PWM Private Wealth Counsel | The Impact of Family Dynamics in a Family Enterprise

Managing Family Dynamics

The familiar adage, “Shirtsleeves to shirtsleeves in three generations” conveys an uneasy truth: when significant financial assets are created by the drive, skills or luck of an initial generation, they are often lost by the next two generations. Why does it happen?

There is more to wealth transfer than simply passing on financial assets. The current generation must nurture and provide following generations with the skills to oversee, create and understand wealth. This is particularly true in a family enterprise, which in addition to financial assets, layers on non-financial factors such as social identity, support for formal and informal education, and the sharing of values and purpose.

A family enterprise:

✓Contributes significantly to a family’s ability to generate income.
✓Represents a substantial financial asset for the family.
✓Is associated with the family’s social or community identity.
✓Involves transgenerational influences and interactions.

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Managing Family Dynamics

Family dynamics affect interactions and patterns of behavior amongst family members. How family members interact with one another influences communication, leadership, change management and strategy of a family enterprise. Strong family dynamics can be a superpower, leading to an engaged culture, the ability to make quick, impactful decisions, committed employees, and longer-term vision. On the flip side, when ignored or not addressed, poor family dynamics can be responsible for the downfall of a family business or farm

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When family members recognize conflict or tensions as normal and utilize tools, strategies and processes to address them:

✓Uncertainty and emotions decrease. The temperature drops.
✓Communication tends to be more regular and transparent.
✓A higher degree of trust within the family can exist.
✓Shared goals and values are clear and supported; and
✓Boundaries are respected.

Creating structure around family dynamics by investing the time and resources to develop tools, strategies and ongoing processes to govern is a requisite with each successive generation. Consider the impact of challenges such as:

Increasing family size to include grandparents, parents, children, grandchildren, spouses and other individuals.
Management and oversight of the lifecycles of the business(es), such as vertical integration or diversification.
Strategies and oversight relating to the lifecycles of the industries the business(es) operate within, including overall evolution and global economic transformations.

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The Three Circle Model
The Three Circle Model² identifies the three interdependent components of a family enterprise system, namely: Family; Business; and Ownership:

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Three Circle Model diagram showing Family, Ownership, and Business

When a decision – large or small – arises in a family enterprise, the Three Circle Model helps to highlight:

✓ Which component(s) the decision impacts and who the respective decision makers should be.
✓ Different perspectives by family members in making the decision, depending upon which components are involved.
✓ Decisions or tensions in one component that can reverberate and impact another.

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Here’s how the Three Circle Model can help to identify potential family dynamic considerations, and some of the typical decisions members of a family enterprise may face.

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Family

Who: Individuals who are not owners, nor employees, in the family enterprise such as minor aged children or spouses that have married into the family.
Considerations: Perceived roles, parent/child and sibling relationships, triangulation and informal communication.
Decisions: Who is at the cottage this weekend? Oversight of the family’s charitable giving.

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Family employee

Who: Grandchildren, children, siblings, or spouses employed in the family enterprise based on their skills and professional experience, or those in training opportunities such as summer employment.
Considerations: How to support their gaining relevant experience and the succession of the enterprise, leadership opportunities, fair compensation, work/life balance, and intergenerational dynamics.
Decisions: What are the metrics for promotions and advancement? How to give feedback?

Family owner

Who: Shareholders who are not employed in the family enterprise. These may be spouses or siblings with neither the time nor the inclination to be actively employed in day-to-day operations.
Considerations: The nature of reporting and stewardship of the day-to-day operations of the business enterprises, shareholder agreements, and the nature of ownership – active, passive or investor.
Decisions: Estate planning, or growth versus harvest mindset.

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Family owner employee

Individuals who are both employees and shareholders in the family enterprise including founders, parents, siblings and children who are actively engaged in the day-to-day business.
Considerations: Operating versus long-term strategy decisions, acquisition and divesture decisions, risk versus reward allocation, nature of ownership managing or operating.
Decisions: Implementing a mandatory retirement age, promotion or identification of next generation leadership, updating the family enterprise succession plan.

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Harness the Power of Family

Collectively, the family enterprise system can be worth far more than the sum of the individual – Family, Ownership and Business – components. This is particularly the case when leadership makes the effort to nurture, and govern, a strong, well-maintained family dynamic.

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^{[1] Attributed to Andrew Carnegie.}

^{[2] Source: Tagiuri, R., & Davis, J.A. (1996), (1982).Bivalent attributes of the family firm.}^{Family Business Review,}^9,199-208^.

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A family business, farm or an investment portfolio does not guarantee a great family, but a family can create a great family enterprise. If you are interested in learning more about family enterprises and implementing governance, please reach out to your PWM Private Wealth Counsel Wealth Advisor or your Q Wealth Portfolio Manager.

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Disclaimer

^{Your PWM Private Wealth Counsel Wealth Advisor or your Q Wealth Portfolio Manager is an owner and partner in the Q Wealth Partnership. Portfolio Management services are provided by Q Wealth. Financial planning services are provided by PWM Private Wealth Counsel. This document has been provided for information purposes only and is not intended to be relied upon as investment, financial, tax or legal advice. Please consult an independent legal or tax professional if considering the implementation of a planning strategy. The planning strategies and technical content are provided for the general guidance and benefit of our clients at the time of writing; however, we cannot guarantee the accuracy or completeness of the information contained herein.}

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Kevin Hegedus is the founder of PWM Private Wealth Counsel with offices in Saskatoon, Prince Albert, and Swift Current, Saskatchewan, Canada.
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The Impact of Family Dynamics in a Family Enterprise

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