Friday 29 Mar 2024
By
main news image
This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

 

Succession planning for the Family CFO is the most commonly neglected component of most family businesses, yet one of the most important actions that will determine the ability of Family Inc to thrive over multiple generations. Many successful people work a lifetime to accumulate substantial wealth yet spend minimal time preparing their families to effectively manage this tremendous asset. When navigating this generational transition, it is helpful to look to corporate America for best practices. Among them are:

Leave your emotions at the door. One reason the discussion of generational wealth transfer is so neglected is that parents and kids often have a hard time interacting without the bias of family routine. When it comes to family financial business, the discussions and decisions should be based on the merits of the financial decisions, not the family roles.

Establish periodic strategic planning sessions to review Family Inc’s performance. Just as a corporate board of directors meets to discuss the performance and strategy of a business, the Family CFO should orchestrate periodic meetings — at a minimum, annually — to review the status of Family Inc’s performance over the preceding period, and any major initiatives over the coming period. This represents a low-stress way to engage and educate the family members about your finances.

Promote two-way communication. Parents often seem uncomfortable candidly sharing their financial situation with their children. This apprehension can be minimised in two ways. First, clearly establish that the family expenditures are at the discretion of the oldest generation — the parents should not feel guilty about consuming their accumulated assets and leaving less for the next generation, and the younger generation should not feel entitled to the assets of the parents. Second, promote a two-way exchange of information so that when finances are discussed, all family members are encouraged to share information and ideas, and to acknowledge shortcomings, mistakes and weaknesses.

Establish that the skills necessary for the Family CFO requires years to develop. Remember that your journey as a financially sophisticated professional has been an evolution. For most of us, it continues over a lifetime. Many of the concepts presented in this book are fairly complex. One of the primary responsibilities of the Family CFO is to be a teacher. Be patient and take every opportunity to teach and reinforce the lessons of financial security. It is difficult to start this education process too early.

Create opportunities for failure. Failure is a critical part of the learning process. We all have stories and experiences such as maxing out a credit card, failing at budgeting, committing financial infidelity (lying to your spouse about a purchase or how much something cost), or losing money on a stupid investment, and these experiences helped us become better financial managers, and maybe better spouses.

As the Family CFO, you should create opportunities for your children to assume financial responsibility and likely fail. Give them access to a credit card, give them autonomy to spend budgeted money, give them authority to invest a small pool of capital. doing this, you create valuable teaching opportunities and chances to fail with a relatively low cost. I would much rather have my kids learn the lessons of finance through small, controlled failures than catastrophically squander the family resources that I and previous generations of my family have spent working lifetimes accumulating.

Create financial incentives to promote engagement and participation. In business, we commonly fashion financial incentives to encourage desired behaviour employees and managers: pay raises, bonuses and equity ownership. Financial incentives can also be effectively employed in managing and transitioning Family Inc. Common and effective financial incentives include the following.

Subsidised investments in labour development. Encouraging highly educated heirs subsidising education is not only a great investment but also a great way to perpetuate your extended family’s financial success.

A matched savings programme. As many companies do with 401(k) retirement plans, you can promote higher savings rates among your children and their children establishing a programme to match all or part of what they save.

Compensation for responsibilities as a member of the Family Inc board of directors. Just as some companies pay for the services of an independent board of advisers, you might choose to compensate family members for actively engaging in family financial meetings and for specific financial management responsibilities such as assisting with tax preparation or managing rental property.

Capital contributions to heirs based on enhancing desired Family Inc performance metrics such as income or net worth. For example, one might make annual payments to family members based on a percentage of their earnings or net worth.

No technique is perfect. These and many others, however, are all designed to have the same impact: promote responsible financial planning and behaviour.

 

Key conclusion

Allocate capital and bequests based on equity and fairness. Allocate control of financial resources and decisions on the basis of capabilities and merit. These two concepts do not necessarily go together. You can allocate your financial resources equally among heirs, but give disproportionate rights to heirs with the aptitude and personality to effectively manage, expand and perpetuate Family Inc. Your heirs who are not financially astute may thank you in the long run for not simply awarding decision rights default. Whether they thank you or not, they will be more financially secure.


Reproduced with the permission of John Wiley & Sons

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share