What should family enterprise clients do to help ensure members of the next generation are prepared to assume ownership of the enterprise when the time comes? In this week’s edition of FFI Practitioner, Juan Pablo Cerón and Phoebe Clark share three aspects of NextGen education to help prepare family members to become effective owners. Juan Pablo and Phoebe then illustrate the benefits of this educational program through a case study.

When family members inherit shares, they do not automatically inherit an understanding of what it means to be a responsible owner and the associated behaviors. Devoting adequate time to developing policies around the education and development of next generation family members is an essential step in preparing them for ownership and leadership. The starting point for this discussion will be agreement around the family’s shared values and the relationship the family wants to have with the business, and what it means to be a responsible owner and steward of the family wealth.

To effectively address the topic of preparing future family enterprise owners, advisors and their clients can consider three fundamental aspects of education:

1. The family’s circumstances, since they will determine the methods to be used
2. The family’s values, which will serve as a guide for the advisors and the family
3. The standards or rules applied to accomplish such a difficult task

The following example case will help to illustrate these three aspects.

The Family’s Circumstances

The nephew of a prominent family business founder decided to drop out of university. His parents, concerned about his future, encouraged him to ask his uncle for a job in the family business. His parents helped him approach his uncle with the request that a managerial position be created for him, with his salary to be decided by the Family Council. When word of their conversation got out to the wider family, conflict broke out among the three family branches. Family members disputed the young man’s eligibility for such a role and demanded similar consideration and compensation for individuals in their branches. The business founder, stuck in the middle of all this and concerned at the scale of the developing family rift and its impact on the business, sought advice from external consultants.

The Family’s Values

One way to approach next generation education is from a family values perspective. How do the core family values relate to the business, the family wealth, and the family culture? Defining and communicating the core family values is not enough—family members inculcate values in the next generation by practicing, not preaching. This means members of the senior generation(s) really living their shared values and serving as a positive role model for the younger generations. How can advisors help their clients see to it that money and economic resources help the successive generations of entrepreneurial families, rather than harm them?

The business founder in this case example learned the hard way about the importance of educating children from a young age about privilege, family legacy, and how to handle their wealth. Knowledge, skills, and attitudes are formed early within the family, and to a large extent by way of observational learning. Teaching by example is an effective way for parents to influence their children. Even unintentionally, parents’ behavior gives children a point of reference for their own behavior.

A widely shared concern among founding members of business families is how to raise their children so that they don’t develop an attitude of entitlement towards money, profits, and/or inheritance, but rather with a proactive desire to work, to contribute, and to protect and grow the family’s assets, so that they can become stewards of their wealth. Whether or not the children ultimately become prudent and resourceful administrators of the family wealth is not totally under the parents’ control. However, there are things that families can do to make it more likely that the next generation grows in a positive direction, developing self-esteem and competencies in alignment with the family’s values.

The Standards and Rules

In the example case, the consultants facilitated a series of family meetings, creating a safe space for family members to share their concerns. Together they came up with a set of ownership policies, including a family employment policy, to clearly define the terms and conditions of employment for family members. These included requirements for entering the family business, such as the following:

• Compatibility with the business vision
• Commitment to and respect for the business, employees, and family values
• External experience and knowledge of the business and financial environment
• A comprehensive induction process and career development plans
• Management programs and training
• Clear evaluation processes and job descriptions

The consultants also helped the family establish a NextGen Committee with the remit of developing and establishing a formal, cohesive, and sustainable next generation engagement and development program. The objective of this committee was to develop a desired profile in next generation members that considered the following aspects:

• Responsible Ownership: It is essential that successors develop attitudes that ensure their performance as exemplary leaders.
• Visionary Entrepreneurship: Succession implies the ability to maintain and increase value, which is a consequence of entrepreneurship and risk-taking.
• Competence: Being capable, knowing what to do and having the capacity to do it, is required of successors.
• Prudent Ownership: Knowing how to be an owner is a virtue that is achieved through education, practicing sensitivity, and good judgment.
• Trustworthiness: For succession to be effective, it must be led by a responsible and trustworthy person who has integrity and values that guide him or her.

The NextGen Committee nominated six individuals from different generations and family branches, bringing varying experiences, viewpoints, and skillsets. Forming this committee allowed senior and next-generation family members to collaborate and learn from each other. Crucially, everyone felt they had participated in a fair and open planning process. The committee eventually established programs of education for the younger members, including basic financial literacy, family business concepts, education around the company’s foundations and its history, and nurturing the family values. They set up monthly NextGen lunches with plans to encourage engagement of the next generation family members in family business social and philanthropic activities.

Helpful Steps for Clients

Families that identify effective ways to contribute to the formal education of the next generations and proactive development of succession plans often take the following basic courses of action:

• Succession Planning and Clear Rules: Having a clear succession planning process and training program for successors will improve the probability of success of the strategy to be implemented.
• Intergenerational Engagement: The older and younger generations both have active involvement in important matters. This means working together, fostering open communication, and respect when it comes to activities related to family wealth, shared family values, and family legacy.
• Training: Training and educational activities so that the next generations are able to develop their abilities to manage their inheritance and learn about the differences between managing, maintaining, and growing their wealth.
• Sense of Belonging: As a family, acknowledging and addressing the important task of defining and developing family members’ responsibility as stewards of family wealth, their participation in family governance of the company, and in mature and responsible decision-making.

Fundamentally, if a family wishes to raise a generation that acts prudently with its resources and to incorporate next-generation members effectively into the business, family members themselves must embody individual responsibility and actively create awareness around the need for balance between the responsibilities and opportunities of the family’s legacy.

Without an effective plan for the education of possible successors, encompassing the formation of character and the accumulation of significant experiences, the worry about succession looms large.

About the Contributors

Juan Pablo Cerón de la Torre, ACFBA/ACFWA, is a Partner – Consultant at Ceron & Co., where he advises family businesses from many industries in the processes of professionalization of management. His professional career has focused on consulting companies on strategy and management, in addition to experience in commercial areas. He has been an invited speaker at educational institutions such as Universidad Panamericana and Universidad Iberoamericana, and he has collaborated in the research, development, and publication of technical notes and case studies at IPADE in Mexico. His education credentials include a master’s in management from Instituto de Empresa of Spain, postgraduate degree in Marketing from New York University, and specialization studies at MIT and Harvard.

Phoebe Clark, CFBA, has worked internationally in the family business consulting sector for over six years. In London, she worked with leading consultancy firm Peter Leach & Partners, advising large and small business families across Europe and the Middle East on issues such as business management, family governance, succession planning, and conflict resolution. In Austin, Texas, she joined Price Wealth Management, serving as the point of contact between family clients and their wealth needs. Now in Mexico City, Phoebe has joined Ceron & Co., where she is part of The Family Business Society team, contributing to the professionalization and institutionalization of the business families in the region.