Sooner or later, parents learn that loving their children equally doesn’t necessarily mean treating them the same. This is especially true in wealthy families.
If a sister works in the family business and the brother doesn’t, how can compensation, ownership, estate plans and family leadership be determined without damaging the family or the business?
It’s a big topic, and in this first of two articles about equalizing wealth among heirs in enterprising families, three experts discuss the roles that children can take on and how much (or whether) they should be compensated for them.
“Often we conflate two things: ownership and management, or a role in the business,” says Vancouver-based Wendy Sage-Hayward, who is a senior consultant with the U.S.-based Family Business Consulting Group and academic director for Family Enterprise Canada.
“If you have a role in the business, you are entitled to compensation – and hopefully market-tied compensation,” she says. Other family members, though they’re not working in the business, at the same time “may be doing a lot of work to build cohesion, alignment and knowledge” in the family.
Sage-Hayward describes four types of compensation:
- Salary or payment for specific duties.
- Reward for exemplary performance.
- Return on property, such as rent.
- Perks of family membership, such as use of a second family home.
“We need to think about it in a way that helps everybody understand the complexity and agree on what feels fair,” she says. “Fair is not equal—equal is one version of fair.”
When one or more children follow their parents’ footsteps into a business and others do not, Ambreen Bhaloo, CEO and founder of Ambreen Bhaloo Coaching in Toronto, turns to Harvard Business School’s three-circle model to illuminate murky discussions.
“If we keep family, business and ownership circles as distinct as possible, then the child who is working in the business is being compensated for their work,” she says. Those in the ownership circle receive dividends, while a family policy determines what’s owed simply by birthright, whether as gifts, loans, educational support or other considerations.
“This is where inequalities between children should be balanced,” she adds, “such as health challenges, child-rearing responsibilities or careers in lesser-paying fields.”
The ‘big tent’ approach
With several client families, Chris Reichert, president of Reichart Family Enterprise Advisors in Winnipeg, has developed an order of priorities regarding which payment types are made in which order.
“It is so helpful to agree upon this well in advance of ever needing it,” Reichert says.
He cites a useful video by Justin B. Craig, a visiting professor of family enterprise at the Kellogg School of Management at Northwestern University in the U.S., about the “big tent” approach. It’s a way of viewing all the ways that family members can contribute while being “inside the tent” of family enterprise.
They might join the management team, lead entrepreneurial initiatives, participate in philanthropy, sit on a board of governors or contribute to a family council, Reichert says. “The point is to develop clear pathways to prepare aspiring family members to one day contribute.”
In one family she works with, says Sage-Hayward, all the spouses participate on the philanthropic board. In another family, they’ve set up a board to handle maintenance and upkeep on the properties they own.
“One family has an art collection, and some family members look after that,” she adds.
Bhaloo says that some families establish an “intrapreneurship” program that supports the development of small-business ventures undertaken by family members, sometimes financially and sometimes with the aid of family mentorship.
Intrapreneurships are an important tool for developing next-generation leaders, since they offer a relatively risk-free testing ground. Also, these ventures may provide a way for younger family members to open up new markets for the family business that might otherwise have been overlooked.
Reichert offers the example of another family with a construction business. During discussions with them, he learned that a daughter and son-in-law were passionate about fishing. The family helped them acquire a fly-in fishing lodge that not only operates as a business in its own right but today provides the legacy operating company with a unique marketing advantage for clients and suppliers.
Intrapreneurships also create “a great learning opportunity for members of the rising generation,” Reichert says. Quarterly updates at family meetings allow the whole family to celebrate successes together or step in to support the project during setbacks. “You win and you lose together, and it’s just so powerful,” he adds.
Perhaps few topics are more sensitive than the hopes and expectations of the next generation. Reaching a situation in which family members of all ages are comfortable sharing their wishes, offering and considering counter-suggestions and ultimately reaching a solution that satisfies most parties most of the time requires tact, trust, generosity and clear-headedness.
“The point is to develop clear pathways to prepare aspiring family members to one day contribute.”
Chris Reichert
“The relationships between us as family—even without business—are complex,” Bhaloo says. “Unity, trust and harmony: These are the things a family should be actively building and sharing, just as a team in a business would be actively building trust.”
One best practice, she says, is building an element of fun into family meetings or retreats. In her own entrepreneurial family, everyone in attendance is given an icebreaker question such as, “What do you want to do this year?” Deepening family ties when things are going well fortifies resilience during times when problems arise.
Reichert advises creating opportunities for all generations to come together regularly. He offers the example of one family that recently assembled 15 family members aged 17 to 81. The youngest attendee put together a video on his iPhone with older relatives who had never done such a thing before.
Family advisors can play an integral role here, but only if they are prepared to get to know the members of each generation and build the kind of trust that enables each one to speak openly about their wishes, Reichert says. “In my opinion, one of the most important pieces of this work is building in-depth knowledge with the members of the family.”
Demonstrate care by being genuinely curious—and judgment-free, he adds, about the needs and concerns of each individual. “Then, help by facilitating dialogue within the family about the patterns and opportunities you see. In short, invest the time.”
Read Part 2 in this series: Equalizing heirs in the will is a delicate dance for business families
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.