Wk7 Flashcards
Succession
Succession / intergenerational wealth
transfer are are possibly the most critical issue in family wealth…
* How successful are these ? What is the success rate for founding to second,
third and fourth generation businesses ?
* What is the single most likely contributing factor to failure of a family
business ?
From Founding to Second Generation: Approximately 30% to 50% survive.
From Second to Third Generation: About 10% to 15% survive.
From Third to Fourth Generation: Only 3% to 5% survive. The primary reason for failure in family businesses is often attributed to poor succession planning.
Lack of Preparedness: Many founding members do not adequately prepare the next generation for leadership roles, leading to a lack of necessary skills and knowledge.
Family Dynamics: Issues such as unresolved family conflicts, differing visions for the business, and nepotism can hinder effective governance and decision-making.
Communication Breakdown: Ineffective communication among family members about the business’s vision, goals, and succession plans can create confusion and conflict.
What causes a failure?
* How material is the factor of reluctance or refusal to plan by a founder CEO ?
* How many CEOs do not plan to retire ?
* Is there natural tension with a family successor ?
Poor Succession Planning:
The reluctance or refusal of a founder CEO to plan for succession is a significant factor. This often leads to a lack of preparedness for the next generation.
CEO Retirement Planning:
Research indicates that about 50% to 75% of CEOs do not have a formal retirement plan in place.
Natural Tension with Family Successors:
There is often inherent tension between family members, particularly between the founder and the successor. This can stem from differing visions for the business, the emotional weight of family dynamics, and challenges in establishing authority for the successor.
How can the three circle model be used to support some of the issues faced in succession planning?
The Three Circle Model, developed by Ivan Lansberg, illustrates the interrelationship between the family, the business, and ownership. It can support issues in succession planning by:
Clarifying Roles:
Helps define the roles of family members within the business, ownership, and family dynamics, promoting clear expectations and responsibilities.
Facilitating Communication:
Encourages open dialogue about succession, governance, and business strategies, reducing misunderstandings and conflicts among family members.
Identifying Goals:
Assists in aligning the goals of family members with the business objectives, ensuring that everyone is working toward a common vision for the future.
Generational patterns to wealth
* Is there empirical support to the adage “shirtsleeves to shirtsleeves in three
generations”
* The HBS text referenced an interesting potential solution to this problem with
practical history in Japan - what was it ?
Empirical Support for “Shirtsleeves to Shirtsleeves in Three Generations”:
Yes, there is empirical support for this adage, indicating that many family fortunes do diminish by the third generation due to factors like poor management, lack of financial education, and familial conflict.
Potential Solution Referenced in HBS Text:
The HBS text suggests that financial education and active involvement in the business can help counteract this trend. Engaging the next generation early in business operations and providing them with the necessary tools and knowledge can foster better stewardship of wealth.
Dysfunction in succession
* What are some of the typical issues in generational succession with more than
one sibling ?
* How does this compare to the situation we examined in China Merchants Bank
in week 2 ?
Dysfunction in Succession: Typical Issues in Generational Succession with Siblings:
- Sibling Rivalry: Competing interests and jealousy can create tensions.
Differing Visions: Siblings may have different ideas about the business’s future direction.
- Role Confusion: Lack of clarity regarding responsibilities and authority can lead to dysfunction.
- Communication Breakdown: Poor communication can exacerbate misunderstandings and conflicts.
Comparison to China Merchants Bank Situation:
- In the case of China Merchants Bank, the bank successfully navigated generational succession by adopting a structured governance model and focusing on professional management rather than family control. This contrasted with typical family businesses, where emotional dynamics can hinder effective succession.
Practical History in Japan:
- In Japan, family businesses, or “keiretsu,” have often involved long-term planning and professional management structures, contributing to their success across generations. However, they also face challenges in succession when transitioning from founder to next-generation leadership, similar to other cultures.
What are the development stages in succession?
1.Positive attitude and early exposure and development
2.Entry into the firm - when does this typically take place ?
3.Business development
4.Leadership development
5.Selection of successor
6.Transition of leadership
7.The next generation
Succession planning
* Creating a successor development plan - what does this look like ?
* Executive education - specialisations for founder led companies
* Incumbent founder / CEO focused issues: redefining retirement
* Estate planning - is there crossover with a family office ?
- Creating a Successor Development Plan:
-Identify potential successors within the organization or family.
-Develop tailored training programs, including mentoring and formal education.
-Ensure exposure to various business operations.
-Implement regular assessment and feedback systems.
- Executive Education - Specializations for Founder-Led Companies:
-Focus on leadership development, governance, and family dynamics.
-Offer courses in financial management and investment tailored for family businesses.
- Incumbent Founder/CEO Focused Issues - Redefining Retirement:
-Encourage gradual transitions to allow continued involvement in strategic decisions.
-Address legacy planning to integrate the founder’s vision.
-Consider emotional readiness for stepping back from leadership.
- Estate Planning - Crossover with a Family Office:
-Overlap with family offices in managing and preserving wealth.
-Establish trusts and legal structures for asset transfer.
-Align estate planning with overall investment strategies and family values.
What are some structural solutions? (Nonvoting stock - how does this touch the three circles model ?, “Pruning the family tree”, Trusts as a structural, solution, exit and liquidity strategies - IPO or trade sale ? Private equity partner ?)
Nonvoting Stock:
Maintains family control while allowing broader ownership, aligning interests in the three circles model (family, business, and ownership).
“Pruning the Family Tree”:
Involves assessing and potentially reducing family involvement to clarify roles, minimize conflicts, and enhance business focus.
Trusts as a Structural Solution:
Manages and transfers wealth, minimizes estate taxes, and ensures controlled distribution of assets, aligning family and business interests.
Exit and Liquidity Strategies:
-IPO: Provides liquidity while retaining control through nonvoting shares.
-Trade Sale: Offers immediate financial returns and allows family members to exit.
-Private Equity Partner: Injects capital and expertise for growth, ensuring family interests are represented in governance.
What are some key attributes of millennials and how much of the global population/market do they account for?
Digital Natives: Comfortable with technology and prefer digital platforms for financial management.
Attitudes Towards Advice: Seek personalized, accessible, and tech-driven financial advice.
Asset Class Preferences: Favor alternative assets like real estate and cryptocurrencies over traditional investments.
Business and Wealth Perspective: Less focused on building businesses for wealth; more inclined towards diverse investments.
Historical Context: Distanced from World War II experiences, shaping their financial attitudes differently from their parents.
Market size - Global Representation: Millennials and Gen Z together make up over 50% of the global population, with Gen Z accounting for about one-third.
What about ‘robo advice’
* At its core - what is this
* Who defines the array of ‘advice’
* Can this scale ?
* Who can give ‘financial advice’ ? Does ‘robo advice’ meet this standard ?
Definition: Automated digital platforms providing financial advice and investment management with minimal human intervention.
Advice Definition:Defined by algorithms based on financial principles and data analytics; influenced by regulatory frameworks.
Scalability:Highly scalable due to technology and automation, allowing service to a large client base without proportional cost increases.
Who Can Give Financial Advice:Requires licensing or registration; includes certified financial planners (CFPs) and investment advisors.
Regulatory Standards:Robo advice can meet financial advice standards if it adheres to regulations and includes risk assessment and suitability analysis, but may lack the personalization of human advisors.
Why are Millennials or young professionals not being taken up or think they can’t be by wealth management firms? What are some of the barriers in relation to fee models?
Slides 23 wk 7 - Millennials are seen to simply not have as many assets or enough money yet to be worth the industries effort, leading to a focus on more affluent clients.
The current fee model charges client based off of commission or a percentage of their assets under management known as the model and therefore asset-light clients aren’t as appealing as a prospect.
