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May 2004 Preparing HeirsSuccessful estate plans for wealthy families require open communication, participation across generations.In 1964, America's wealthiest scions were sending their children to graduate school, and Victor Preisser discovered several of his Business School classmates were their offspring. The students with the recognizable names seemed extraordinarily lucky to the kid of modest means from Iowa—until he got to know them. One by one, he recalls, "they told me, 'I'm scared to death.' Their families' expectations for them were enormous, and they did not feel prepared. What I saw as their huge opportunities for a clear path to the top of a business they saw as their immense obligations." Now, having handed off one of his own businesses to a son, Preisser is coaching wealthy families on how to prepare their younger generations to hang onto family businesses or manage assets for purposes they can agree upon. His book, Preparing Heirs (Robert D. Reed Publishers, 2003), written with business partner Roy Williams of the Williams Group of Stockton, Calif., estimates that only about a third of wealthy families maintain control of their wealth through the second generation—whether it be in a family-owned company, more diverse investments, or philanthropy. Perhaps only a third of those maintain control through the third generation. Carefully conducted studies are few and far between because data on family involvement is not readily available, but those studies that do exist seem to suggest well over half of family business assets do not stay under family control through a second generation. A study of 200 Illinois manufacturing businesses by John L. Ward, MBA '69, PhD '73, a professor at the Kellogg School of Management and at IMD in Lausanne, Switzerland, found that only 13 percent of firms were still owned by the same family in 1984 that owned the firm in 1924. Ward is the author of Perpetuating the Family Business (Palgrave Macmillan Publishers, 2004). A study last year contracted by BusinessWeek found a third of current S&P 500 companies had members of founding families still on the company scene. The vast majority, however, were young companies still in the hands of the founding generation. Clearly, some founders or their heirs choose to cash out. Preisser and Williams prepare heirs to manage wealth and avoid involuntary loss of control of inherited assets. Based on Williams' interviews with 3,250 wealthy individuals over four decades, the authors say that estate planners generally provide reliable guidance on tax, wealth preservation, and governance. The most common reason for failure is poor family communication, including misinformed gossip and anger, and loss of trust. Take, for example, the case of the Pritzker family of the Hyatt hotel chain. A teenage daughter is suing her father and other family members for more than $1 billion. "Large power differentials in wealthy families make open communication less likely to happen," Preisser says, and "trust can only be built through demonstrated sincerity, reliability, and competency." "Almost inevitably, when we start working with a family, we ask the adult children if they know how much their parents earn, and they answer no," Preisser says. "You ask the parent who made most of the money when he or she plans to disclose the inheritance plan to the heirs, and the reply will be 'when they're ready.' That is too indefinite. The kids embark on their own plans." Preisser and Williams say they have discovered that children need to invest sweat equity to be competent to manage all or part of the family business, charitable foundation, or large amounts of capital. Some families develop a mission for the family wealth, along with a strategy, structure, and roles to accomplish it. They develop standards, such as successful work experience outside the family, as preparation for specific roles. "We came to an agreement that our children would have to work, and until they got their careers established, we just gave them birthday and Christmas presents," says Becky Morgan, MBA '78. Morgan, a former California state senator who is currently president of the Morgan Family Foundation, and her husband, Jim, chairman of Applied Materials. During the 1990s, the Morgans established trusts for their children and began including them in foundation decisions. With their two children, the children's spouses, and coaches from the Williams Group, they met for nine weekends over three years. They worked out a mission for the family wealth and for the foundation, and even how long each wanted to be kept alive if comatose. "Not everybody includes children's spouses, but I really believe it provided us with ways to understand each other more deeply than would have happened at normal get-togethers," Morgan says. "Our children's personalities, their spouses, and careers are so different that I think it also strengthened their understanding and love for each other." Morgan's daughter, Mary, is a medical doctor, and her son, Jeff, Sloan '98, is a former software marketer who recently started the Global Heritage Fund, a nonprofit to preserve and protect humankind's most important archaeological and cultural heritage sites. The six adults and five grandchildren now share fun times like ski trips, but the adults also meet as the board of the Morgan Family Foundation to make grants focused on youth, education, the environment, and programs that strengthen community through collaboration and/or development of nonprofit leadership. The Morgans' openness with their children contrasts with the experience of many of the heirs interviewed by Williams, who told him they learned of their roles when a parent's lawyer read the will. Nepotism is an uncomfortable issue within some families. George McCown, a 1957 Stanford engineering graduate who cofounded the investment company McCown De Leeuw & Co. 20 years ago, said he and his partner began with the agreement that they would not involve family members in any permanent positions at the firm. Their children could work temporary jobs at the company as they were growing up, but not permanently. "I've seen the hiring of family really hurt companies because the non-family members don't know where they stand," says McCown. "It makes it harder to hire top talent from the outside." McCown and his wife, Karen, head a blended family with adult children from their first marriages. They chose the Williams Group to facilitate family meetings with six adult children, including the children's spouses, on objectives for the family's money. Says Karen McCown: "If you can talk about money and your values for using it, you can talk about the most important and highly charged concerns. For example, there were issues of equality versus fairness that we had to deal with. If someone is handicapped in a certain way, that person might require more. It isn't always comfortable, but the issues are there whether you talk about them or not." George McCown agrees and adds that the sessions forced both of them to think more deeply about their goals for their wealth and their children, and helped those children in turn begin thinking deeply at an earlier age about their own goals for their families. Building trust in wealthy families can be more difficult than building trust on executive teams, says Dr. Peter Yaholkovsky, a graduate of Stanford and the University of California, Davis, who gave up a medical practice to consult with the Williams Group and with the Layne Group of Larkspur, Calif., on communication skills. In families, he says, "children change as they mature, but the older generation may tend to treat them as though they were still the same. If a parent is too much of a jerk in this way, in most families the kids will simply leave at some point. But when hundreds of millions of dollars are in the game, the parent has so much relative power that the children are stuck and afraid to speak up." In their book, Williams and Preisser tell of a 30-year-old heir who showed up late for family meetings and appeared not to have bathed for some time. He had not held a steady job since college, and family members referred to him as "the loser." The heir had no interest in the family business but blossomed when given a role in the family foundation. He cleaned himself up, became foundation president, and ran 5K races, to the others' great surprise. Some children want to start their own companies. "The pace of change and competitiveness is accelerating, so families may be more likely to convert a business to more liquid assets in order to allow the next generation to take advantage of emerging opportunities," says Preisser, whose son has taken their water desalination company in a different direction than he had taken it. David Joslin understands the fear of failing to live up to the past generation's heroics. His father was a cable entrepreneur in the sixties who made a lot of money and then made more as an executive in cable programming. "It is generally assumed that each generation picks up where their parents left off and advances the puck forward in terms of upward social and economic mobility," says the younger Joslin. But in instances where parents have been enormously successful, "the equation changes from defining success in terms of wealth accumulation to one centered on culture and exposure." The transition is difficult, he adds, partly because "so much of the focus is on wealth preservation and not the maturity that must accompany its management." A Duke University graduate, he has lived in several countries, learned languages, and worked on Wall Street because those were things his father had no opportunity to do. In coaching sessions with the Williams Group, Joslin's parents decided to give a substantial sum to each of their three 20-something children. "I don't know what the formula was, but we were given an amount large enough to do something positive with or to screw up with, so that when we get the lion's share later, we are not making the same dumb decisions with more zeros on the end," he says. "We also set it up so that the inheritance is far enough in the future that we have to work today." At 33, Joslin is happily working long hours on three medical technology-related startups, two of them in Puerto Rico and one in the United States. He drives a used car, pays himself a five-figure salary, which is what he feels those companies can bear for now, and says he has very little in common with young inheritors who don't work for a living. The family coaching on how to communicate differing views and feelings, he adds, helps him communicate better in business across roles and cultures. "If these companies work, I will have made a lot of my own money—not as much as my father perhaps, but I've done things that he wasn't able to do. These experiences were made possible by his hard work and I believe are at the core of his true legacy to us as children." When families work on a transition plan with coaches, they often commit more resources to philanthropy or at least think harder about their community goals, Preisser says. Philanthropy becomes natural to the discussion, Yaholkovsky adds, because "in the end you still have to come to terms with the temporality of life." None of Preisser's name-brand classmates from the Stanford Business School were the failures they feared they would be, he says. "For the most part, they have matured marvelously but at a high price." Today's wealthy offspring might have an easier transition, he says. "Their families seem a little more aware of the need for balance in their relationships with each other." |
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Based on the book Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, by Victor Preisser, MBA '64, and Roy Williams [thewilliamsgroup.org], published by Robert D. Reed Publishers. Also mentioned is the book, Perpetuating the Family Business, by John L. Ward, MBA '69/PhD '73, published by Palgrave McMillan Publishers. RELATED STORIES Alumni Bookshelf: The Latest Alumni Authors Walt Disney's Revolution, by Buzz Price, MBA '51
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