How to make ill-prepared heirs into leaders (or at least not slackers)
Parents can set them up for success by building leadership skills and a sense of responsibility early in life
When he died in 1877, Cornelius Vanderbilt had parlayed a borrowed $100 into a shipping and railroad empire worth more than the U.S. Treasury had in its coffers at the time. In today’s dollars, it would be the equivalent of almost $200 billion.
The plundering of that fortune over the next four generations is the stuff of legend. There were lawsuits, a suicide, fortunes made and lost. The Vanderbilt name became synonymous with decadence. By 1970, the remnant of his railway empire was bankrupt, the family’s Fifth Avenue real estate long gone.
“It was just a disaster,” says Tom McCullough, chairman and CEO of Northwood Family Office and adjunct professor of finance at the Rotman School of Management at the University of Toronto.
And it was a predictable one, he says.
Wealthy families face many hurdles to successful succession, he says, chief among them unprepared heirs. Taking over from a successful patriarch or matriarch casts a long shadow.
“They’re already extending the dream of the existing founder, as opposed to doing their own thing and having freedom and creativity,” he says. “What they’ve got to do is make sure they don’t screw it up, so there’s often a lot of pressure.”
How can heirs be groomed and prepared?
McCullough says parents can set them up for success by building leadership skills and responsibility early in life. Let them budget during the college years, for instance, or face the consequences of their actions and develop the muscles to be independent human beings.
“Obviously, we want to protect our kids from disaster, but failure is part of the deal,” he says. “And a lot of parents use money and power to help their children avoid failure. Those muscles don’t develop and, therefore, they find it very difficult to take on future responsibility.”
Coaches are needed
He also encourages heirs to develop their own skills and reputations independent of the family enterprise. That gives them credibility when they do take the reins.
“Just like you plan your wealth, and plan your estate, you’ve got to plan your human capital and have a plan for the next generation to actually be prepared,” McCullough says. “I think coaching is a big piece of it. I think having a coach to help this next generation through to the next stage is extremely important.”
In contrast to the Vanderbilts, banking magnate Nathan Rothschild established a mentoring process for his heirs and instituted annual family meetings that have continued for more than 200 years.
Dennis Jaffe, an organizational consultant and clinical psychologist, says the key issue is young family members who are not prepared for their roles. “Every young family member must be informed and prepared for the role as responsible owner,” says Jaffe, who is also the family business fellow at the Smith Family Business Program at Cornell University in Ithaca, N.Y.
Practice values-based behaviour
Heirs need to learn about what the business is, how it works and what the expectations are of them, he says. They need to talk about and practice responsible, values-based behaviour.
“Often expectations are confused or simply unrealistic, and that is because the family is not clear and does not discuss what they expect and want,” Jaffe says. “Wealth is not just a prize and benefit, it is a responsibility.”
The family would be wise to instill across all branches in their family that joining the family business is not a free ride.Chris Reichert, Blackwood Family Enterprise Services
Rothschild set up a family bank from which heirs could borrow to pursue their own careers or businesses, so long as they committed to a set of family values.
Chris Reichert, a partner at Blackwood Family Enterprise Services in Winnipeg, says the greatest challenges to succession tend to be family-related, rather than business-related. “As hard as it is to build wealth, it’s easier to build wealth than it is to transition wealth,” he says.
Gradual handover is key
Builders have had the benefit of starting and growing with the business, he says, whereas inheritors are “jumping on a treadmill that’s already moving at 100 miles an hour.”
Gaining credibility and respect from those who may have been at the company longer than they have is important, he says.
“We often see a senior generation that does not want to let go until the day comes where they suddenly want to let go and it’s like a light switch goes off,” Reichert says.
They have had very little communication with the rising generation around what it takes to lead a business of that size, little discussion and involving them in decision-making processes.”
A gradual handover is key, he says, and family meetings – starting when heirs are young – are the simplest thing a business family can do.
Instill a stewardship mindset
It’s also important that heirs know they have to bring something of value to the table, he says. “The family would be wise to instill across all branches in their family that joining the family business is not a free ride. You need the message to be, ‘Our business wants to hire the brightest and the best.’”
Instill a stewardship mindset in the rising generation, not only for the business but for the community, Reichert says.
“Wealthy families in this country give back to the community, and if they can learn that it’s not all about materialistic self-gain, that’s where the entitlement comes in,” he says.
The payoff for planning well can be immense.
“It is such a rewarding experience to build a business and have a family that’s thriving and cohesive,” he says. “It doesn’t get any better than that.”