In Nigeria and indeed around the world, there are sufficient examples to show that family wealth is not self-perpetuating. It requires careful planning and nurturing, otherwise the hard-earned fortune can easily be dissipated. Evidence suggests that this dissipation of family wealth typically occurs by the time the third generation has taken charge. This propensity for the family's wealth to dissipate by the third generation has inspired many adages across countries. In the United States for example, it is referred to as "Shirtsleeves to Shirtsleeves in three generations". In Ireland, it is referred to "Clogs to Clogs in three generations". These phrases basically describe a three-staged process – creativity, maintenance and dissipation. This means that the first generation work very hard to create the wealth, the second generation usually live a more affluent life and do not do as much to grow the family wealth while the third generation spend away the money. In a study of 3,200 families conducted by the Williams Group, it was found out that seven in ten families tend to lose their fortune by the second generation, while nine in ten lose it by the third generation.
In this article, we examined some of the reasons for this third generation "curse" and offered suggested strategies to family businesses on how to beat it. They include:
Family business owners do not have robust succession plans
Research has shown that many family businesses do not have succession plan in place. For those that have, they do not follow through with implementation because they are pre-occupied with the day to day running of the business. This can be detrimental to the future success of the business and potentially family relationships. A robust succession plan would have identified and planned for key topics such as kids/family members' interest in taking over the business and if this is shown, the transition process in this regard; what to do if they are not interested; the role of external members in the business; the training required for future generation of leaders etc. Given that this is a multi-stage process that takes time and requires extensive involvement, family business owners often get discouraged in undertaking this very important activity. What perhaps they may not have given much weight to is the fact that the absence of proper succession plans will most likely result in situations where the business fails upon retirement or demise of the owner/founder.
To avoid this sort of situation, family business owners are advised to start planning for business succession much earlier. The process typically take years, and whether you plan to hand the business strictly to family members or you hire managers from outside, having a succession plan is an important step to guarantee the survival of the business and ultimately the long-term preservation of family wealth.
Failure to understand what the family's wealth is
James E. Hughes in his book "Family Wealth – Keeping it in the Family" explains that most families fail to understand that their wealth consists of three forms of capital – human, intellectual and financial. To many of them, wealth preservation means the accumulation of financial capital. He further explained that very few families have understood that without active stewardship of their human and intellectual capital they cannot preserve their financial capital. The physical and emotional well-being of the individual members of the family must be paramount. A successful determination that these individual assets of the family are thriving means that the most important forms of family capital (being human and intellectual capital) can be said to be growing. The concentration on the family's financial capital to the exclusion of its human and intellectual capital is a critical reason why families fail to preserve their wealth and this may even cause it to go out of business in just one generation.
Unprepared/unqualified next generation of leaders
Certain family business owners have shown preference for their children to succeed them irrespective of their interest or otherwise, in the business. This has resulted in the appointment of unqualified and/or unprepared family members into key positions. The result of this action may include poor decision making which could put the family's capital at great risk. Failure to nurture a sense of responsibility, stewardship, history and family values in the generations to come will ultimately fail their business.
It is important for successors to learn the ropes and learn all aspects of the business. Experts have advised that potential successors should be familiar with the family business. They should have had hands-on experience working in all departments in the company so they gain deep understanding of every aspect of the business. The business should create guiding principles outlining requisite education and experience before making offers of employment. Doing so ensures that family members in leadership positions are well-equipped to run the business.
Failure to treat wealth preservation as a dynamic process
Wealth preservation is a stage in the overall wealth succession process, the first being the creation of the wealth. As such, the process is dynamic and not static as every generation should contribute to the process from the first stage i.e. wealth creation. There is a need for inheritors of family wealth to understand this in order to ensure a continuum. This understanding will help the later-generation family members to face the inherent difficulties and challenges in creating wealth, work at overcoming these via quality decision making, and provide a chance for a successful multi-generational family business. Furthermore, for a family to preserve wealth, each generation has to recognize its principal role as a dynamic one of creating new human and intellectual capital, while exercising excellence in its stewardship of the financial capital brought into being by the family wealth creator. This way, the growth of the business will be fast enough to match with the growth of the family.
General feuds and the challenge of Family Governance
Conflicts and discords among siblings or generations in a family business are common challenges. Sibling rivalry, disputes between in-laws and extended family, and differing values and priorities are often cited as the main cause of disagreements leading to poor business decisions. When these poor decisions are repetitive, it could lead to business failures.
One of the best ways to address this is via the Family Governance framework. Family Governance is a very important tool that helps family members to manage family businesses. It is a framework that allows for joint decision making based on shared values, a common mission or purpose, and a collective vision for the family's future. Some of the benefits of having a proper family governance structure in place is that it helps families recognize and manage their wealth, define roles, set boundaries for individuals and enable members to manage competing and interrelated interests.
The typical issues addressed by a Family Governance framework include the roles, rights and responsibilities of family members, the formation of a family council to oversee strategic decision-making for the business and strengthen business-to-family communication, the formalization of business relationships between family members, dividend distribution policies among others. These subjects are usually codified in the family constitution. A Family Governance framework that is well implemented will prevent conflicts or provide a platform for quick resolution of conflicts that may otherwise lead to dissolution or sale of the family enterprise, the destruction of family wealth and a breakdown of family unity.
Conclusion
While building family wealth is difficult, sustaining it over generations is even harder and many families are faced with this challenge. It should be noted that each family and their business is unique and therefore require careful attention. Family businesses should speak to experts who will help them to navigate these potentially complex challenges by putting in place structures that will enhance unity among family members, chart a course for next generation of leaders and improve the overall performance of the business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
