One of the most significant challenges or concerns Family Businesses and Family Offices face is whether the next generation of family members can make good decisions critical to the current and future success of the operation/business/investments.
Wealth Creator's decisions
I think it is safe to say; the original wealth was created by a good decision-maker otherwise it would not have been created unless of course, it was by good fortune and luck. In nearly all cases more good decisions than bad decisions will have been made by the founder, even if all they have done is choose the right sequence of numbers to win the lottery.
Future Generation's decisions
The challenge for the Founder and those managing the money, business or investments is whether the future generations of the family can continue to make as many good decisions as their predecessor. History shows that some do that for a period and some fail quite quickly, whilst some just dither and are unable to make any decisions. Whichever way, most family businesses, which have generated the wealth initially, have been sold, closed, merged or morphed into something else by the end of the third generation, (which we can estimate to be about 90 years).
Why do the first generation succeed?
In the first generation of wealth creation, most of those decisions are autocratic decisions, where the original entrepreneur/founder is having to make decisions and quite often high risk decisions. These high risk decisions have often led to disaster, but so many wealth creators are resilient, 'think outside the box' for a solution to a problem and can adapt. They cannot afford to let failure stop them (after all they probably still need to put food on the table), so they learn quickly from their failures, and many go on and create the original family wealth.
Why does it go wrong for the second and third gen?
The most significant challenge for the second (G2) and third (G3) generations is to try and continue the founder's success. For many G2 and G3, they:
- Have not been allowed or learnt to make critical decisions
- Do not need to worry about putting food on the table - there is enough money
- May not be interested in what the business does
- Do not know much about the business
- Do not communicate with each other very well
- Have rivalry with each other
- Do not adapt the business strategy to the business environment
All of the above reasons and much more could have been avoided 'if only' the right decisions had been made at the time.
Did you know that 87% of family businesses do not survive to G3 and 97% do not survive to G4? Also, at the moment there are only a few small number of family offices (that no longer have a family business) that have gone onto the second generation. Hmmmm!! Not an optimistic outlook for all those new family offices!!
Why extreme athletes have to make good decisions?
Over the past few years I have been working with extreme sports people, adventurers and members of the Special Forces. In all cases, they are operating in very binary environments, where good quality decision-making is critical. It is often a life-death decision. They often have to make decisions when the information they have is limited, or their knowledge of what they have to decide about is scant. When I have assessed some of these people and worked with them, you can see that they are very good decision-makers, despite the image that they might like to portray in public. The work I do with them is fascinating, very gratifying and I always learn something new myself. However, still I see an improvement in their decision-making after I have worked with them. See Peak Dynamics if you are interested in learning more about what I do in that arena.
Back to Families and the preservation and growth of their wealth. Whether you are an executive board, investment team, a Family Council or a group of Trustees, you have to make critical decisions under conditions where you might have limited knowledge or limited information. Do you know how to achieve a high-quality result despite those scenarios? Has anybody shown you how? Creating rules, regulations and constitutions do not necessarily guarantee your future success and does provide the solution to difficult decisions.
Future success comes from making good decisions
I can guarantee you that I can improve the quality of the decision-making by your team by between 30% - 70%, if you follow the procedures that I show you. As a team, you do not need to be an expert on the subject. All you need to do is learn how to make good decisions as a group. If you can do just that, and practice it, then there is a very high chance of a high-quality solution, which in turn could mean the difference between the business failing and the money running out or future growth and wealth. Now I know which option I would choose!!
If you are interested in this article and would be interested doing something with your team such as me running a workshop for you, please contact me.
Part of helping your children gain experience with making decisions involves educating them about the decision-making process. Good decision making is complex and takes years of experience to master. Because children lack experience and perspective, they tend to make decisions that are impulsive and focused on immediate gratification. The first step is to teach them to stop before they leap. You can help your children by "catching them in the act," meaning when you see them about to jump without thinking, stop them. Also, because you can't always be looking over their shoulder, you can use times when they do leap without thinking (and things don't turn out so well) to ask them how they could have made a different choice in hindsight.