Gutmann Bank Workshop Family Business Owners Budapest Mark Haynes Daniell May 2017
Learning from the past… “Lend me the stone strength of the past and I will give you the wings of the future…” - Robinson Jeffers Raffles Family Wealth Trust 1
Key points § True wealth is about far more than money § There is a unique nature to – and great value in preserving – true family wealth, including financial assets § Family legacy is as much about the future as the past § Family leadership is often more about leading from the heart of the family than from the head of the table § Great leaders of legacy families think about future generations in their decisions today – taking into account unborn generations and even “seventh generation thinking” § Putting in place a legacy strategy – inc wealth management – can provide a great return in all areas of true family wealth Raffles Family Wealth Trust 2
Definition of True Family Wealth The origins of the word wealth in English – weal and wela – have a meaning beyond pure financial wealth, and are defined more like ‘well-being’ and ‘welfare’… § Financial wealth § Integrity and responsibility § Accomplishment § Physical security, health, and fitness § Knowledge, wisdom, and spiritual growth § Family harmony § Individual happiness Raffles Family Wealth Trust 3
Individual Happiness From the 1960 s onward, psychologists have defined the PERMA elements of ‘positive psychology’ that lead to a happy life for an individual: all of which can be addressed in a family’s approach to legacy and the pursuit of true family wealth § Positive emotions § Engagement § Relationships § Meaning § Achievements Raffles Family Wealth Trust 4
Responsibilities of Wealth Fulfilling responsibilities can support family legacy, contribute to true family wealth and reinforce all elements of the PERMA concept § More than philanthropy (although that can be important…) § To the family – and future family § To stakeholders in the business – owners, employees, suppliers, customers, communities, state § As a good corporate citizen: CSR standards § To the business: clear vision, capable team, effective leadership, efficient processes, positive culture, sustainable results § Bill of rights vs Bill of Responsibilities § To the self: living values, realizing potential, finding happiness, and fulfilling personal destiny 5
Statement of Family Purpose captures the ‘why’ we do what we are doing § To work together as a united and harmonious family to contribute to the § enduring success of a shared family enterprise which is greater than our § individual selves. § This will require all members of our amily to commit to § Aspire to create something significant together for our family, our businesses, and the communities we serve, which is greater than anything we could accomplish alone § Be effective and engaged owners of our business interests § Seek constantly to protect and strengthen the trust and bonds between members of the Family § Carry forward the traditions and values of a name worthy of respect What is your own Statement of Family Purpose? Does it depend upon ownership of an operating business(es)?
Philosophy of Wealth Family Philosophy of Wealth “Owners” Can do what they like with their moneyspend, invest, gift “Stewards” Hold the family’s wealth for future generations “Hybrid Approach” Some personal use and some held in trust for the future Raffles Family Wealth Trust 7
Key Points § True wealth is about far more than money § There is a unique nature to – and great value in preserving – true family wealth, including financial assets § Family legacy is as much about the future as the past § Family leadership is often more about leading from the heart of the family than from the head of the table § Great leaders of legacy families think about future generations in their decisions today – taking into account unborn generations and even “seventh generation thinking” § Putting in place a legacy strategy – inc wealth management – can provide a great return in all areas of true family wealth Raffles Family Wealth Trust 8
US “Rich List” 1918 vs 2008 Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 John D. Rockefeller Henry Clay Frick Andrew Carnegie George F. Baker William Rockefeller Edward S. Harkness J. Ogden Armour Henry Ford William K. Vanderbilt Edward Howland Robinson Green Mrs. Edward H. Harriman Vincent Astor James Stillman Thomas F. Ryan Daniel Guggenheim Charles M. Schwab J. P. Morgan Mrs. Russell Sage Cyrus H. Mc. Cormick Joseph Widener Raffles Family Wealth Trust Estimated Fortune $1, 200, 000 225, 000 200, 000 150, 000, 000 125, 000, 000 100, 000 80, 000 75, 000, 000 70, 000 70, 000, 000 60, 000 Chief Source Oil Coke, Steel Banking Oil, Railroads Oil Packing Automobiles Railroads Banking Railroads Real Estate Cotton, Banking Traction, Tobacco Mining, Smelting Steel Banking Farm Machinery Traction 2008 Not on list Not on list Not on list Not on list Not on list 9
1 0 The Data • Riches to rags in three generations exits as an axiom in almost every major civilization around the world • 93% of family businesses do not last 3 generations • 70% of wealth transfers fail to meet objectives • 70% of wealthy families lack a strategy “Hope is not a strategy” - Chris Zook
Why do families lose their fortunes? There are many reasons why families lose their financial wealth and attendant stature, but one of the biggest reasons for success was a family’s focus on values and soft issues beyond pure finance. Ironically, families that focus solely on money are more likely to lose it than those with a broader view. Avoiding conflict, building a shared foundation of purpose, values, trust and a common appreciation of the value of a united family and shared legacy, for example, are all small financial costs that can have very high financial returns… According to a study by PWC, the biggest reason for failure of wealth thransfer across generations was insufficient preparation of the Next Generation. Raffles Family Wealth Trust 11
Phasing Transitions 70% of wealth transfers across generations fail to meet the full objectives of the transferring generation § Few families have a formal plan for transfer § Phased approaches often work best, with separate challenges at each phase: § Phase I: Current generation leads, Next. Gen learn and observe (but with prior education and, preferably external, experience) § Phase II: Next Gen leads, but prior leaders provide oversight and mentoring § Phase III: Next. Gen lead, next Next. Gen begins learning process § Hard skills: Accounting, finance, strategy, HR, IT, tax, capital markets, private business governance, investment, etc § Soft skills: teamwork, evaluating managers, leadership, family engagement, negotiation, etc 12
Being a Good Wealth/Business Owner Good business ownership is very different from effective wealth management: need to address both § Business ownership/engagement: wealth creation, focused approach, risk -on, team oriented, direct competitive strategies and tactics § § Governance: Board and committee role (strategy, results, executive team) § § Ownership: Vision, strategy, board, team, results, keep/sell, culture, long term value Management: Vision, strategy, organization, team, competitors, customers, etc Wealth management: wealth preservation, capital value vs income, etc § Diversified approach: direct, co-invest, private equity, liquid markets, etc § Asset allocation, financial markets, asset class strategies and tactics § Managing managers: (selection, negotiation, performance and cost mgt) 13
Wealth Management Framework 4. 1 Family Wealth Management Framework
Key Points § True wealth is about far more than money § There is a unique nature to – and great value in preserving – true family wealth, including financial assets § Family legacy is as much about the future as the past § Family leadership is often more about leading from the heart of the family than from the head of the table § Great leaders of legacy families think about future generations in their decisions today – taking into account unborn generations and even “seventh generation thinking” § Putting in place a legacy strategy – inc wealth management – can provide a great return in all areas of true family wealth Raffles Family Wealth Trust 15
1 6 Family Evolution Across Generations
1 7 Family Evolution Across Generations
1 8 Family Evolution Across Generations
1 9 Family Evolution Across Generations A More Comprehensive Model
2 0 Family Evolution Across Generations
2 1 Family Evolution Across Generations
2 2 Key Questions Is the family keeping the business together, or is the business keeping the family together? Is the right definition of family membership being an active shareholder? What happens when there is no main operating business any more – do your family purpose and pursuit of your true family wealth require a family business to optimise the opportunities you have as a family? What can be done ahead of a sale or distancing from operations and management to prepare to continue to fulfill our higher order family purpose after the business is gone – or in which there is no active family management role?
Family Evolution Across Generations Post Sale Generation(s) FAMILY WEALTH MANAGEMENT FAMILY PHILANTHROPY
Being a Good Wealth/Business Owner Balancing roles for ‘active’ vs ‘passive’ family members § Multiple opportunities for active engagement by family membes with the broader ‘family enterprise’: 1. business (ownership, governance, management), 2. wealth management, 3. family governance, 4. philanthropy, and 5. informal role(s); and within each opportunities to participate full time, part time, or very little time § § Governance: Time required, specific role(s), liabilities/risk, § § Ownership: voting rights and shareholder pooling arrangements? Management: Clear and separate roles available and requirements/selection process to fill them need to be defined: Role and performance vs milestones and external benchmarks important (formal review process valuable) Potential role for non-family members on Family Business Board, Family Council, Advisory Board, or as mentors to family members 24
2 5 The Family Legacy Checklist Contents: 1. Is there a clear definition of family membership? 0 1 2 3 4 5 6 7 8 9 10 2. Is your philosophy of wealth clear? 0 1 2 3 4 5 6 7 8 9 10 3. Is the family history understood? 0 1 2 3 4 5 6 7 8 9 10 4. Are the values clear and agreed? 0 1 2 3 4 5 6 7 8 9 10 5. Is the future vision set out? 0 1 2 3 4 5 6 7 8 9 10 6. Is there a shared sense of purpose and values ? 0 1 2 3 4 5 6 7 8 9 10 7. Are the investment and distribution disciplines clear? 0 1 2 3 4 5 6 7 8 9 10 8. Are the reasons for staying together clear? 0 1 2 3 4 5 6 7 8 9 10 9. Do you have a multi-generational strategy? 0 1 2 3 4 5 6 7 8 9 10 10. Does each member understand his or her future role(s) 0 1 2 3 4 5 6 7 8 9 - and have the skills and knowledge to be successful? Actions required: Total score: x/100 10
LEADERSHIP AND CRISES “Great leaders are forged in times of crisis” A family leader can expect to face § A major external challenge every 10 years three per tenure § A minor crisis every 3 -4 years § A range of internal (family and individual) challenges expected and unexpected on a constant basis… Raffles Family Wealth Trust 26
Next Generation Education Development Imperatives for the Next Generation § Build a foundation of values § Build a foundation of knowledge and understanding § Build a foundation of experience § Communicate openly with family members § Instill a sense of individual purpose and responsibility § Provide love and discipline § Build trust § Create time for the family
Next Gen Skill Set/Legacy Framework Each generation of the family – and as many members as possible – need to understand the basic skills (accounting, finance, investment, tax, etc) required to keep the family’s wealth intact Organization and Leadership Individual Family Members The Family Ecosystem and Family Office Family Asset Structuring The Family: Identity, History, Values and Future Strategy Family Philanthropy Family Wealth Management Family Business Strategy Family Risk Management
Learning and Values Best practice says that children learn over time in age brackets, eg. : Age Key learning 0 -10 Values, how/why we spend our money, role of business, giving back 11 -20 Earning money, spend/save/share wealth, budgeting, borrowing, philanthropy 21 -30 Ownership of wealth, job and autonomy, budgeting/spending, making major purchases (car, house), meaningful philanthropy, career management, necessary financial and business, skills, values in action, assessing people, working with the family eco-system 31 -40 Raising a family with strong values, keeping relationships intact, balance work and family, how to be part of a community, living within our means and consistent with our values, how to provide leadership for financial causes, creating and preserving wealth, managing a family eco-system Source: Family Legacy and Leadership
The Family ‘Eco-System’ Share the family’s vision 5. BROADER FAMILY NETWORK Social Clubs Schools 4. TRANSACTIONAL ADVISORS 3. TRUSTED COMMUNITY/ RELATIONSHIP ADVISORS Others Business Contacts Others Art Family Advisors Counselors Community Boards Raffles Family Wealth Trustees Attorneys 2. INNER CIRCLE Family Office Executives Likeminded Families Formal FO Networks Sources of influence and advice Understand support the family’s vision Tax Advisors Conferences Lead Trustees 1. FAMILY MEMBERS Strategic Advisors Family Lawyers Directors and Protectors Friends Family Business Directors Business , HR and IT Consultants Social Contacts Informal FO Groups Bankers Brokers Others with Relevant Perspectives Philanthropy Advisors Selected Events Religious Establishments Provide transactional services 30
Learning and Values One survey of how children learned about money and financial skills showed a startling difference between parents and children: - Parents said that children learned 90% of what they needed to know in school - Their children said that 90% of what they learned they got at home Query: How good are we at thinking through and implementing a thoughtful plan of education for financial and business knowledge at home for our children? Godfrey, J. (2013). Raising Financially Fit Kids (Revised edizione. ). New York: Ten Speed Pr.
Developing Money Skills (Godfrey, 2013) 1. How to save 2. How to get paid what you are worth 3. How to spend wisely 4. How to talk about money 5. How to live within budget 6. How to invest 7. How to exercise the entrepreneurial spirit 8. How to handle credit 9. How to use money to change the world 10. How to be a citizen of the world 11. How to be grateful… Ideas: 1/3 savings, 1/3 charity, 1/3 spending, jobs to make extra; accounts book Godfrey, J. (2013). Raising Financially Fit Kids (Revised edizione. ). New York: Ten Speed Pr.
Family Risk Raffles Family Wealth Trust 33
Risk Analysis – Shared Family Risks Wealth Preservation & Enhancement (#1 2009) Business Ownership & Control • • Family Control Family Leadership of Business Family Dynamics Alignment of Interests Business Strategy Business Governance Business Operations • Investment Goals and Objectives Shared Risk Financial Reporting & Compliance • Legal Exposure • Fiduciary Roles and Responsibilities • Wealth Transfer Protection • Physical Asset Protection • Financial Leverage • Financial Oversight • Financial Reporting/Compliance • Family Office Oversight Raffles Family Wealth Trust • • • Asset Diversification Manager Selection Investment Performance Public Equity Concentration Private Equity Control Private Equity Distressed Situations Family Unity & Governance (#1 2007) • Family Legacy • Philanthropic Legacy • Family Governance & Decision-Making • Family Relationships • Family Reputation & Public Image • Personal Security & Privacy • Personal Health & Wellness • Personal Ownership Responsibilities Office Exchange Source: Family 34
Family Risk Assessing Risk, Setting Priorities and Taking Action § Audit and review-based identification of the full set of risks national and political (risk concentration – business and geographic) fiscal (tax and asset protection, nationality, domicile and residence) family (conflict, individual roles and issues, premises, travel, marital, lifestyle, etc. ) physical assets (gold, cash, art, residences, commodities, etc. ) financial (asset allocation, currency, fat tail risk, concentration, manager) § Risk philosophy and parameters established § Setting of priorities: short, medium and long term § Roles and responsibilities for family members and advisors set § Schedule of actions and target achievements set and monitored
Key Points § True wealth is about far more than money § There is a unique nature to – and great value in preserving – true family wealth, including financial assets § Family legacy is as much about the future as the past § Family leadership is often more about leading from the heart of the family than from the head of the table § Great leaders of legacy families think about future generations in their decisions today – taking into account unborn generations and even “seventh generation thinking” § Putting in place a legacy strategy – inc wealth management – can provide a great return in all areas of true family wealth Raffles Family Wealth Trust 36
3 7 Insights From Past Studies Of Success Best Practice 1: Understand true wealth is more than money Best Practice 2: Think about “next practice” - and your own family history and culture - not just best practice of others Best Practice 3: Address each element of strategy concurrently Best Practice 4: Act and invest for long-term wealth preservation and enhancement of business and financial wealth Best Practice 5: Select and manage a world class family eco-system of friends, advisors and suppliers Best Practice 6: Provide leadership and prepare the next generation to manage risks, opportunities and crises Best Practice 7: Develop an integrated multi-generational strategy
3 8 Legacy Strategy Checklist
Learning for the future… “Lend me the stone strength of the past and I will give you the wings of the future…” - Robinson Jeffers Raffles Family Wealth Trust 39
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