Entrepreneurial families and family wealth

From family businesses to entrepreneurial families

“Family businesses are interesting creatures,” says Marta Widz, Professor of Practice, Family Business and Family Office at SDA Bocconi School of Management. Although they have existed for millennia, academics have for centuries neglected to study them as thoroughly as other kinds of companies. She has spent her academic career trying to remedy that, by carrying out research, speaking with family-business and family-wealth owners, and trying to understand their motivations and aspirations, whilst simultaneously separating the facts from the received wisdom. And there is a lot of received wisdom around.

Marta is convinced, for instance, that we need to broader our understanding of that catch-all phrase “family wealth”. “Family wealth should in fact be seen as something much broader than only financial wealth,” Marta explains. “It also includes different kinds of non-financial wealth, such as social wealth, intellectual wealth, legacy wealth, and many other ‘secret sauces’ of multigenerational family entrepreneurship and leadership.” Marta's personal mission is to  bring this broader way of viewing family wealth to light through research and the education of family wealth owners and family-wealth successors. At SDA Bocconi School of Management, it is planned that this work will be carried out under the auspices of the Family Wealth Initiative, co-established by Professor Alessandro Minichilli.

Another trap that we often fall into is thinking of family businesses as families that own and operate just one company, she says. “We shouldn’t really talk about family businesses anymore, but business families or entrepreneurial families instead,” Marta argues, because most multigenerational entrepreneurial families have a diversified portfolio of companies that is not fixed but fluid. Most of the families she works with, who have owned global operations for several generations, are constantly adding new companies and assets, and exiting other investments. “Over time, a family’s identity shifts from the identity of a founder with one business towards an identity of an owner of multiple assets: that is, the identity of an entrepreneurial family,” she says.

This matters in particular when it comes to passing on family wealth between the generations. Marta cites a concrete example of an entrepreneurial family in Australia, in which the three children consciously decided not to enter the legacy family business but instead to exit its ownership and start their own family office operating in impact investing. “This is only shocking if you think about succession as classic parent-to-child succession within one single family business, and in my opinion, this is too narrow a definition,” says Marta. “For me, this was a very successful succession, because it preserved the family’s wealth and the legacy of family entrepreneurship.”

Navigating family and business dynamics

Periods of family-wealth transfer are a common time for conflicts to arise and, as Marta points out, within entrepreneurial families these are often “existential”. There are two systems at work – a family system and a business one – and they each “have very different logics and different goals,” she says. A family’s logic revolves around love, compassion and everyone being treated equally (“we all go at the pace of the slowest,” as she puts it). In business, by comparison, “we go fast, we compete, competence is important, and we hire and fire.” These opposing logics inevitably clash, and the resulting flashpoints can be damaging, because they are “extremely emotional,” says Marta. In fact, at times, the business is simply the lightning rod for more profound tensions. “Quite often, when you dig deeper,” she says, “the siblings might not be fighting over business or wealth issues at all, but instead over more personal matters such as, for example, parental attention, love and emotional equality.”

Given that wealth transfer and succession are such critical junctures that occur in every generation, Marta stresses that they need to be handled with extreme care. Her first piece of advice is for the next generation, who she believes must not be fixated on leading the company or family office as top executives. “The truth is, the family’s human capital is very limited, so it’s rare that the best candidate will be a family member,” she says. “It’s much more probable that somebody on the market would make a better executive.” This is also healthy, she points out, because executives can make mistakes and sometimes need to be let go, a decision which is difficult to take if they are a family member.

Preparing the next generation for leadership

As such, she advises the younger generation to concentrate in the first instance on “becoming a responsible owner, because that career path will definitely be waiting for you.” What does being a responsible owner mean? For Marta, it’s about taking on the responsibility of fostering the family’s legacy, financial wealth, and diverse types of non-financial wealth, as well as, in time, passing the entrepreneurial mindset on to the next generation. If they’re interested and capable enough, they might also join the board of the company, family holding or family office. Otherwise, “there are lots of functions outside of the business in the wider ecosystem of an entrepreneurial family that need to be occupied by family members,” she says. “One such place is the Family Council, a governing body in the family governance system.”

However, if the next generation should indeed take over the executive leadership, then Marta preaches patience above all. According to research, the process can easily take up to seven years. Her advice is first of all for the next generation to gain experience outside the family firm. One family business she has studied insists that next-gen family members be promoted at least twice and lead a team of at least five people at an external company before they integrate. “Then, you come in as an established business leader,  with credibility,” she says. Above all, she says, the next-gen leader needs to embark on peer learning with other family-business and family-wealth owners and, ideally, also some form of business education. And finally, Marta notes, “communicate, communicate, communicate, with family, employees, suppliers, customers, so that they all know that you are going to step into this role, and how it will happen.” It’s little surprise the process can take “a very, very long time,” she adds.

One generational transfer is fraught enough, but the picture only gets more complicated and the potential for strife is only enhanced as the business gets older and the family grows larger. “In older families, you have more complex family trees and thus also relationships; conflicts can be inherited, because of course people tend to be more loyal to their parents than to their third, fourth or fifth cousins and uncles,” says Marta. “The conflicts are then not only between the ‘now generation’ and the next generation, but also among family branches.”

Building family cohesion and legacy

Two forces act on entrepreneurial families that can further increase disunity. Firstly, as time goes on, families generally disperse geographically, so that they’re increasingly far away from one another. Secondly, with each passing generation, each individual family member becomes a smaller and smaller shareholder. “In the end, the business portfolio is not the prime purpose that keeps them all together anymore,” says Marta. Family cohesion, in such circumstances, has to become an intentional goal. Of course, governance should be a priority, which includes everything from who sits on the board to ownership agreements to investment theses, as well as potentially placing some of the family’s wealth into a trust or foundation. But it also means family governance, which might involve a variety of structures and documents, such as a family charter or constitution that formalises the family’s relationship to family assets and wealth.

There are also, however, a range of “softer” enhancers of family unity, says Marta. She has worked with an entrepreneurial family that shares an internal communications platform, for instance, which reminds members of birthdays and anniversaries. She knows another that organises an annual, days-long get-together for its more than 200 shareholders. “If you think about the long term, you have to celebrate family cohesion and build family unity through these methods,” she says. Few things bring a family together better than giving the family wealth a purpose, whether that’s “through a family office, philanthropy via a charitable foundation, or with a family museum,” she adds. Such activities of course create impact outside the family, but they also play a tangible role within the family, cementing unifying values and transforming family wealth into purposeful wealth.

For Marta, this is also where storytelling comes in. “We all know that entrepreneurial families think long-term, but we usually see this as planning for the future,” she says. “But they also think long-term backwards.” For her, this is the best definition of what “legacy” means within a family-business context. “It is everything the family has taken with them over the generations: the experiences, the ups and downs, and the tangible and intangible learnings that in fact make the family’s secret sauce.”

The process of passing this legacy down to the next generation often starts in a very relaxed way around the dinner table. Marta meets a lot of next-generation family-business and family-wealth owners and they can rarely pinpoint a moment when they were first told about the family’s wealth story. “They often say they were born into the family wealth and it was simply always with them,” she explains. At a certain time, however, this storytelling can be formalised through the publication of a book about the origins of the family’s wealth or business, or through the foundation of a family museum, perhaps. One family she has studied has a “history wall” in its headquarters – a wall festooned with a timeline, historic photographs and other artefacts that tell the family’s entrepreneurship story; each new employee walks along the wall with a member of the owning family before they join. “There is no one single route,” says Marta. “There are lots of different creative ideas around how to cultivate your legacy around family wealth.”