Family Office – The Generation Rule
In Spain and throughout Spanish-speaking Latin America, the challenge of preserving wealth and the spirit of enterprise across generations is captured in popular wisdom in the expression: “Padre bodeguero, hijo caballero, nieto pordiosero” (or Father-merchant, son-gentleman, grandson-beggar). In Brazil, the three generation rule goes like this: “Pai rico, filho nobre, neto pobre” (or Rich father, noble son, poor grandson). In North America the most common expression on the subject is: “From shirtsleeves to shirtsleeves in three generations.” In China, the expression “Fu bu guo san dai” states unequivocally that wealth is not supposed to survive three generations. And in other countries around the world, similar folklore points to the significant challenge that family business and family wealth continuity represent.
Family members play a unique role in the strategy of family-controlled companies. Top management and the ownership group of any family enterprise must not lose sight of its primary objective—creating value for its customers. Only in this way can a business create value for itself and for its shareholders. This ongoing process of creating customer value will generally result in healthy profit margins and cash flows, which will then lead to an increase in shareholder value. This is easier said than done, particularly after a generation or two of great success and the understandable attitude that it creates: why change?
“Ignacio Osborne – the Spanish/U.S. $332 million maker of premium wine, sherry and brandy – in 1993. His father and uncle had led Osborne in the fifth generation. Now as the sixth generation took over (Ignacio as its CEO, Tomás, Ignacio’s cousin, as the chairman of the board), competitive conditions had changed. Casa Osborne may not have needed a revolution, but it certainly needed to change its culture and its strategy to respond to its increasingly successful competitors.
The wake-up call for the change was quite personal for the family. As Ignacio Osborne revealed, “Up until the fifth generation, at least some of the Osborne family members could live from the dividends generated by the company. In the sixth generation, none of us could live from the dividends. I know this is not very romantic or very family-business oriented, but in practical terms, this was very important.” The resulting business renaissance of this wake-up call led to higher revenues and increased profits, and prevented Casa Osborne from meeting the fate of the three-generation-rule in its sixth generation.”
The inability of a family company to generate sufficient dividend income to maintain the living
standards of a family that generally grows with each succeeding generation has served as a wake-up call for other families as well. For example, the McIlhenny family, known in the United States for their Tabasco products, did not gun the engines of growth through new products as a result of grand strategic planning exercises led by outsiders or famous consulting companies. Instead, it adopted a new strategy and promoted growth opportunities as a result of its CEO putting the choice to family shareholders in stark terms during a family retreat in its homestead on Avery Island, not far from New Orleans. The choice: invest in growth so as to expand the profit-generating capacity of the firm or invest in psychologist fees through a family assistance program aimed at helping family members adjust to their new, less affluent, reality. The family chose to move the challenge to the strategy level, to try to find a solution to their quandary, and supported reinvestment in growth. New products and product-line extensions were created. The company grew successfully and the shareholders benefited.
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