» Investment Committee Series – Chapter 8Bonner & Partners

Friday, 19 January 2018

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Investment Committee Series – Chapter 8

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Who’ll Be in Charge When You’re Gone?

By: Will Bonner

Succession may be the most difficult issue facing multigenerational families. According to studies, most single-family offices do not have succession plans in place.

“Power-sharing and mortality can be two of the toughest things for a patriarch, matriarch, or CEO to face, but to shy away from the necessity of handling both is an almost sealed guarantee of chaos later that the family office may or may not survive,” says Steffianna Claiden, co-founder of Family Office Review.

The wealth creators of wealthy families are often hardworking, driven, type-A personalities. Power-sharing goes against their nature. And they often resist dealing with their own mortality… Who can blame them?

I’ve written about this many times over the years.

Wealth creators can be reluctant to let go of the position they worked so hard to achieve.

There is the story of the wealth creator who stayed at the head of the family enterprise into his late 80s. He finally decided it was time to hand over control to his only daughter, who had been working in the family business for decades. When he told her she was going to take over, she responded, “Daddy, I’m 65 years old and am retiring next week. Maybe you can ask one of the grandchildren. But I don’t think they’re interested in a career change…”

The best way for a wealth creator to successfully transition the reins of power, in terms of the family business, the family office, and the family investment committee, is to oversee that transition himself.

That means making the transition sooner rather than later…

Don’t Gamble with Your Family’s Future

If you want to have multigenerational wealth, you need your heirs to be on board with the succession plan before you’re gone. And it can’t just be “your” succession plan. Your succession plan needs to match with the expectations of your heirs. It needs to be a family succession plan, with everyone on the same page regarding how it’s going to work…

Your vision of the future leadership of your family needs to match up with the vision that your heirs have. Also, your heirs’ abilities, experience, and inclinations have to match up with the responsibilities bestowed by the succession plan.

If there’s a disconnect, it can be a recipe for disaster.

Succession planning should be one of the highest priorities for a family office. After all, the purpose of the family office is to allow families to preserve, and build, wealth for multiple generations. Successful wealth transfers from one generation to the next hinge on effective succession planning.

Even if you get everything else right, failure to make a successful leadership transition could easily spell doom for your family office, and for your family investment committee.

When there’s no clear succession plan, the family’s leadership role is up for grabs. This leadership vacuum can create a battlefield for family members vying for power over the family enterprise and assets. This is when childhood slights and sibling rivalries come bubbling to the surface.

Then family wealth is used as a weapon to mount legal assaults on family rivals. Huge amounts of family wealth can be wasted this way. And the emotional rifts that open up often prove to be beyond repair. 

When a patriarch or matriarch of a family dies, it is a time of heightened emotions. This is the time to avoid surprises or perceived slights.

Instead, the succession plan should be worked out and put into practice far ahead of time.

Consistency of leadership and family harmony are the key things that allow multigenerational families to hold on to their wealth.

Control vs. Ownership

Successful multigenerational families maintain consistent leadership by setting up a family council. In most cases, leadership is passing from the patriarch and matriarch to multiple children. So the centralized power of one or two people is passing to multiple people, to be managed collectively.

The family council is like the board of directors of the family enterprise… which may include a family business, the family investment portfolio, real estate, and other assets.

Your family council meetings are also a great venue to work out a succession plan that everyone can get behind.

There are two parts to succession in the family office system. There’s operational control. And there’s ownership.

The family council, composed of family members, provides leadership to the family enterprise, but it does not have direct operational control.

This is an important distinction. And it’s something multigenerational families should consider very carefully in their succession planning.

Just because someone is a stakeholder doesn’t mean they’re qualified to have operational control.

The family investment committee is directly responsible for the performance of the family portfolio and reports to the family council. In small or young family offices, it is often the same family members on both.

When it comes to your family investment committee, the key things to focus on regarding succession planning are performance and family values…

The Family Investment Committee’s Dual Mandate

The family investment committee has a dual mandate from the family council:

Generate a reasonable rate of return from the family portfolio. What is considered a “reasonable rate of return” is determined by the committee, along with other goals, in collaboration with the family council.

Operate in line with family values. This applies to the level of risk the portfolio takes on, leverage, investment selections, and the macro-outlook.

The key to effective succession planning for the family investment committee is staying focused on this dual mandate. The composition of the family investment committee should be optimal to fulfilling the mandate…

Keep in mind that this is the centralized family office model that my family is following. At least, we’re working toward following it. As you’ll know from Joey’s essays, his family follows a more decentralized model, with different family members heading up different family businesses.

In either model, staying focused on business objectives and avoiding family disputes are paramount. Any family issues that arise can be settled within the family council.

One of the most difficult parts of succession planning is the honest comparison of the abilities of the next generation to those of the wealth creator.

Oftentimes, the wealth creator is a one-in-a-million in terms of his business acumen and wealth-building skills. The next generation may not match up. But, even if that’s the case, that doesn’t mean things have to fall apart.

You Can’t Replace Sam Walton or Bill Bonner…

Obviously, you should have your family investment committee set up and running while the wealth creator is still around. And you should prepare the committee members as much as possible by giving them opportunities to gain real experience managing investments and providing them with financial education.

The head of the family investment committee is the wealth strategist. In the first generation, this role is typically filled by the wealth creator. In my family, while he’s around and willing, my father serves in that role. But I don’t know who, if anyone, in the second generation of my family could or will fill the role.

While it would be ideal to have a family member do it, we don’t think anyone is sufficiently qualified. That’s why we’re moving toward bringing a professional outsider on board to take on the role. This person will report to the family investment committee. All decisions relating to the family portfolio will be discussed within the committee and signed off by it.

This is often how successful multigenerational families deal with succession. If there’s no qualified candidate within the family, then you need to bring in a qualified outsider.

Maybe, in the future, the role could be taken over by a qualified family member. But the most important thing is to stay focused on effectively fulfilling the dual mandate of the family investment committee.

For example, Sam Walton groomed a non-family successor to be CEO of Walmart long before he left the position. He promoted David Glass to president in 1984 and to CEO in 1988. Sam died four years later.

Shortly before Sam died, Glass said, “You can’t replace a Sam Walton. But he has prepared the company to run well whether he’s there or not.”

Sam’s son Rob took the reins as chairman of the board of directors after Sam died. And Rob’s son-in-law, Greg Penner, was recently chosen to fill the newly created position of vice chairman of the board.

In announcing his son-in-law’s new position, Rob Walton said, “One of the board’s most important responsibilities is long-term succession planning, and the company spends considerable time planning for stability and continuity, both at the board and management level.”

With a $149 billion fortune, the Walton family is the richest family in America. It still owns 51% of the voting interest in Walmart.

The Walton family maintains ownership of their family business, but they give operational control to the most qualified people. And they hold those people accountable.

So, take a page out of the Waltons’ playbook and take succession planning seriously. When it comes to your family investment committee, stay business-minded and focused on the dual mandate of the committee. If you don’t have a family member suitably qualified to lead the committee, then bring in a professional outsider and hold him accountable.

If you’re the wealth creator, then you need to get all this in place as soon as possible. Get the system working without you, while you’re still around. That will greatly increase the chances that your family will prosper when you’re gone. It might be very difficult to put yourself on the sidelines prematurely. But the peace of mind you’ll get from knowing that you have a working succession plan in place will be well worth it. If you want a multigenerational family legacy, then you simply can’t leave succession issues to chance.

Next, our strategic partner, Joseph McLiney, tells us how his family succession plan operates. And he provides some food for thought for those now thinking about how they can prepare the next generation to take over the reins when they’re gone.


Successful Succession

By Joseph McLiney

When reviewing the previous seven chapters of this Investment Committee Series, the thing that strikes me the most is how blessed my family has been. It’s the only word I’m comfortable using. There’s really no other way for me to wrap my head around the fact that since arriving in the United States in the 1840s, we have had continued success, prosperity, and family unity.

Today’s concluding chapter on succession would seem like a layup for someone with a family that has navigated it comfortably for more than 150 years. Unfortunately, that wasn’t actually the case.

Writing about one’s family forces a lot of introspection. The obvious answers as to why we have succeeded faded after rereading the first draft of this chapter. It became clear that I didn’t have a good handle on how or why we had managed to succeed as a family. There were plenty of clues but nothing written on tablets and handed down from on high.

And so, after realizing how little I really knew, I began an earnest search to solve this mystery. As is my custom, I consulted the only oracle we have – my Dad. The conversation went like this:

“Dad, do you have a moment to talk about the family succession plan?”

Two fingers sprang to his neck searching for his pulse. “Don’t I look well?” was his reply.

After this expected stab at humor, he reminded me that I was the president of the family investment bank and my older brother was its chairman. Explaining the obvious, he said that our family turns over responsibility to the next generation when they are capable of handling it.

He had completed his plan for succession and I had not noticed.

I was 40 when I became president. My brother was 41 when he became chairman. There was no ceremony and no announcement in the city’s business journal. It was, for lack of a better term, completely natural.

At the time of our promotions, neither of us had paid much attention. My dad had simply walked into our offices, announced his new position as chairman-emeritus, and congratulated us on our new lofty titles.

About the only memorable thing was my brother asking if a raise was involved. We both knew the answer but were tickled when Dad unexpectedly said, “Yes,” and then followed with, “when you produce more.”

Natural is the word that best fits the situation. Nothing changed in my role. My responsibilities didn’t increase, nor did anyone’s expectations of me or my brother. The entire process, until new business cards arrived, went virtually unnoticed.

Business succession, as well as taking on the mantle of the family investment committee, always brings up the discussion of nepotism. In a world littered with business management consultants, nepotism is only mentioned in hushed tones and treated like a four-letter word. In my family (and extended family), it’s considered standard operating procedure.

A job with a family organization is virtually guaranteed for anyone (in the family) who asks. The funny thing is, few do. Virtually everyone enters the workforce on their own, and only after succeeding elsewhere does anyone consider a position with us.

We’re strong proponents of nepotism and believe that it has been a determining factor in our family’s legacy. And, while there are some definite challenges when it comes to navigating personalities (that have driven me crazy since birth), there are no individuals more trusted than my brothers and sister. We feel there are few investments our business or investment committee could make that are superior to hiring loyal people whose interests are in line with our own.

A clarification regarding our brand of nepotism should be noted here. My job didn’t begin with the responsibilities, or pay, of the president. Nor was there any planned succession that required some time to pass before the title was bestowed upon me, like some prince inheriting his throne.

I approached my dad for a job in one of the family businesses after a successful stint as a commodity trader, and later working in Japan, where I earned a very satisfactory salary. Believe me, having a job in the family business didn’t feel much like an advantage – his initial offer was barely above minimum wage.

It was made clear to me, as well as to everyone in the organization, that I would be working from the bottom up. That was 30 years ago. I understand now the tremendous opportunity I was given. However, at the time, making hours upon hours of cold calls combined with 50,000 miles of windshield time annually in my Mercury Grand Marquis didn’t feel all that great.

My father explained that as we grew in experience, more responsibility would be given to us. Had we stopped progressing, or lost interest, so, too, would any advancements in our careers. And so succession, along with our form of nepotism, is nearly seamless and, forgive the repetition, natural.

This sounds simple enough. Yet, according to Paul Karofsky, director of the Center for Family Business at Northeastern University, only about 10% of family-owned businesses make it beyond the second generation.

Psychologists have coined a term for it. They call this “sudden wealth syndrome.” They acknowledge that heirs to family businesses, like lottery winners, tend to blow their windfalls.

In researching this phenomenon, as well as inheritance and succession, a quote from Andrew Carnegie kept surfacing. He wrote in an 1891 essay (emphasis mine):

The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.

That quote seemed to fit perfectly with this chapter. It also helped solve my question of how a family like mine can produce wealth, generation after generation, and, more importantly, keep it.

That was going to be my formula; successful family succession requires children learning (or being forced) to produce. Throughout this series, Will and I have written about only “eating what you kill,” having “skin in the game,” and “production over consumption.” They are all very important.

And had I ended this chapter there, my conclusion would sound correct. My family’s results would also indicate these points to be accurate.

And yet, there was something annoying me about the Carnegie quote. It does drive home the point that you will corrupt your offspring by dropping a ton of cash into their laps. The obvious conclusion of every article citing it was to avoid this stupid action.

My annoyance forced me to read Carnegie’s essay in its entirety. I realized this seemingly obvious conclusion was the equivalent of telling an alcoholic that to cure his addiction, he need only stop drinking.

Problem solved. Please deliver my Nobel Prize to Kansas City.

But, of course, this simplistic solution was wrong.

What so many, including myself, overlooked was an exceptionally critical portion of the quote. Carnegie stated (again, emphasis mine):

At the root of the desire to bequeath to children there lay the vanity of parents, rather than a wise regard for the good of the children.

In my humble opinion, that excluded portion provides the all-important key as to why so many parents drown their children with wealth.

As a teenager, I remember the envy I felt when a friend would show up to school with a shiny new Mercedes on his 16th birthday, the very best clothes, or wads of cash that always seemed available.

These were all seemingly harmless gestures of love bestowed by parents on their offspring. In reality, the parents were waving a flag, saying, “Look how rich I am.”

Not having any of these things provided the insight into how my parents raised their five children and how my father was able to navigate succession. It also explains why so many of my friends, and my friends’ kids, are sinking.

The truth is, it’s not the crummy, irresponsible kids that destroy the hard-earned wealth and sabotage the parents’ carefully laid plans for succession. It’s lousy parenting that sets children up for failure. If children have been taught only how to consume, how can they be expected to understand the value of producing? Unknowingly, some parents have “deadened the talents and energies” of their children.

This is nothing new. Carnegie wrote about it in 1891, and history is filled with glorious kingdoms destroyed in a single generation.

This was an eye-opener, as well as a chilling revelation. We have three kids who are out of the house and successful in their own right, but two remain.

Has my vanity, unwittingly, tied an anchor to these two and not forced them to struggle enough? Has the family purse been too easy for them to access? Have I sacrificed the two boys to make us look good?

Those are difficult questions.

However, unless we allow (or force) our kids to struggle, and equally important, fall flat on their faces in failure, no matter how it may look to the “Joneses,” we’ve handicapped them for when they enter the real world.

My parents provided me, and my siblings, with the hidden opportunities only found in facing difficult situations, and allowed us to fail, as well as succeed, on our own. They ignored how it may have appeared to the outside world and created in us a stable, independent foundation. Succession was accomplished long before any formal actions took place. Their job had been accomplished long before that.

But the nagging question that remains for me is have I passed on this difficult, and most critical, gift that has served my family for generations, or has my ego already laid a minefield for my children? The answer to the first is, “I certainly hope so.” I pray the answer to the latter is “No.”

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