Your best client is the owner of a family business. Yet you know that some 80% of wealthy families go from “shirtsleeves to shirtsleeves in three generations.” What better work could you do for these clients than to prevent them from succumbing to this fate, to help them create what noted wealth counselor Jay Hughes, author of Family Wealth, calls the “100-year family enterprise”?

A white paper by Wise Counsel Research, Good Fortune: Building a Hundred Year Family Enterprise, published in August, brings new information and insight to this issue. The notion that creating a family culture and governance system is necessary for survival of a family business is not a new one. But the specific information and details here, gathered by Dennis T. Jaffe, family wealth consultant, are.

Jaffe interviewed 38 wealthy families that successfully transitioned significant businesses or financial wealth through at least three generations over roughly 100 years to discover what qualities these families have in common. What he found is a culture of the successful wealthy family. For example, one of the families in his study is Pakistani. This family is more like the other families in the study than it is like other Pakistani families, Jaffe says.

Much has been written about Jay Hughes’ first book, Family Wealth (2004) and what his publisher, Bloomberg Press, called “the successor volume—and intellectual prequel,” Family: The Compact Among Generations: Answers and Insights from a Lifetime of Helping Families Flourish (2007). A favorite story from Hughes is how he was asked to travel to Singapore when he was still a young lawyer to offer advice to an enormously successful businessman. At their meeting, the businessman told Hughes that the Chinese have a proverb: “Rice paddy to rice paddy in three generations.” He didn’t want that to happen to his family. “Mr. Hughes, can you help us using the techniques of families in America to solve this problem?” he asked.

Hughes could and did. As he traveled around the world helping wealthy families not only survive but flourish, he discovered that the proverb is universal. For example, the first-generation Irish might work in a potato field wearing clogs, which is what the Irish call their work shoes, maintaining a frugal lifestyle and passing wealth on to the second generation. G2 eventually enters high society, and the numerous members of G3 grow up in luxury, spend the money while doing little work and leave G4 to go back to the potato fields. Thus, “clogs to clogs in three generations.”

Wealth consultants like Hughes and Jaffe have contributed much to the resolution of this problem. The first phase of Jaffe’s research identified the best practices of 200 wealthy families. The most recent phase, published in “Good Fortune,” is based on interviews with 38 families from the study and includes personal statements from the members of these “hundred-year families.” For example, some of the families in the study sold their businesses and drifted apart only to regenerate themselves years later as a family enterprise that promotes shared values, a common culture and a way of using their wealth to enhance human capital in both family members and the world at large. Jaffe calls these successful family enterprises “generative families.”

In the report, Jaffe stresses that such families are not made by happenstance. After the success of the family business, the families he studied “decided to use their resources to create a ‘family of affinity,’ or, a connected family with shared values that is dedicated to making the best use of its opportunities.” To accomplish this, the family must be resilient, be able to balance multiple goals and be able to develop representative groups and perhaps a family constitution. The family must provide transparency, collaborate to face and resolve differences openly and take responsibility for their actions.

Unlike a public company, a family enterprise is both a business and a source of personal identity. As owners, the family members “feel responsible for the business, for what it does and how it does it,” Jaffe writes. Clearly, to become a 100-year family, the enterprise must develop professionalism. “Increasingly, the families incorporate non-family operational leadership,” the report says.

These families emphasize freedom, allowing members in each generation to “choose to remain or to take their share of the family financial assets for themselves.” The generative family becomes an educational community that reminds members of their shared heritage, whether they choose to remain shareholders of the business or not. Philanthropy becomes a way to make a difference and to sustain family connections.

Jaffe’s research unearthed seven qualities that characterize such families, tracing their unity, shared core purpose and family capital over a century:
• They all have a shared purpose and values; it’s not just about money.
• They have a family community that exists across generations.
• They have professionally managed business and financial activities.
• They are able to show continual adaptation and resiliency.
• They offer family members a free choice of whether to remain partners.
• They actively develop human capital.
• They have a commitment to give back to the community.

Of the families studied, 31 came from the U.S. Almost all have family net worth in excess of $200 million, and the median net worth was $700 million. Twenty-three are worth more than $1 billion each. More than two-thirds of the families (25) traced their family enterprise history over 100 years. Twenty-one of them still own their “legacy” family businesses, many of which have grown to be public companies. Fifteen have diversified into a family office with various shared assets.

Jaffe says that the success of these families offers many lessons to other families who would flourish:

1. Each first created a family business and later decided to become a great family. Becoming a great family took much more combined effort than creating the business.

2. While each family enjoys great financial resources, they have all come to see their true wealth much more broadly. They value development of “human capital” –assets that have almost nothing to do with money, including “the lives, experiences, skills and knowledge of generations to come,” as well as “the legacy of positive impact their families have had on employees, customers and communities.”

Many members of generations three and four know little about their family businesses and even less about their family’s roots and values beyond building a business. Some of the members of these 38 families worked with advisors to learn more family details. In one family, the members of G3 learned that the family business had been celebrated for its dedication to both employees and to social causes. These G3 members wanted to bring those values to the family itself.

Eleven G4 cousins in one family had “complex relationships that included multiple divorces and blended families,” according to a member of the family’s third generation, whom Jaffe interviewed. “My generation has been very sensitive to broken families and appropriate spousal choices,” said this family member. This person also said that the parents had been so busy working that on some level the children were almost afterthoughts. “There’s been an evolution to being very aware of disharmony in previous generations and a real commitment by ours to find more harmony in our partners and in our families and our real commitment to being with our children,” this person said.

3. Each of the families has taken steps to cultivate and grow the human social capital it has accumulated through “communication, education and clear methods of decision-making or governance,” Jaffe writes. At the same time, each has “elevated [its] attention away from stewarding financial capital.”

4. “These families act as values-based, socially responsible entities, using their vast resources to make a positive difference in their communities. Their philanthropic commitments grow out of and in turn grow their focus on human capital.”

5. At the same time they respect their legacy and core values, they “continually adapt, innovate and change as they face new realities.”

6. The families adopted what Jaffe called an “owner’s mind set,” whereby the family operates to create family wealth within the parameters of its values.
One of the insights Jaffe developed after interviewing members of the 38 families is that the notion of an “evil 1%,” coined by the Occupy Wall Streeters and advanced in the media, is simply unfounded. Indeed, he believes that “100-year families” contribute more to the global good than do public corporations.
“Many families that have created great wealth have focused their energies on doing great things and giving back to society,” Jaffe said. “They consider it the foundation of their identity that their wealth enables them to use it for wider purposes.”

Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.