Third generation blues

by CXOtoday Staff    Nov 03, 2010

The pocket money of his teenage clients tends to be in the range of $10mn a month. That’s $250,000 they can spend every week. Older ones are usually a tad richer. Peter A. White is a consultant on managing wealth. During the course of 17 years of interacting with some of the world’s richest business dynasties, he has picked up a theory or two about ambition or the lack of it, in the third generation, what causes entrepreneurial spirit to dry up, and what makes family business so special. In This exclusive interview to Ami Jhaveri & Gita Piramal of Smart Manager magazine, White talks about his radical interpretation of the relationships between generations and their impact on family business.

When the second and third generation have more than enough for their physical needs, can you create ambition?

People by nature are ambitious - in the best sense of the word - if they are connected to their own passion. If your passion is business and your parents are forcing you to be a musician, it is really hard to be ambitious because you are being forced into a direction that isn’t really you. If you are allowed to develop as the person that you really are, then you become quite anxious to fulfill whatever is within you and become ambitious.

I don t believe that having a lot of money makes people not ambitious. If you have a lot of wealth and you are not self possessed, then you may be a person who is aimless and confused in life; and wealth can support this state of confusion. Since I don t have any money to support me, I cannot afford to be aimless and confused in life. But I don’t believe that wealth in itself makes a person unambitious.

Have you come across a situation where there is a powerful entrepreneur, very passionate? The second generation absolutely looks up to the father and is driven by the need to fulfill his ambitions, but does not have the competency. What happens?

I have seen such unhappiness often. It s not a good situation and it can be a very serious problem for the family; especially for the younger person who has to bear that burden and often times ends up feeling very inadequate. It is a recipe for an unhappy life. There can be even more pressure in the third generation. The distance between this titanically successful entrepreneur and the third generation family members is wider. Not in every family, but in many families, they feel their lives are being measured by the original successful entrepreneur.

There are many studies to show that the third generation is generally less successful than the first. Can you explain this?

Let s first look at the second generation. Being a member of the second generation in a family business is a difficult job in n two respects. It is a good position to be in, you have seen the business grow from nothing to something very substantial, you have sort of been there, been a part of it, have heard your parents talk of it, probably worked in it and you really understand the business. So, many second generation people are in an excellent position to go in a family owned business and make it soar. I have seen it in a number of situations where the first generation started the business but the second generation came in and really made it grow quite profoundly.

The difficulty in being a member of the second generation is that you are excessively committed to carrying on the work of the first generation. Psychologically attached to the first generation, it can be difficult to give your children the kind of attention necessary for them to grow up with a sense of competence and confidence. This transition from the second generation to the third generation, I believe, is really the difficult test in a family business. It becomes more complicated in a joint family, because it is moving from a generation of brothers and sisters to a generation of cousins. This situation is inherently different, the attachment is not there. You are moving geometrically into a larger group of people and those people also don’t have the connection to the family business that the first had, so the second generation has a tough assignment but they are often very very good at business.

Some families decide that it is best to sell of their business after the second generation. Other families have the vision to keep the business for generations. I can’t say that one is better than the other. But if a family wants the third generation that is inclined towards music or literature to be in business, then something is not matching there. Often families want the third generation to be involved in the family business but don’t really involve them, don’t train them in what I call the ‘smell of the business’. One has to see what’s realistic, and then do the things that are necessary to achieve that vision.

Are family run companies better run than professionally run companies?

You cannot generalize like that. There are certain things that family run companies bring to the business that a professionally run, non-family run company doesn’t bring and these things may materially aid the business or they may detract from the business. The issue is whether the family spirit is helping in propelling the business. It’s great when there is a strong family tradition, people are working hard, have strong values, feel connected to each other. That energy can really contribute to the family business in a very positive way. Other times when there is conflict and confusion in the family, it can detract from the business. So, I don’t think that there is a way to generalize.

I do think that there is one thing a family run business can do that businesses that are non-family run, especially public businesses, have difficulty doing (and I am not speaking about India because I don’t know Indian business and am not an authority on them -this is a US perspective) is to take a long term view of the business. The pressures of the market are not so heavy in a private business, and one of the great things about family owned businesses is that they can look further down the road, making short term sacrifices for the long term good of the business, and I think that is a good thing

What makes a family run business special? Can you list the top three or four elements?

One, would be the ability to look at the long term, an ability to make investments today for the tomorrow, investments that may impair the bottom line today but will pay good dividends in the future. But perhaps the most important is that family businesses often, not always but very often, have the sense that the business means something, that the business is something more than simply a way of making money, that it is an institution that has a value for society, whatever kind of company it may be, that its employees matter, that its vendors matter, that its customers matter. The realities of global competition put immense pressure on business, and if a business has an intrinsic meaning, that the business is performing a useful role in society, it is a most important factor.

I have noticed in family businesses that the successful ones tend to be those that have a high sense of integrity. This point is really related to the earlier point in terms of how the business deals with its customers, how it deals with its employees, how it functions in the world. Integrity is often a value that people pay attention to, not as a means to an end but because they believe in it

Yet it is largely companies that are professionally managed who control huge sections of the economy in countries all over the world. Mars and Cargill are large family firms but it is the GEs of the world which dominate the global economy.

In the US, there are hundreds and thousands of family run companies. I have a feeling that in the information economy, there will be more family run businesses, more privately run businesses as people are able to figure out how to effectively leverage other people’s capital. The need for enormous capital investment that often compels companies to go public will reduce.

Can a family owned business be professionally run?

There are a couple of points there. .or a business that is going to be led by a family from generation to generation, the only successful way to do that is to make managers part of that process. Some managers find they are not suitable for such a business but there are a lot of managers who are very happy to work in a family run business if they know what is going on, if they know what the plan is, if they are aware that the idea is to groom someone for the CEO, if they are part of that process and are considered as important functionaries in that process. But when there is the uncertainty, it becomes a very difficult situation.

In India, there are many companies which are publicly listed and family run. Is there an inherent conflict between shareholder value and needs of the family?

You could say that there are potential conflicts but the issue is, are they publicly known? And if they are understood by shareholders then they are just like any other conflict in human affairs.

What about corporate governance? Could there be an inherent conflict between the need of the individual, the CEO, his family, and the company?

It is hard for me to see why there would be any more of an issue given the family context than there is in any corporate situation where the CEO of a big corporation has a lot of power and one hopes that the CEO is using that power for the benefit of the shareholders but that power could be used for other purposes including ego purposes.

Let’s talk in a more tangible sense, say dividends. In a family run, closely held business which is not doing well, a large payout would not matter. It would in a publicly listed company where the CEO announces a high dividend because he owns 60%. It would not really be in the interest of the company.

That is exactly what I was saying about potential conflict. If it is in the open, I am not sure how the situation would differ in a family or non-family firm. If the shareholding public knows what’s going on, people evaluate, decide whether or not to invest in that company. In the example you are giving me, it is not clear to me why it would be more of a conflict for somebody owning 60% or even 30% (which might be enough for control) versus someone who owns 5% and can influence the dividend. Such questions are always on the table: what kind of a person owns the company, and what are the motivations of this person, is the person acting in the best interests of the company?

Is being rich bad?

Being rich is highly overestimated by those of us who are not rich. I have been around wealthy people — the wealthiest people in the world — for the last 16 or 17 years and I know that wealth does not bring happiness. I know for an absolute fact that wealth can make life much more complex and difficult in certain circumstances. Yet I am capable of waking up in the middle of the night and saying to myself, “Gee, if I just had a million dollars, everything would be great.” Then I think to myself, “what am I saying? This is against everything that I have experienced.” There is something in western culture, may be not in India, that says being wealthy is the answer to all problems. It can create the greatest opportunities. It can give a creative person the means to express himself in the most creative possible way but it can also be a considerable burden: it can separate people, can isolate them, can give them a very unrealistic sense of who they are.