Family businesses remain a ubiquitous social institution throughout the world. At the same time, few succeed in surviving beyond the 100-year threshold. A version of the adage, “Shirt sleeves to shirt sleeves in three generations,” spans cultures and languages to describe a marked pattern whereby one generation makes the wealth, another wastes it and a third ends up without it. Sustaining shared family wealth after the third generation has proven immensely difficult.
When a business family reaches the third generation, internal and external forces threaten the family’s ability to continue as a business entity. At this stage, the family becomes larger and the dynamics more complex.
But now, based on findings from a multiyear study of families around the world whose businesses have endured beyond the three-generation mark, several elements emerge from the experiences of families who’ve successfully crashed through this barrier. Such families are considered “generative,” and they represent fewer than 1 percent of family enterprises.
The variables that contributed to their achievement in sustaining a vibrant family business show how to avoid disaster and survive for the long-term. These include:
- Maintain a balance. Families who successfully hold their enterprise together past the 100-year mark are likely to no longer encompass a single business as much as an ever-changing business partnership. As such, they learn how to balance what seem to be opposing polarities: business and family, legacy values and innovative practices, and individualism and collaborative teamwork. Choices made by the second generation to create a disciplined, values-based business culture and develop the capacity and interest of the rising generation set the family on a generative path.
- Develop a shared culture. Family members realize they are more than the businesses they own. They also share a family culture of relationships, values, traditions, respect and learning that underlie their family enterprise. Their family culture is the foundation of their business acumen. This special nature of a family that shares not just resources, but a values-based connection, is the essence of generativity. Family culture and identity are sustained across the family’s many ventures.
- Undergo reinvention. Passing on the dedication, creativity, vitality and innovation of the founding generation across new generations is a challenge of the highest order. How that happens is more about the nature of the extended family as a family than about wealth creation by any particular business. A generative family goes through multiple reinventions. After creating success in a legacy business, each successive generation builds on this legacy, adding value through new ventures and inspiring visions.
- Support cross-generational engagement. Family members that make the decision to sustain the family business rather than cash out, inevitably turn from short-term gain to long-term establishment of purpose. To perpetuate the cycle, attention on grooming the rising generation must ensue. The older generation passes on an understanding of finance, business and family governance to younger generations in a way that motivates them to become more than passive, disinterested consumers of the family wealth. This involves building closeness, respect, trust and connection across the generations.
- Establish governance structures. In many instances, the strong personality of the first generation entrepreneur precludes a need for policies or governance in the second generation. But even the family enterprise built on the most abundant business or forceful founding personality faces strains by its third generation. If the enterprise is to remain together, third generation members — who may have grown up apart and not know each other well — must agree on a common path. In order to achieve their values and sustain their success with emerging generations, the families develop clear, explicit, and often complex structures to regulate family and business activities.
- Serve successors and society. The family nature of generative families exerts a beneficial influence on their business and financial realms. It influences the values and the culture of the business to take a long-term view of its purpose and policies. The business in turn influences the many family members, not only by providing wealth but also by offering opportunities to take on roles in society that aim at the greater good. Generative families see ownership not just as an entitlement but also as an opportunity to serve their successors and society.
Family enterprises with the adaptive capabilities to sustain themselves beyond their third generation uphold their family connection against the tides of dispersion and separation. They prioritize continuing what their relatives created and expanding and adapting it into the future.
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