actors. Another reason it is very useful is that since successions involve “a dizzying amount of information with many interconnections,” the process often involves hard choices and the acceptance of less-than-optimal outcomes, which can be articulated and factored into game theory in order to help “decision-makers clearly articulate the information on which they are making choices.” That is, since there are choices within the process which often include conflict and indecision, indecisiveness is not far behind, and game theory can help to clarify this.

The complexity of the process of succession combined with the studies done to date on this subject, the authors argue, show that a single theory likely could not ever successfully demonstrate the intricacies of succession. The authors admit that their theory, and their paper, is general and only provides an introduction of game theory as it can be applied to management succession. But they argue successfully that game theory a) provides a solid foundation of how it can be applied to succession; b) is a rigorous tool, and c) is agile enough to include subsequent, more complex and more complicated dynamics than they have thus far included as examples in the paper.

By the end of the paper, one feels quite convinced that this ‘new’ theory (as in, new to the family business field) could and may very well advance the study of family business, as the authors write, by improving both the theoretical and empirical basis of research and by applying it in conjunction with other frequently used theories (such as agency theory, stakeholder theory and the resource-based view of the firm).

While the details of this theory and research paper are not necessarily relevant or immediately applicable to most professionals who work with or within family firms, the very prospect of game theory becoming applicable and more broadly used in relation to succession would provide an interesting and hopeful avenue which may lead to better solutions and better understanding of the complicated process of succession.

Written by Jennifer Halyk for IFEA

Article Citation:
Tim Blumentritt, Timothy Mathews, and Gaia Marchisio
“Game Theory and Family Business Succession: An Introduction.”

Family Business Review March 2013 26: 51-67, first published on October 4, 2012 doi:10.1177/0894486512447811

Monday, October 26, 2015

The Relevance of Game Theory to Succession in Family Firms (Part I)

In the article “Game Theory and Family Business Succession: an Introduction” by Timothy Mathews, Tim Blumentritt and Gaia Marchiso in the March 2013 issue of the journal Family Business Review, game theory is introduced as a framework through which to examine succession as a series of decisions about a family firm’s leadership, for the purpose of better-understanding the outcomes of succession events. Despite the complicated use of mathematical equations inherent in this theory, the authors make a strong case for the relevance of game theory and its effective application to succession.

Experts in the field of family business widely agree that succession is the single-most-often cited challenge or hurdle for family businesses, and that many studies have been conducted in an effort to understand succession and help to alleviate its ensuing problems. However, in all of the studies to date on succession and its related factors, none have “explor[ed] specific decision-making processes involved in the succession process,” especially in the “presence of conflict or indecision,” which is the basis of reasoning for this unique application of game theory to the process of succession.

Using game theory as a tool to analyze interactions between two or more ‘players,’ or ‘actors,’ the authors argue that the application of game theory could create potential for a significant step forward in the study of family business succession and “allows for a more sophisticated and insightful analysis since the decisions … [are analyzed] as interdependent choices.” Furthermore, it creates an opportunity to test these models empirically, which would also be a significant step forward in the study of succession.

The authors explain the basic tenets of game theory in the first half of the paper, and then apply it to basic succession events in the second half. The introduction to game theory and the examples of the application of game theory operate on several assumptions, including the assumption that the family wishes to retain family control of the firm; which, as professional advisors know, is not necessarily or always the case, but which is a necessary hypothesis in order to explain the application of the theory to the process of succession.


While informative, the first half of the paper on the introduction to game theory itself is only interesting in relation to family business because of its proposed effectiveness when applied to the complex family dynamic: “[t]he power of game theory rests in its ability to analyze situations in which the choices and actions of multiple players are interactive and mutually dependent: The outcomes experienced by one actor are influenced by the choices made by the other actor(s) in the game.”

Written by Jennifer Halyk for IFEA
Part II will appear next week.

Article Citation:
Tim Blumentritt, Timothy Mathews, and Gaia Marchisio
“Game Theory and Family Business Succession: An Introduction.”
Family Business Review March 2013 26: 51-67, first published on October 4, 2012 doi:10.1177/0894486512447811

Monday, October 19, 2015

HBR Study Identifies Key Factors for Successful CEO Transition

The article “Leadership Lessons from Great Family Businesses” published in the Harvard Business Review provides several practical suggestions for increasing the chances of a successful CEO transition process for family enterprises. 

By analyzing 50 globally leading family firms with annual revenue above 500 million pounds and investigating the reasons behind their success, authors Fernández-Aráoz, Iqbal and Ritter explain that strong governance; a family focus; an openness to family and non-family members; and a structured, methodical approach to the succession process significantly affects the overall chance of success in the process of generational transition. 

The authors describe these factors as follows: 
·      a governance baseline
·      “family gravity” (a family member as the center of influence)
·      future leaders with aligned values
·      a disciplined CEO succession plan 

Firstly, the authors identify governance as the baseline from which to attract and manage both internal and external talent. They found that nonfamily executives had concerns related to governance before joining a family firm because of the likelihood that the family would influence the business as oppose d to being professionally-run. Pointing out that very few companies in their study operated without eith er a supervisory or advisory board, and in many cases where there was a board, a “clear separation” between family and business representation existed. 

Secondly, the authors use the term “family gravity” to describe a family-centeredness or unique family focus which includes at least one family member, an d as many as three, as a center of influence which personifies the corporate identity, aligns various interests and maintains a common vision. (This term is sometimes also called “familiness” in other context s.)

Thirdly, the authors identify the skill and rigorousness with which the family seeks and finds future leaders as another key factor in the success of generational transition, and argue that both family an d nonfamily talent must be assessed on competencies, potential and values, with a particular emphasis on values. In the study, company ethos was often described by both family members and nonfamily executives as respect, integrity, quality, humility , passion, modesty and ambition. Along with 
cultural fit and investment in talent development, these values provide a solid foundation from which to start. 

Lastly, the authors outline a disciplined succession process with which to approach multiple candidates for a CEO appointment proactively and strategically, and display it in a clear and easily understandable three-phase table. Based on the experiences of the best family businesses from their sample, they found that many of the companies followed a hierarchical process when considering candidates, and gave first preference to family, then internal talent, and then finally external executives. While the authors have identified three “nonfamily CEO archetypes,” many experts could argue that it isn’t necessarily accurate to classify “types” in this way, particularly in family enterprise, where firm-specific qualities vary from company to company. However the recommendation is sound, with the contextual knowledge that the archetypes describe leadership qualities which would be most effective in family enterprise environments overall. 


Ultimately, the authors have identified governance; a family focus; leadership values and discipline throughout the CEO succession process as crucially important factors which will positively affect the success of intergenerational transition in otherwise successful family firms. Given that succession is a profoundly complex and challenging process for most , if not all, family firms, these recommendations derived from research on some of the most highly successful enterprising family businesses globally should be taken into consideration. 


Sunday, September 13, 2015

Family Culture as the Multi-Generational Glue: A Preview


    One of the basic objectives of advising family enterprises is to assist the family in creating a continuity plan that maintains the family as the “trans-generational engine” for wealth creation over multiple generations. Having achieved the FEA designation, I reflected on what it means to establish the family as the trans-generational engine for wealth creation over multiple generations. How do I, as a FEA designate assist families to achieve that goal? The legal tools I use are aimed at wealth and are not designed to create a continuity plan over multiple generations. Even the FEA tools although useful are simply that, tools to be used by the skilled practitioner of family enterprise advising, to collaborate with a particular family to manage issues that are relevant to the family at that time, and provide the family with the necessary structures, processes and tools so that the family is able to chart its course into the future.
    So where is the continuity in the planning? I was still restless and continued my intellectual pursuit of what I could do to assist a family enterprise to create a multi-generational continuity plan which led me to the concept of “culture”. As I delved into the subject, I found that there is little empirical research on the culture of family enterprise1 which in a way was a relief as it allowed me to free think about how the concept of culture relates to continuity planning.
    In my First Nations practice, I saw the power culture has to bind communities together through adversity over multiple generations. The power of culture to hold communities together over multiple
generations, even under adverse conditions made me start thinking that the truly successful transgenerational families, the ones that have been able to keep the family enterprise together over multiple generations, must have created a family culture for that is the only way that the family enterprise could continue to stay as a family enterprise over multiple generations. There is nothing else strong enough to hold the family enterprise together over multiple generations. As a family moves through the generations, it moves from a nuclear family to an extended family and for the truly multi-generational family, ultimately to a community. Mom and dad hold the nuclear family together: culture holds the community together. If the goal is to become a true multi-generational family, then a family culture must be fostered.
    The family may get along well now and everyone may listen to you now, but why will your great great grandchild care about your motives or the tools you used to implement your plan, with the emphasis on “your”? Unless the goal is to create the family culture, everything else is simply a tool that future generations may or may not use, or worst case scenario, set as their goal to break. Tools are intellectual. Culture is the family DNA.
    In FEA jargon, we advise the family to move from the “intuitive” to the “intentional”. For example, how the entrepreneur/founder might do things intuitively without really thinking about it, needs to be articulated in a form that the next generation can emulate and learn from, or that intuitive knowledge will be lost. Intuitive to the intentional.
    Creating a family culture means, to a certain extent, that we need to go full circle back to “intuitive”. Intuitive in the cultural sense relates to whether the family recognises who they are as a family and whether each individual belongs.  Change is inevitable and the dynamic of change is predictable. It is the expression of that dynamic that is unpredictable over multiple generations which proves the undoing of most family enterprises. Creating cultural reference guide posts allows prior generations to provide their family cultural wisdom so the future generations can take advantage of this pool of wisdom. The family culture creates intergenerational conversation. A successful family culture will allow you to speak in a fashion that your great great grandfather would have understood culturally, just as your great great granddaughter will also. Money talks in the present, culture speaks over the generations.
    If the goal is to truly be a trans-generational family, then there must be something other than wealth to bind the family together. Robert S. McNamara said that it is important to believe in something greater than oneself.2 In the context of family enterprise advising, family culture is that greater thing. 
    The key to continuity planning is that individuals must want to continue to belong together as a family for the family to remain as the “trans-generational engine” creating wealth across multiple generations.
    You can't want to belong to wealth but you can want to belong to family.

written by: gregsenda@yahoo.ca


Values in family enterprise, Ritch L. Sorenson, SAGE Handbook of family enterprise, London 2013 at pg 477 
2 The Fog of War, An Errol Morris Film

Monday, July 27, 2015

Researchers Assess the Meaning of ‘Value Creation’ in Family Firms

An article in the June 2015 issue of the Journal of Family Business Strategy, “Value creation in family firms: A model of fit,” investigates the convergence of goals, resources and governance in the family firm and how they can either create or destroy value over time. Value-creation in family firms is a commonly-debated issue amongst researchers and has led to several empirical studies and many publications arguing that family firms either have unique competitive advantages, superior financial performance, or alternately, unique disadvantages as a result of their “familiness” and idiosyncrasies which are not present in non-family firms.

While this particular article is neither easily digestible nor a particularly essential read for the average family business member nor professional advisor, and while it was also intended to frame several other articles elsewhere in the journal’s special issue on value creation in family firms, the authors do make several attempts to outline relevant questions and areas of exploration for advisors when working with families, which we will briefly summarize here, followed by some useful and practical questions for use in work with families.

The authors argue that advisors and professionals working with family firms must take into account the family firms’ goals, resources and governance mechanisms in order to accurately draw conclusions about value creation within the firm, and furthermore, that in order to create a fit and maximize effectiveness, the three main factors in value creation (goals, resources and governance structure), should be prioritized when assessing the “fitting process.”

The authors describe the meaning of “fit” as the effects between goals, resources and governance as well as the fit of the specific firm and its surroundings, ultimately calling for integration of and accounting for the environment, the owners and the organization. An effective illustration of their concept is depicted in Figure 1, “Model of value creation in family firms,” which readers of this blog should be able to find by conducting a simple Google search of images, using the following specific search phrase: “Fig 1 Model of value creation in family firms 64 N. Kammerlander Journal of Family Business Strategy 6 2015.”

The authors write:
… even when a family firm has managed to build up unique resources, if these resources do not match the requirements of the firm’s context, value creation is unlikely … The deployment of even the most useful and valuable resources is inefficient if governance structures are set up in a way that impedes purposeful resource orchestration. When there is a misfit between the family-specific goals in the family firm and the output created by the firm’s specific resources within the given governance structures, the created ‘value’ will likely not be perceived as being ‘valuable’ by the family owners. Creating fit among several ‘ingredients of value creation’ – in our framework, goals, resources, and governance – raises the question of which of the three elements – goals, resources, or structure – should be prioritized when initializing the ‘fitting process.’

Cautioning professional advisors to assess a family firm’s governance structures carefully in order to distinguish between actual and ceremonial governance elements, the authors provide the following questions to provoke thought and use in discussions with family members:

What are the main goals of the family owners?

What resources are available?

Do the available resources support or hinder the family owners’ goals?

How can we adapt the resource base through leveraging, acquiring, and shedding resources to attain those goals?

What governance structures are in place in the family firm and why do they exist?

Are things this way for historical reasons or because of ‘‘fit’’?

Have structures been adapted over the years?

Are there constructive discussions about whether and how the extant governance structures support the efficacious deployment of resources?

Do governance principles exist for all levels — firm, owners, family, and wealth?

How are they coordinated and aligned?

Are they adapted to the existing goals?

How effective are they at mitigating potential conflicts?


Tuesday, April 21, 2015

Business Family Dynamics and the Continuity Process: Initiating the Conversation

Member Resource Series #1

The process of generational transition—also called “succession”or the “continuity process”—is the single most-talked-about issue in the area of family enterprise today. Business family members often delay addressing this complex challenge because of the type of conversations and decisions that need to take place with the future generation. Advisors want to help business families develop a plan but are equally apprehensive about broaching the topic of personal family relationships and associated dynamics with their clients.

However, conversations about interpersonal dynamics and generational transition are necessary for the family to secure its best chance of long-term success. In order to provide some helpful and effective ways for advisors to successfully broach these conversations, IFEA spoke to several renowned family enterprise experts and gained some insight from their experience. Among them, several key attributes on the part of advisors repeatedly came up, including the relevance of active listening; the ability to identify a client’s (or family’s) readiness; the ability to resist the urge to provide immediate solutions; and to provide and maintain sensitive, ongoing guidance throughout a transition. 

As much as it is the duty and responsibility of family enterprise advisors to initiate and guide these early discussions, it is also recommended they act multilaterally and collaboratively, with the best interest of the family at top of mind at all times. This is a philosophy that if adopted can deepen the trust and respect between family enterprise advisors and their business family clients. It is this foundation that the following recommendations are presented, and deemed relevant to designated family enterprise advisors from all disciplines, no matter their area of expertise.

Continuity planning, or succession, is not a one-size-fits-all solution, and in order for it to be successful, it undoubtedly involves several advising professionals with different areas of (potentially overlapping) expertise to support the family system through a transition process, not an event. It is the inherent nature of family enterprise advising that makes it multi-disciplinary, complex and at times, challenging and humbling for a professional of any background. 


Monday, March 30, 2015

Fiscal Unequals and Household Philanthropy

Our blog post this week was written by Gena Rotstein, CEO of Dexterity Ventures Inc., and recent graduate of the Calgary FEA Program.

Societal demographics are shifting. Women make up 50% of the North American population and almost the same for the workforce. A growing number of these women are taking on upper management roles (37% of upper management positions) 1 and as a result, women are becoming the primary bread-winner in a family. As such family dynamics and household financial management processes and norms are evolving. Various studies state that in half of all households in North America, financial management decisions are shared equally between partners – a significant change from the previous generations.

In contrast to this, human sociology and social norms are pushing against this trend; for the foreseeable future the majority of the rising generation of entrepreneurs who are the wealth creators, will likely be men. However, as the pay equity gap closes, and women in leadership roles continues to rise, within the next three generations, it is my observation that the wealth creator within a first generation family enterprise will likely be split equally between both genders.


 Why is it important to raise this issue now? As more women achieve business success, take over family enterprises, and hold a more dominant role in the wealth creation and financial management within households more pressure is being put on what society has indicated as the norm. This type of relationship stress, as Jay Hughes points out, in a recent publication that he co-wrote with Joanie Bronfman and Jacqueline Merrill entitled Reflections Fiscal Unequals, does not have a positive track record in North American family units “…history has presented a very bleak picture of the outcome of relationships with the woman’s financial wealth exceeds that of her partner.”

For families that are working within a Family Enterprise/Family Business model the financial stresses that fall under one sphere can easily be carried over into another sphere.

By ensuring that the lines of communication between partners are “safe” and open, you can create the space for tough conversations to happen in the family sphere without carrying over into the business and ownership spheres. 

To continue reading the full article click here.

Monday, March 16, 2015

Retaining Clients through Generational Transition

          This short article from Financial Advisor magazine may appear to be insignificant in the big picture but exemplifies a serious and noteworthy problem in the representation of professional advisors in mainstream media publications.
Firstly, the article oversimplifies a complex subject which applies to most family enterprises, and secondly suggests that advisors incorporate multigenerational planning for the sole purpose of retaining clients or “assets” in the firm. Thirdly, it is not serving to contribute or uphold the professional standards of financial advising or family enterprise advising, and should instead recognize this area as a growing field.
The trouble with investment firms, generally speaking, is that they are focused on making money, which is not necessarily the same thing as working in the best interest of their clients. This story cites one of the largest investment firms in North America, and the reader must take this into account.
The article singularly suggests that advisors incorporate multigenerational planning into their practices in order to maintain assets and retain clients and their heirs. One could argue that many advisors, and family enterprise advisors in particular, are seeking to incorporate multigenerational planning into their discussions with clients for many reasons and would not initiate a discussion about generational transition for the purpose of retaining “assets” with a firm. A good family enterprise advisor working in the best interest of a client would already be in discussions with a client about wealth transfer, or would at the very least not begin the conversation about wealth transfer solely for the purpose of retaining a client.
The article says parents and children are reluctant to discuss family financial issues, which is not necessarily true. The real danger for family enterprises is that advisors don’t know how to adequately address complex family issues. The ultimate problem that could cause irreparable harm is that the advisor does not sufficiently understand family dynamics or how to navigate them.
The article says that “fostering this conversation is a way to build a relationship” – but negates to address the complexity of the family relationships which the advisor is about to wade into. As most designated family enterprise advisors would already know, the advisor wouldn’t aspire to be the trusted “family advisor” just to retain the family as clients but instead to help the family survive and thrive with the resources they have.
                


Monday, March 9, 2015

Commonly Held ‘Best Practices’ For Family Firms Are Not Necessarily True

Family Business Magazine’s article, Using and Abusing Family Business Research from the Autumn 2009 issue, is written by noted academic and family business researcher Joseph H. Astrachan. He has clearly outlined a number of key challenges for family businesses, and addresses whether or not scholarly research has proven solutions to these challenges, warning that “[a]necdotal evidence should be taken with a grain of salt.” Many of his points will come across as controversial to some family enterprise advisors or consultants.

Key excerpts from his article:

1.      “The central task of family business management is growing and developing family and business simultaneously. In so doing one must help family and business build upon one another while reducing the forces that lead each to erode the other. The core task of research should be to promote real understanding that leads to actionable information.”

2.      “‘Best practices’ research ... [dictates] that practices of successful companies are purportedly relevant for all family businesses. Most such research is not conducted in a rigorous manner and does not specify the conditions under which the ‘best practices’ work. A lack of rigor in research can have profoundly negative results when applied; among other drawbacks, it gives false comfort and allows leaders to avoid deeper challenges.”

3.      One of the commonly cited ‘best practices,’ “can be summed up as ‘run your family like a family and run your business like a business.’ These notions promoted a separation of family and business, developing inflexible rules and structures, and the idea that non-family businesses provide a good model for the management of family companies. To date, there is scant research support for the separationist view and growing support for an integrative view.”

4.      A frequent recommendation is that “one should have a plan for succession of management and ownership. Currently, there has been no research that supports this idea. There is a simple reason for this lack of research support: if you love working with your family, it does not matter how badly the company performs; you will still want to work with your family and be an owner of the business. Conversely, if you cannot stand being around your family, it does not matter how much the company is making; you will still want ‘out.’

5.      “Another common recommendation is that in order to develop successors and family employees, to benefit corporate performance and to ease family relations, family members should spend three or more years working for others before returning to the family company. Again, to date, there is no research yet supporting this commonsense proposal ... I suggest that the important issue here is that parents and children should continually work on their relationships, whether in the business or not.”

6.      Popular ideas for successor succession hold that 1) strategic planning should come first, followed by 2) a careful review of the talents, experiences and abilities needed by the future leader who will implement the plan, then 3) an examination of the current candidates to create a development plan and 4) when the needed attributes have been achieved, succession can occur. No research has been conducted on this notion. A contrary view is that for most family firms the future is too difficult to predict; therefore, a leader must be someone who can align stakeholders and motivate people to action.

7.      Many consultants recommend that the senior generation should choose the successor. Again, no research supports this idea.”

8.      “There is also no research on the use of ‘bridge’ leaders - non-family managers who will lead the company and train future successors - but there have been some studies of non-family leaders in general. They suggest that non-family leaders must view caring for and managing family as a critical role, and that the hiring process should be carefully designed to ensure they have this quality.” 

9.      Family constitutions or protocols - a collection of family ‘laws’ that govern relations between family and business - are thought to be valuable in ensuring family harmony and business success. The research here is mixed. ... It appears that family commitment to the business is a better indicator of performance and longevity than policies, and that commitment is built through transparency, education, communication and involvement.”

10.   “While some research shows the importance of family meetings, research from the organization theory school suggests that rigid structures can lead to catastrophic failure. It is likely a good idea that when implementing such suggestions, family business leaders make sure the structures have appropriate flexibility to adapt to changing conditions. Research on complex systems shows that organizations, be they family or business, must be able to change quickly in order to survive. The ability to rapidly evolve is, of course, enhanced by communication, commitment, and deep, strong, healthy family relationships.”

11.   Boards of directors are widely seen as important for organizational survival. Research supports this idea. However, in private family business rigorous studies linking outsiders to the board to business success have yet to be conducted. ... In private companies the critical factor may be having board members from whom the CEO will willingly take direction.”

12.   Family business leaders should take a skeptical view of suggestions not supported by research. It is unfortunate that much of the research conducted on family business over the last 25 or so years is largely inaccessible to the layperson. Nonetheless, the truly professional family business leader is well advised to either wade through what is available or seek the counsel of those familiar with the body of scholarship.”


 In another, related column written for advisors and practitioners on the above points from  Astrachan, and published on the FFI blog The Practitioner, Jane Hilburt-Davis calls on fellow advisors and practitioners to change their ways of advising families because too often advisors “make suggestions based on our experiences and not on data.” She calls for more research, and appeals to other advisors to give researchers feedback in order to help make research more user-friendly and practical. Ultimately, she argues, more ongoing, challenging conversations between practitioners and researchers will develop the field and build stronger family firms.

Monday, March 2, 2015

The Value of Trust – Study of Investor Services

This 2013 joint study “should be of great concern” to members of the investment profession, since it signals several fundamental problems in the financial services industry according to investors, and is threatening the very integrity of investment management and capital markets, according to authors of the study CFA Institute and Edelman.

               Strong returns alone are not enough to earn trust on behalf of investors – and trusting an investment manager is the single most important factor in hiring that person, according to the findings. Also more important than performance alone is the investment manager’s behavior and an ability to demonstrate an aligned interest with his/her client.

Investors say the top attributes that build trust in their relationships with an investment manager relate to integrity – not performance. These attributes are transparency; taking responsibility for one’s actions and ethical business practices. And while investors (52%) believe that regulators have the greatest opportunity to affect change and enhance trust in the industry, it remains to be seen how effective these changes will be.

               In order to change the perception of their profession in the face of diminishing trust, the CFA Institute and Edelman advise investment professionals to be proactive and take it upon themselves to improve the likelihood of winning the trust of their clients. To do this, they advise acting transparently; demonstrating integrity and increasing frequent communication.

Some concrete ways to make a difference include providing clear insights into processes, risks, risk management and limitations; affirming the primacy of client interests and resolve or disclose conflicts of interest; aligning fee structures to reflect the client’s success in achieving risk and return objectives; and providing full disclosure of fees including calculations and the impact on the portfolio.

               In order to demonstrate integrity, they encourage compliance with a voluntary code of ethics and maintaining independence and objectivity; adhering to professional codes of conduct and standards; and disclosing regulatory infractions.

               Investment professionals could also adopt these practices in order to improve communication with clients:
·        take a client-centered approach to disclosure and reporting when possible
·        consider performance reporting not just on a time-weighted basis that reflects the
investment manager’s performance, but also on a dollar-weighted basis, as this will offer insight on the client’s actual performance given client-directed cash flows
·        provide a fair representation of the investments made, results achieved, expenses incurred, and risks taken

The results of the study, collected via online survey in the U.S., UK, Hong Kong, Canada and Australia show that the informed public is actually more trusting than the general public of the investment industry and that investors trust all other industries (technology, food and beverage, pharmaceuticals, consumer goods, automotive, telecommunications and even banks) more than the investment management sector. Investment management professionals would do well to take the results of this study into serious consideration and make changes accordingly, for the integrity of themselves, their clients and their industry.


Monday, February 23, 2015

Key Findings from STEP-IFB Engaging Advisors: Family Business Research

This joint research report from STEP and IFB provides insightful context and information about how advisors see family business clients and vice versa.

While the sample of individuals was small, the summary of findings and implications for this research are important to the field of family enterprise and the further development of advisory services to business families.

The report is a very realistic snapshot of challenges faced by family enterprise advisors and family businesses members. In some cases, the report makes valid points which are rarely seen elsewhere, and includes perspective from all sides on a variety of issues: owners, advisors, skill sets, governance, advice and the referral process.

Even highly educated and emotionally aware advisors should take the key findings of this report into serious consideration when navigating the complexity of family business relationships.

Furthermore, the questions and themes raised in this report are ideal topics of discussion for advisors and their family business clients, and/or as tools for development amongst family enterprise advisors.

A few choice quotes especially relevant for advisors:

“Everybody said they could help but most people did not understand family businesses”

“There is ego, arrogance, lack of empathy and a real lack of real credibility in terms of actually having done [this] before”

“The difference between being a successful owner and family and an unsuccessful owner and family is whether or not you’re savvy enough to choose the right advisors and use them in the right way”

“Family businesses have very little interest in being talked to about tax, accountancy or structuring; it is nearly all soft stuff”

“Advisors need to empower the family to choose who they’re going to work with”

“It is all about the process; if you haven’t got a process then there’s no way you’re going to get to the big decisions”

“Advisors bring two key skills to succession planning: setting objective standards for management skills and acting as neutral observers of individual family members’ strengths and weaknesses”

“The value-add of the outside advisor is to provide insights into the qualities and calibers of the people and come up with hard truths, to be able to hold up a mirror to the people and the family psychological system”

“I think advisors need to get away from the clock ticking”

“It has to be an outcome-based fee structure, not an hours-based fee structure”

“Advisors are not solution providers; they are a facilitator of a solution that works for every individual family”

“Advisors can’t provide solutions; families have their own problems and need to make their own solutions.”




Monday, February 16, 2015

Re-thinking Family Firm “Failure”


 Dr. Pramodita Sharma, Sanders Professor for Family Business at the School of Business Administration, University of Vermont, writes that the commonly used 30-13-3 statistic (referring to the devolving chances of family enterprises succeeding to the next generation) is no longer serving the field of family enterprise because of its inaccuracy and constraint on the reality of family businesses today. Sharma cites a number of reasons why: enterprising families run an 3 to 4 firms in a generation; families are more likely to manage a portfolio or enterprises, either parallel or sequentially; exiting a firm by selling it, going public or closing can be considered successful rather than failed; firms may continue over generations but become controlled by another family or families; and a controlling family may become governing investors rather operational leaders.
                  
Looking at firm survival over time is different than assessing the longevity of a family enterprise (Colli, 2012, as cited by Sharma). The ‘oldest family firm’ lists are focused on family survival over time, whereas the longevity of a family enterprise focusses on the ventures they create or destroy as they work to create value and wealth over generations. She points out that “both the creative destruction of firms and pruning of the enterprising family are integral parts of longevity of an enterprising family” (Lambrecht & Lievens, 2008; Schumpeter, 1954), and that efforts are now more focused on understanding the common practices in family enterprises that survive in the face of time and adversity. One size does not fit all, and the cavalier use of the word ‘success’ has not sufficiently captured the complexity and heterogeneity of family enterprise successes (Gersick & Feliu, 2014; Long and Chrisman, 2014; Stewart et al., 2012).

She poses two important questions which should be considered when thinking about generational transition and would help to lead the way to deeper conversations:

1. What is being transitioned – a firm, enterprise, entrepreneurial spirit, or company name?
2. Why is the transition important?