How can a family business thrive for a century or longer? Dennis Jaffe, a consultant on family enterprises, discussed the results of his research and its application with Southern California executives at a May 16 event sponsored by the Center for Family Business.
Of the more than 5.5 million family-owned businesses in the United States and millions more worldwide, only a few will successfully be passed on to fourth and fifth generations. These “generative families,” as consultant Dennis Jaffe refers to them, have invested in their families and enterprises to create versatile and resilient operations that transcend a single leader.
“The 100-year family [business] isn’t a bystander to its wealth,” says Jaffe, who holds a doctorate in sociology from Yale University. “After the first-generation success, 100-year families decided to use their material success to create a second successful entity: a connected family with shared values that is dedicated to making the highest and best use of the special resources and opportunities they’ve been given. They invest in a conscious family, a group of individuals who are personally tied to each other through a legacy and a commitment to becoming stewards for their own and future generations.”
Jaffe shared his research, which has included interviews with leaders from 70 such families in the United States and other nations across four continents, with members of Mihaylo College’s Center for Family Business at a May 16 event.
The Evolution of Success
Internal and external challenges and opportunities require adaptation and versatility for family businesses that continue for a century or longer. Jaffe notes the cultural practices and qualities that define these entities.
“Over generations, we noticed an increasing focus on professionalism, transparency, collaboration and a family united by shared values and purpose,” he says. “As the family increases in numbers and complexity of assets, each generation recommits to the united family.”
While each case is unique, Jaffe notes a typical progression in which the first generation is marked by a visionary entrepreneur, whose children are raised in light of this success and with the expectation that the vision must be carried forward. During the second or third generation, a cohesive family organization is developed, which counterintuitively may involve protocols that limit family involvement in favor of outside professional assistance. A renewal of commitment is necessary to continue into the fourth generation and beyond, while a metamorphosis may be pursued, often involving the sale of the business and the development of a family office and investment group. Philanthropic activities are often common among these mature family businesses, which by this point often incorporate 100 or more family members.
While a few family businesses in Japan and the Middle East have reportedly continued across dozens of generations over a millennium or longer, Jaffe notes a major change of character and identity in organizations that endure for multiple centuries. “Four or five generations is about as far as you can go before the business encompasses thousands of people,” he says.
Creating a Winning Team
Jaffe notes each succeeding generation requires an increasingly sophisticated vision and dedication. “A generative family isn’t just a bunch of cousins who like each other. They are stewards of an extensive portfolio of assets,” he says. “Cousins have to get to know each other, and they have to decide what they want from their assets and how to manage them. In the second generation or third generation, the family builds an organization, representing all family members who choose to work together. They develop a representative group – a family council – and maybe other task forces or work groups, to organize their activities.”
A family constitution, which codifies legal, trust and shareholder agreements in a single document, can form the basis of an efficient organization.
The creation of a board of directors, comprising non-family directors with related professional experience appointed by the family shareholders, ensures a combination of commitment to the family vision and top-of-the-line industry acumen.
Family Business and You
In advising aspiring entrepreneurs, Jaffe notes that plans to build a concept around family relations is second to the initial vision, but many enterprises become family businesses due to convenience. “You start a business that you are passionate about, rather than starting a family business,” he says. “But you look, and family members are around, so it is often a natural fit.”
For many young people, parents and other relatives have family businesses, providing career opportunities. Jaffe encourages getting involved, but after gaining experience with previous employers. “Talk to your parents about opportunities,” he advises. “But you should develop yourself and your capabilities, and do that outside of the family business first.”
For More on Family Business
The Center for Family Business offers regular speaker events designed to educate family businesses on a wide range of topics and offers a course for Cal State Fullerton students and the broader community, MGMT 335 – Family Business Dynamics. For more information, visit them online or stop by their office at SGMH 5284.