Key takeaway: With the next generation of family members increasingly beginning to come into the workplace, family businesses are recognising the changes and challenges that succession may bring. New values and a strong focus on sustainability have implications for asset allocation, diversification and definitions of success.
As the new generation begins to come through, many current family business leaders are recognising that not all of their next-generation family members will work in the business. As a result, there are increasing concerns about the succession of the business amongst business families – and what ramifications this has for how wealth is defined and sustained.
One response may be to look at selling the family business to other families or to larger organisations.
Others, however, recognise that the fact some next-generation members won’t be in the business doesn’t mean that they’ll disengage from it. The family will remain the glue that binds, and family members will continue to care about the legacy they’ve inherited and how its assets are being allocated.
The growth of the sustainability agenda
That said, the younger generation will be likely to define their wealth in entirely new ways both inside and outside the business family as they continue to deploy the family’s financial, human and social capital, with particular emphasis on the sustainability agenda.
In an increasingly sustainability-focused environment, we can expect the next generation to be the pivot point in redefining the meaning of wealth and how to create and grow it in family businesses. They have a different value set and recognise the power of human and social capital as well as the family’s financial assets, across aspects such as:
Changing the lens: five key thoughts to consider
Looking ahead at the many dynamic changes that are taking place across the world, I and my colleagues in KPMG Private Enterprise believe that family businesses have an opportunity to change the lens on the definition of wealth and to achieve the highest possible returns on their financial, human and social capital investments.
Here are five thought-starters and questions to consider as you begin to look at capital through a wider lens:
- Is your business fit for the future?
Is the legacy business still relevant to the next generation and the future generations? If not, where does the family want to go next?
- Asset reallocation is rarely a one-generation decision
How does your family currently value its assets? How are the various generations of your family involved in discussions and decisions about the family’s wealth? Can (and should) next-generation members outside the family have a voice?
- In the last three years, have you re-examined your business and investment portfolio?
What decisions have you taken to focus on the assets with the highest growth and impact potential? What was the rationale for your choices, and are they still relevant?
- How has the current generation’s attitude towards potential diversification evolved, if at all?
With the input of the next generation, does the family have an appetite for redirecting the family’s assets to meet the aspirations of the next/younger generations? How might you implement, manage and oversee your family’s investment strategy if wealth is being created outside the family business?
- How do you measure the ROI in relation to your definition of success?
Do you measure both financial and non-financial factors, including ESG? If so, how? How might you implement appropriate governance mechanisms to manage and oversee your family’s investment strategy if wealth is being created outside the family business?
There are many questions – and opportunities – facing family businesses as the world continues to change and a new generation of family members begins to take its place. The redefinition of wealth into a broader perspective than simply financial assets, to include human and social capital too - and all integrally bound up with the growing sustainability agenda - is bringing family businesses into new discussions and thinking about the very purpose of what they are trying to achieve.
Is your family business alive to the challenges and taking steps to forge a successful and sustainable path into the future?
This is the final in a series of three articles on Redefining Wealth in Family Businesses. Read the first article in the series, “Family capital diversification – protecting the family’s financial assets”, for my thoughts on ways to de-risk and diversify capital strategies. In the second article, “Leveraging human and social capital in family businesses”, I explore the diversification of wealth strategies in the complex and changing landscape that family businesses operate in today.