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>>How does your organization help business-owning families?
Jennifer Pendergast: Kellogg Center for Family Enterprises has a 20-year history of supporting enterprising families. We educate MBA students and host executive education courses on topics including Governing Family Enterprises, Leading Family Enterprises and Family Enterprise Boards. In these programs, we share the latest thinking on how to ensure family enterprise success as well as provide an opportunity
for family enterprise members to learn from each other. In addition to our education offerings, we conduct research on the challenges facing family enterprises, leveraging the expertise of the Kellogg faculty and doctoral students. Finally, as a thought leader in the field of family enterprise, we take a lead role in convening the global audience of researchers and practitioners to enhance the dialog on critical family enterprise topics.
Karen Reynolds Sharkey: Bank of America Private Bank’s integrated approach addresses
the family, the personal and the business. We offer the expertise of a top private wealth manager with a diverse group of specialists who coordinate with the family’s external advisors to deliver ideas and solutions based on their individual circumstances and goals. By addressing personal and business planning issues holistically, and anticipating how actions in one area will impact another, we help the family build a comprehensive plan that addresses both sets of goals. The collaboration provides access to a wide array of solutions, including
personal and business credit, cash management, investment management, wealth and estate planning, succession and exit strategies, and different ways to address philanthropic and legacy goals.
Anna Nichols: At Altair, we assist business-owning families in three key ways. We help them develop a portfolio guided by a unified investment policy statement that incorporates the broader family objectives and distribution needs as well as any investment constraints. This enables them to diversify and grow shared family assets outside of the operating business. We also provide the comprehensive reporting required to enable family members to view all their holdings universally, so that they can make informed planning decisions, given the full picture of their wealth. Finally, we provide education and facilitation services to help family business owners come together to make decisions about what they want to achieve going forward.
Kristi Daeda: The Family Business Consulting Group helps families envision the future of their enterprise and build alignment around goals and strategies and how they’ll work together to achieve them. We’re often engaged for succession planning, strategic planning, ownership transition, family and corporate governance, family education, leadership development and preparing the next generation. We work with families that are proactively planning for future change and growth, and those that are navigating a current family or business challenge together.
>>Why should family businesses consider moving toward an enterprising approach?
Pendergast: The approach is dynamic and allows reaction
to the changing industry and market realities the family businesses may face. It’s also more inclusive to family members, increasing the likelihood of a lasting family connection.
Nichols: An enterprise approach is the realization of the mantra, “Concentrate to build wealth and diversify to stay wealthy.” The goal is for the family to progress from reliance on one primary source of wealth, the legacy business, to a portfolio of multiple revenue-generating entities. This stabilizes the wealth of the family and leaves them less exposed to the volatility of any single entity.
Daeda: Most family businesses are already enterprises, with shared real estate holdings, family assets like homes or heirlooms, philanthropic assets and so on. The idea of a family enterprise presents new possibilities for how they can collaborate and grow over time; many families feel it better represents their hopes for the future.
Reynolds Sharkey: An enterprising approach can enhance family cohesiveness and build a company that lasts for future generations. Our research and experience with family businesses underscores the importance of taking a stewardship approach with the business or portfolio of entities that make up the family’s business.
>>What are some traits or hallmarks of families that do this successfully?
Nichols: Enterprise families tend to take a long-term perspective. They appreciate the need to grow and evolve, even if that means selling the legacy family business. Typically, these families are
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>>> Family businesses are important and dynamic participants in the world economy, and about 90 percent of American businesses are family-owned or controlled, according to the U.S. Census Bureau.
The family business model is evolving to what’s known as an “enterprising” approach. Enterprising families, as they’re called, see themselves as not being in a particular type of business—manufacturing, for example—but rather in a family business where they’re focused on transmitting wealth over generations, adapting their business portfolio to meet the needs of the market, engaging family members to contribute in a variety of ways, and more.
Four professionals who advise enterprising, business-owning families shared their insights on the new approach with Crain’s Custom Media.
We work with business-owning families to create alignment, structures and processes which protect the integrity of the family and the enterprise. Our custom solutions include:
• Leadership and ownership succession planning• High-performing corporate governance structures• Next-generation development• Communication and conflict resolution• Effective ownership education
Let’s start a conversation. (773) [email protected]
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well-organized in terms of their governance and their family members feel well-informed. They often have a lot of irons in the fire and are willing to continuously invest in different options, knowing some will be more successful than others. These families also have a good sense of where their internal expertise begins and ends. They’re willing to bring in professional management and seek out external advice to help them evaluate options and leverage opportunities. Most importantly, these families invest in their relationships. They make coming together a priority and allocate significant time and resources toward maintaining strong family bonds. They’re highly aware of the benefits of pooling their assets and know they have more opportunities working together than they would individually.
Daeda: Enterprising families see money as capital to be deployed in new entrepreneurial ventures. They also make the shift from thinking of themselves as business operators to a portfolio management mentality. They get excited about “playing the game of business” and the ability to tangibly measure their success. They have a bias for action and learn to be confident in their experiences as successful business owners to apply their skills in new arenas. And along the way, they invest also in their family members—their education and their relationships—to prepare future stewards and leaders.
Pendergast: Families that transition to this enterprising model effectively seek outside counsel from a strong board of directors, non-family management and consultants. They have a robust family decision-making structure that supports education and communication among the
family to understand the enterprise and the strategic challenges it faces, and provides a venue for the family to have discussions about how to evolve the family enterprise. They also follow an inclusive approach that supports engaging the family beyond those in key operating roles and encouraging cohesion among the ownership group. And of course, they have a clear mission or purpose of the family regarding what they want to accomplish through their shared wealth.
Reynolds Sharkey: Companies that transition to an enterprising approach consider human capital, financial capital and innovation. Preservation of family values in the business culture hinges on how leadership deals with the valuable asset of human capital within the family and also non-family members within the business. Successful family businesses develop the next generation, understand the importance of family values, take a stewardship approach and develop strong communication routines. A family constitution can create a roadmap for the eventual transfer of wealth and include the family’s approach to investment and philanthropy.
>>What are some common steps families take in moving toward that model?
Reynolds Sharkey: If the family hasn’t already developed a family constitution with an investment policy, that’s an important first step. The conversations that lead to the creation of these documents produce more cohesion among the family by identifying shared goals and vision. The family constitution also serves as a strategic roadmap to guide
considerations regarding future opportunities. Family businesses also benefit by engaging a group of non-family trusted advisors, such as a wealth advisor, attorney, and tax specialist who have industry knowledge and have also worked with other families that have moved to an enterprise model. The advisor group can provide financial expertise and perspective that can effectively evolve as the business and family grow.
Daeda: Typically, families start by thinking about how the enterprise can help
them achieve family goals, including meaningful shared work, financial gain, fulfilling a purpose in the world and opportunities for their children to thrive. From there, the family’s entrepreneurial energy often leads to its natural evolution. This might mean buying unrelated businesses, funding a startup, building a real estate portfolio, strategic acquisitions, direct investment or private equity approaches, creating a foundation and so on. Along the way they invest in learning and collaborate as family members and business partners. That said, there are
as many routes to a family enterprise as there are family enterprises, and successful families build agreements and structures for making these decisions together.
Pendergast: First comes proactive education of the broad family ownership group on the opportunities and challenges faced in their operations. This education provides a platform to decide how the enterprise should evolve. Another step is understanding the “realm of the possible” by studying other families who have successfully
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KRISTI DAEDAVice PresidentThe Family Business Consulting Group>>[email protected]>>773-784-5008
ANNA NICHOLSDirector - CommunicationsAltair Advisers>>[email protected]>>312-429-3011
JENNIFER PENDERGASTExecutive Director - Kellogg Center for Family Enterprises John L. Ward Clinical Professor - Family EnterpriseNorthwestern University Kellogg School of Management >>[email protected]>>404-788-3155
KAREN REYNOLDS SHARKEYManaging DirectorNational Business Owner Strategy ExecutiveBank of America Private Bank>>[email protected]>>212-852-3379
made the transition to the enterprising approach. This may include attending conferences or executive education to interact with these families. The family should also empower a board of directors with some independent director representation in combination with senior business leadership to think broadly about the long-term goals of the family and how they might be best accomplished through the family enterprise.
Nichols: Achieving the enterprise model requires a family to develop a vision for the future; where do we want to be as a family ten years from now? Twenty years from now? They then use that vision, in part, as criteria for evaluating opportunities. No family gets there overnight. It can take decades of planning, nurturing and probably a few failures and some luck too. Once a family gets to the point of owning a portfolio of wealth-generating entities, they then have to evaluate the best ways of continuing to strengthen and
grow each of them. The work is never over.
>>What are some typical growing pains families encounter as they transition to an enterprising approach?
Nichols: Diversifying away from the legacy family business can be difficult for many families. There’s usually a strong emotional tie to that business, and it can be hard to then channel funds to other efforts that have not yet proven to be successful. Sometimes a family also struggles with transitioning from running all their entities directly to bringing in professional management or outside board members to provide guidance. However, it’s critical to recognize when bringing in outside expertise is necessary to unlock the full value and potential of new entities or even the legacy business.
Pendergast: It’s often difficult to let go of “rules” from the past, such as, “We should never
pursue partnerships or joint ventures.” It’s also difficult to let go of legacy assets, such as an operating business or piece of real estate that could be sold to create the opportunity for the family to invest in new areas. These types of decisions require strong strategic thinking and openness to the “outside.”
Reynolds Sharkey: Issues can arise when there’s a desire to move quickly to change the family’s business approach before gaining consensus from all stakeholders. Communicating major changes to all impacted stakeholders is critical.
Daeda: As business ownership passes to siblings or cousins, collaboration in decision-making becomes more important. It’s no longer just the founder’s call. Family members must learn how to stay informed and connected so they can make enterprise decisions together. Enterprising families must also learn to honor their history while embracing change. They can’t be so
focused on the successes of the past that they miss the chance to move forward. This requires a clear sense of where they are and where they want to be, as well as a lot of sensitivity.
>>What are some options if the next generation lacks the capacity, interest or temperament to take over the business?
Daeda: Many “next gens” lead acquisitions, investment activities and found startups. They may chair the family foundation or the family council, a governing body dedicated to family concerns. Many serve as board members or provide expertise in law, accounting or marketing. Others choose to be less involved, and find reward in the connection the enterprise provides to their family and community. The key to remember is that families that are successful in an enterprising approach allow their next generation to put their fingerprints on things, making meaningful decisions, taking risks and learning from them, to encourage engagement and their development as future leaders.
Nichols: Many families transition over time from owner-operators of a business to just owners and there is a lot of value in that. The best talent for growing the business may not be in the family at some point. Family members can still provide input and influence by serving on the board. Just because family members aren’t working in the business doesn’t mean that they should look to sell it. A healthy, well-run business can still serve as a source of wealth generation and family unity.
Reynolds Sharkey: Acknowledge when a family member cannot perform the required role within the firm, up
to and including the CEO role. This may require moving them to another area within the firm that better suits them, or they may not have the required skill set or desire to work within the firm. Consider additional roles to serve, such as participating in the family’s philanthropic efforts, serving as a liaison between the family and the company, managing internal family communication efforts and so forth.
Pendergast: In the case of a move to non-family management, the family should consider putting in place a strong board of directors, including family and independent directors, to oversee management. When selecting a non-family leader, culture and values fit with the family are as important as skills and experience. And, a strong succession planning function that identifies a need to go outside for talent far ahead of when it will be needed is valuable. The best non-family leaders are not dropped in from the outside but have an opportunity to grow within the organization for several years before taking over.
>>For privately held businesses, how important is it to keep family members informed about financial performance?
Reynolds Sharkey: It’s important that all family stakeholders—even those not actively involved in the day-to-day operations of the company—understand how the company competes in its industry, the high-level strategic plan with its associated business risks and a quarterly or other regular update on performance details. Communications can take various forms; we have seen families host a regular call
KRISTI DAEDA is vice president of The Family Business Consulting Group, a Chicago-based organization serving over 2,500 client families in 70 countries. She leads practice areas focused on family and corporate governance, family enterprise education, knowledge development and research. She also moderates the firm’s popular webinar series. As a member of the Family Firm Institute, she has contributed to its publication, The Practitioner. She also serves on steering committees for the Family Wealth Alliance and the Private Directors Association national board.
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Kellogg offers three professional development programs focused on the challenges of managing family enterprises.
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KAREN REYNOLDS SHARKEY is the national business owner strategy executive with Bank of America Private Bank, directing its strategy, outreach and offerings to entrepreneurs and family members. She partners with advisory teams and specialists nationally to provide thoughtful guidance and innovative research on critical issues including business succession, liquidity strategies, family governance, wealth transfer and philanthropy. She serves on the advisory board of the Eugene Lang Entrepreneurship Center at Columbia Business School, and contributed to The Owner’s Journey, a white paper published by the Center.
JENNIFER M. PENDERGAST, PHD, is the inaugural John L. Ward Clinical Professor of Family Enterprise and faculty director of the Center for Family Enterprises at Northwestern University’s Kellogg School of Management. Previously, she spent 20 years consulting with enterprising families on topics including strategic planning, family and business governance, and family office design. With a doctorate in strategy from The Wharton Business School, she has taught at a number of leading business schools in their undergraduate, MBA and executive education programs.
ANNA NICHOLS is director of communications for Altair Advisers, an independent wealth management firm based in Chicago. Her background includes marketing, research and educational programming in the family wealth industry, including a previous management role at Family Office Exchange, a membership organization for ultra-high-net-worth families and their advisors. She has authored multiple studies, articles and whitepapers and speaks to professional groups on a wide range of generational wealth issues. Her work has been published in the Journal of Trusts and Estates, Private Wealth Management, Family Business and SRR magazines.
with all stakeholders to provide this update.
Nichols: Even when family members are disappointed by some aspects of financial performance or disagree on a decision, it’s far better that they know about things and have a format for voicing their opinion. Ownership in the family enterprise is likely the largest financial asset for any family member. It’s what will make the most difference in their own life and that of their children and grandchildren. Surprises are never welcomed.
Daeda: Clear communication on financials can be an important part of building an engaged, supportive family group and helping younger family members make wise financial decisions for themselves and for the enterprise. A great way to do this is to have a CFO or investment advisor walk them through the financials and address questions.
Pendergast: The best owners are informed owners. I advocate strongly for transparency about financial performance and education of family members so they understand the strategy and financial drivers of the business and can interpret financial information. Obviously one of the benefits of being a privately held business is that information is not publicly available. So, there must also be a clear understanding of the importance of confidentiality when sharing information.
>>How should a family’s governance structure evolve to manage a more expansive enterprise?
Daeda: An enterprise model may lead to a revamped
board structure focused on managing a portfolio of assets. Some families may also have a board of directors or advisory committee for one or more of the companies or investments. Families may form an investment committee, or formalize family communications or meetings. Policies around conflict of interest and related-party transactions can avoid later misunderstandings. An assessment of your current governance structure can be a powerful start, and will keep you from fixing something that’s not broken.
Pendergast: The challenge is to figure out how and from where you govern the more expansive enterprise. Many families move to a holding company structure, with a holding company board that oversees activities across their holdings and serves in the function of providing overall vision and capital allocation. Others govern entities separately. In this case, a family or owner board that takes a 30,000-foot view of all holdings and determines where to dedicate resources is valuable.
Reynolds Sharkey: As family businesses expand, so do family dynamics and complexity. It’s at this point that families consider whether a family office makes sense to help govern, plan, administer and report on the diverse aspects of the family’s wealth. Regardless of the path that’s ultimately chosen, it’s important to work with a trusted circle of advisors who can provide counsel and help the family consider a governance structure that will serve them well now and in the future.
>>Any other advice or best practices to share?
Daeda: Ultimately, family enterprises that succeed do
so because they’ve invested in the family and the enterprise. The family will change, and the enterprise will change, and it’s the care and feeding of both together that creates sustainable growth.
Reynolds Sharkey: Every family business is unique, and faces its own challenges and opportunities. Identifying priorities results in focused plans for human capital, financial capital and the family’s long-term legacy. Engagement with stakeholders
and communications of the family’s goals and plans can help advance family cohesion and lay the foundation for future generations and successful transitions as the business evolves.
Pendergast: Not surprising, given the role of Kellogg, I strongly advocate for education and exposure to other family enterprises. It’s a magical experience to see families interact with and learn from each other. Families need to remember that they’re not
alone; there’s a wonderful community of peers available to support their journey.
Nichols: So much comes down to good communications. There are usually very different levels of excitement and concern about branching out into new holdings. To help everyone move forward, the family should decide together on the scale, timeline and criteria for investing in new options. The risks are then more contained within specific and known parameters.
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