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A lesson in giving

Joachim Schwass  is Professor of Family Business at IMD and Co-Director of the Leading the Family Business programme.

Instilling a sense of 'giving' into the next generation can release a passion and bring with it a motivation. Joachim Schwass explains why this is the ideal tool for linking the younger generation to both the business and the family's values

The key to the long-term ­survival of family businesses is effective generational transition planning. Research has repeatedly shown the risk that families who share business and wealth activities incur before, during and after a generational succession. While most families seem to acknowledge this risk, they appear to struggle to find an approach that best addresses the needs of the stakeholders. Recent research by IMD on key success factors in multi-generational leading family businesses points to the increasing use of philanthropy as a vehicle to drive the generational succession plan.

Philanthropy and ambiguity
A closer look at philanthropy, from a succession perspective, reveals quite a mixed picture. On one side, there are the dynastic families well known for their elaborate and diverse philanthropic activities, particularly in the US. An outstanding example is the Rockefeller family who, over five generations, remained strongly committed to the values of giving back to society. John D Rockefeller, who founded Standard Oil in 1870, created the Rockefeller Foundation in order to structure and institutionalise the family's diverse aid activities. The roots for the philanthropic tradition had already been put down by his mother, who taught her children to give 10% of their income to church or church-related activities. In the next generation, John D Rockefeller Jr expanded the Foundation's and his own philanthropic activities and verbalised the family's values: "Every right implies a responsibility; every opportunity an obligation: every possession a duty".

These family values are carved in stone at Rockefeller Plaza in New York, a permanent reminder for today's fifth generation of Rockefellers.

Wealthy families in early generations, especially in Europe, tend to be less interested in philanthropic activities. A new pan-European IMD study on family offices reveals that the founding generation sees its primary task as wealth creation, leaving the wealth spending to future generations. A not uncommon answer from European early generation owners to questions about philanthropy is: "I already pay taxes and this is the responsibility of the government".
Philanthropy in the US is supported by a fiscal system that allows for substantial tax deductions. This supports the integration of philanthropy in succession planning around wealth and privately-owned businesses. In Europe, the fiscal systems typically do not incentivise philanthropy. Indeed, quite the opposite. Governments often appear to be wary of substantial private donations that might be perceived as an unwanted intrusion into activities that are the preserve of government, possibly even motivated by the desire for some type of personal gain.

The general attitude towards philanthropy can be quite ambiguous. On the one hand, it is part of an inherent values system passed down from generation to generation. On the other hand, it is seen as an instrument that is certainly laudable, but one that belongs to the 'spending' dimension, whereas what really counts are value creation, entrepreneurship and business building. This view ignores some of the key benefits that can be extracted from the structured and strategic use of philanthropy in planning generational transition.

The 'WHY' of philanthropy in transition planning
Integrating philanthropy into a succession plan has both internal and external benefits. The first key internal benefit is to be found in the values dimension. The values attributed to philanthropy are, in essence, the very values found in families who have successfully built businesses and wealth over a number of generations: respect for others and different views; building trusting relationships; hard work and entrepreneurial initiative; patience and a long-term approach; humility and a willingness to learn.

Another important internal benefit is the meaning provided to one's life. A third generation family business leader noted, "Philanthropy gave me the opportunity at a young age to do something different and to make a difference in today's world". Inheriting a business and substantial wealth can be an overwhelming prospect for next generation family members. Seeing wealth not as an objective in itself, but rather as an opportunity to help improve the quality of life of others can provide a strong emotional and motivational inner force. Third generation family member David Rockefeller recently stated that what counts most for him as he approaches the end of life is "the ability to do things that are both worthwhile and in which one believes".

A further internal benefit is the learning provided by moving from an idea, to actual implementation. Philanthropy typically starts with a passion which must then be brought alive. A strategy needs to be developed and executed.
Lastly, philanthropy provides an opportunity to bring family members of diverse backgrounds, ages and generations together around shared ideas, visions and plans. Philanthropy creates a united 'we' feeling that can pull the family together.

There are also external benefits to linking philanthropy with succession. The next generation, through the pursuit of their own philanthropic agenda, show the outside world a personality profile that is individual and different to their predecessors' and parents' profiles. External stakeholders may appreciate the character individuality and have a more respectful attitude than they typically reserve for inheritors of wealth.

Often families elect to establish a close link between the family's business and the family's philanthropic activities, creating a beneficial cross-fertilisation effect. The SC Johnson family in the US has developed a particularly well-structured and transparent approach, actively involving their employees.

The internal and external benefits outlined above undoubtedly provide compelling reasons for the proactive integration of philanthropy into generational transition planning. What are some of the lessons to be learned from families who have experience with this approach, and what are the key elements of an effective process?

The 'how' of philanthropy in transition planning
Philanthropy as a structured process can be divided into four distinct phases: learn to do; do; lead to do; let do.

The learning phase is triggered by the discovery, often unplanned, of a new and unusual situation requiring humanitarian aid. Often, the initial exposure is through a media report on a disaster, but next generation members describe a first-hand direct experience as the most meaningful catalyst for an involvement in philanthropy. Some families have created a mentoring role for senior generation members who take the next generation members on field trips with the clear objective of triggering an interest and a desire to become involved in philanthropy. Several next generation members, reflecting on their own positive experiences, expressed their strong intention to take their own children on discovery field trips. The recommended age range appears to be 15 to 18. The learning phase is about understanding the problem and educating oneself about what elements will help address and solve it. This phase also provides insight into the motivational powers of passion.

The 'do' phase requires connection with others. Who can help bring an initiative alive? Typically, this is a search for resources – human and financial. In philanthropy, this search may require a great deal of creativity, as unusual and difficult problems require imaginative and unconventional solutions.

The leadership phase brings a structure and process alive, around a now clearly defined objective. One next generation family business member realised it was preferable to link up with an existing and experienced humanitarian aid organisation, rather than adopt its own custom-made approach. The family business leader devised a process whereby an initial investment in the project could be leveraged to raise substantially more funds from institutional and governmental donors, thus having a stronger impact.

Finally, the 'let do' phase recognises the need for efficient structures, management processes and governance mechanisms which allow for the institutionalisation of the philanthropic initiative. Philanthropy thus provides a learning platform for how best to move from a one-off project to an ongoing, well-­structured stream of activities.

Experienced families clearly favour a highly structured approach to philanthropy, particularly in addressing unusual and unstructured situations. The process applied to addressing philanthropic issues closely resembles the process applied to any business and wealth creation which requires sound leadership. Philanthropy is a meaningful opportunity for next generation family members to develop and build broadly applicable management and leadership skills. This is not surprising, since both philanthropy and business and wealth creation processes share the same objective of bringing about change, albeit on different platforms.

A growing number of families in business follow the example of successful, multi-generational leading family businesses who take a more strategic and structured approach to philanthropy by actively integrating it into their succession planning. Philanthropy offers broad and deep benefits on multiple levels. It is also a catalyst for linking generations in more meaningful ways than a business or shared wealth can.

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