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Business Family Dynamics

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.