Transcript
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we open with a listener whose 88-year-old mother wants to start gifting to her grandchildren now while she’s around to see it. The complication is 50 years of embedded gains in one brokerage account, and the question of whether lifetime gifting quietly sacrifices the step-up at death. Then we hear from an executive who’s been selecting the default on his deferred comp elections every November without thinking much about it. With another decade of work ahead, the question is what he should be evaluating before this year’s window closes. And in From the Field, we’re joined by Dennis Jaffe, one of the world’s leading researchers on multi-generational family enterprises. After interviewing 100 families across 22 countries, Dennis joins us to talk about what makes wealth survive across generations. So let’s go ahead and get started with question one.
Question 1 – Should an 88-Year-Old Gift Appreciated Stock to Her Grandchildren, or Wait for the Step-Up at Death?
Stephan Shipe: My mother’s 88, sharp as ever, with about $6 million in a brokerage account with enormous embedded gains, and a house she’s owned since the early 70s. She wants to start giving large gifts to my kids, her grandchildren, now while she’s here to see it. But it’s my understanding that gifted assets lose the step-up at death. Is gifting while she’s alive a mistake? Or are there better ways to do it?
So this one — I’m going to give you two answers. I’m going to give you the textbook answer to how this should be approached, and then the realistic answer as well of how you should think about this. The realistic answer is that this lady’s 88 years old, she can do whatever she wants with her money. And if she wants to give the money to her grandkids because it’s going to make her feel better at 88, let her give the money to her grandkids and don’t tell her she can’t because it’s going to cause tax implications or be technically better if she does anything else. So that’s the way you should really look at this.
Now, if she doesn’t have a strong preference for how she gifts, there’s plenty in the textbook answer that can help us out for how you gift in these types of scenarios. Because we want to be careful not to lead with the tax discussion, especially with her being able to save six million dollars. So let’s take a step back and think about what the issue at hand is, especially for those who may be unfamiliar with the step-up in basis. There is a massive benefit of death in the US tax code, and it is called a step-up in basis. In other words, if I buy a stock for a dollar and now it’s worth $100, I have $99 of embedded gains. The problem is if I go sell that, I have to pay tax on $99 of gains. But when I die, whoever receives that stock gets a step-up in basis, and their basis is now $100. And all of a sudden, that $99 that was going to be taxed is gone, right? So it is a massive tax savings. And you can see the same thing with her house that she’s owned since the 70s. That thing probably has ridiculous amounts of gains, even over and above the exclusion that you’re given by the government. So upon death, that house will have a step-up in basis. Someone can sell the house immediately and not have to pay any tax on the gains. That is a huge benefit.
So your point of bringing this up, of getting into are there better ways to do it — of course there are better ways to do this. When you have any type of large embedded gains in any type of asset, it’s better to wait until death to get a step-up in basis. Because whatever she gifts now, assuming we’re gifting shares of stock that have these large embedded gains, somebody’s going to pay the tax. They would inherit her basis. In other words, if she has that same stock that she bought for a dollar that’s now worth a hundred, and she gifts that to your kids, her grandkids, then when they go sell that stock, they’re going to pay the tax on the $99.
Now there is a little bit of tax arbitrage you can get into. Depending on what tax rate they’re at, maybe they’re at a really, really low rate and that’s going to be fine. Maybe she’s at a really low rate and she can just go sell that $100 stock, gladly pay the tax on the $99, and just give the grandkids cash. All perfectly fine. So that works out well. Ideally, you’re gifting things that have higher basis, or cash, right now. So if any of those shares are throwing off dividends and they’re building up cash, I wouldn’t be reinvesting the dividends. I’d hold that to the side and she can gift that over. So we want to be careful, especially with the house, not to do any gifting there.
If there’s some cash available and she’s wanting to gift, then you have a concern of the estate tax limit at 15 million, 30 million for married. Would she exceed that limit at six million dollars? Unlikely that she hits that limit on the federal level. However, at a state level, depending where she is based, she may end up hitting the state estate tax limit, which would make that taxable in some way. So we do want to be careful of where that is going to be. But if she’s going to be gifting just cash, she doesn’t have to worry at all about any of the federal limits as long as she’s gifting up to $19,000 per grandchild. Again, if she gifts more than that, that would just go against her exclusion, which doesn’t seem like it’s going to affect her anyway based on this information.
But that also has this grand assumption that she has a bunch of cash lying around that she can easily gift. And based on your question and what you’re talking about, that doesn’t seem to be the case. Sounds like she just has a bunch of appreciated stock and a house that’s likely appreciated significantly as well. And she’s here wanting to give some money to the grandkids for their birthdays, and she can’t because you’re telling her that that’s not the most tax-efficient way to go. So that’s where you’re going to run into issues here. Of course, the textbook answer, if you’re looking at it, is don’t gift any of the stock. Wait, get a step-up in basis when she dies. And then that’s going to be best from a tax perspective all around. Ideal scenario. That, however, puts her joy and happiness of gifting to her grandkids at risk. I don’t think that’s worth the tax benefit there.
Question 2 – Deferred Comp Election Window Is Open: What Should You Actually Be Evaluating?
Stephan Shipe: My company’s deferred comp election window opens in November, and I’ve been defaulting to lump sum at separation every year without really thinking about it. I’m 51, planning to work another decade-ish. Someone told me my elections are basically irrevocable and that the default is usually the worst option. They are right. What should I be looking at before this year’s window closes?
So on deferred comp plans, these are very different than traditional retirement plans. Everyone gets excited about them because they think it’s an additional deferral option, which is true. You can put money in there and not have to pay taxes on it until you pull the money out. But unlike a 401k or 403b, which is something that you actually own and you’re invested in, the 457 is just an IOU from your company. All it is is a deal with the company that they pay you and you say, hey, you know what? Why don’t you take 20 grand this year, and instead of paying me because I’m in a high tax bracket, can you just hold on to it? And then whenever I leave working here, you can give me my $20,000. It’s just deferred compensation. That’s all there is. And they say, sure, this will be a nice perk. We’ll hold it for you. Whenever you’re ready, we’ll give you the money.
So you look at that and say, well, that’s great. Except what if your company goes bankrupt? What if they run into financial problems? You don’t have the same protection as a 401k or a 403b. That could be spent. That’s still assets of the employer at that time. So we’ve seen cases of this happen where even large hospitals have gone under and the 457 plans or deferred comp plans that a company has have disappeared. So we want to be careful of how much we’re putting into deferred comp plans as a proportion of your entire asset mix. So if you have $10 million of assets and you have $5 million in a deferred comp plan, that’s a problem. If you’ve got $10 million of assets and you have $500,000 to a million dollars in deferred comp, not as big of a concern, because ideally you’d be able to survive without five to 10% of your wealth in a worst-case scenario.
When you’re doing this, now you’re getting a little close to that window, and you’re looking at that decade-ish scenario. So you could imagine your money doubling over that time, however much you have in there. So it may be time to stop those contributions, because we don’t want to look at what’s in there now. We want to know what would be in there if it continues to grow at a normal market rate.
So that aside, now we get to your situation of saying you’ve been choosing the default. Well, imagine in that scenario that you’ve been contributing to this deferred comp plan and now you have $500,000 in there. What you’re doing is you’ve checked a box essentially that says, when I leave here, drop a $500,000 paycheck on me. And that’ll be fine. That is exactly what’s going to happen. In your current situation, lump sum is going to be a $500,000 paycheck, or whatever your balance is on the day you leave, which is going to be a tax nightmare and likely put you in a bracket that is as high, if not higher, than what you’re at now. So it’s going to have the opposite effect of what you were hoping for when you deferred this compensation.
So there are a couple of ways that you can get out of this. You can change your distribution option. Usually what happens when you change — and everyone’s different, deferred comp plans are a perk generally to executives over a certain level of companies. So the only downside of this is every plan has different ways that it’s been devised. So you’ll have to look and make sure it’s doable. But what you’ll want to do is first try to get out of this default scenario of a lump sum. And we want to stretch that income out as long as possible. A lot of times they’ll let you say you’ll take distributions five years or 10 years after service. As long of a timeline as we can get, the better, assuming you don’t need the cash. Because we’re going to try to reduce the tax hit every single year. In other words, instead of taking a $500,000 paycheck the day you leave, you could take a $50,000 paycheck for 10 years and allow that to spread out and hopefully help you manage taxes throughout retirement.
So that’s going to be the first thing you want to do. Generally, when you make that election, because you’ve got 10-plus years until retirement, there should be plenty of time. There might be like a five-year window or so that allows you to push that out and say, if you make a change now, it doesn’t take effect for five years. So I think you’re still going to be okay in that scenario. But when you make that election, as of right now, you’re getting a big paycheck. So I would look first to see whether or not you can change it and what your company’s timelines allow. And assuming all of that looks good, and you said, all right, I’m able to go in and change it, it’s no longer a lump sum, it’s spread out over 10 years starting at separation — then I would evaluate whether you should be contributing any more to this deferred comp plan. Because what if they come back and say, you’re going to have to take the lump sum, there’s no option for you to change it, anything like that? Why would you add anything else to that account? You’re just going to end up in a worse place with more taxable income. And then you just divert all the money you were putting into your deferred comp plan into a brokerage account and have it run there.
So that’s what I would be looking at, in that order. I would look first to see whether or not you can change that election. If the election can be changed, then evaluate whether or not they’re allowing you to change it to five years, 10 years, 15 years. Then look at what your account would likely be when you retire 10 years from now, and divide that by five, 10, 15, whatever options they give you. And that would give you a decent idea of how much income is going to be generated from this deferred comp plan once you retire. And if you start hitting Social Security limits and affecting Roth conversions and all of these different things, it might be time to pull back — and in some cases even do in-service distributions where you’re still working and pulling from your deferred comp plan because you’re already at a high bracket. And I’ll leave you with that one. Imagine a situation where you’re already in the highest bracket possible and you’re looking forward to retiring and potentially being in a mid-bracket where you’re going to do some Roth conversions. It may make sense for you to take some of that money out while you’re working. And especially if your income fluctuates quite a bit throughout your employment over the next 10 years, to smooth out income now, which would also smooth out income post-retirement.
From the Field – What Makes Family Wealth Survive Across Generations
In our From the Field segment, we’re joined by Dennis Jaffe, an organizational psychologist and one of the world’s leading researchers on multi-generational family enterprises. After interviewing 100 large families across 22 countries that have thrived past their third generation, Dennis has built a body of work on what it actually takes for wealth and values to endure across generations, captured in his book, Borrowed from Your Grandchildren.
Stephan Shipe: Dennis, welcome to the Scholar Wealth Podcast. To start off today, give us a little bit on your background and what drew you into doing this type of study.
Dennis Jaffe: Well, I’ve been a professor, and I’ve worked in two areas that originally were totally opposites of each other. I worked with families and family dynamics, and then my main field was organizational change. And so I worked with organizations going through change, and I also had worked with families and runaway kids way back. And then in the eighties, a group of people said, you know, there’s never been any research on family business, and yet family businesses are all over the world, we should start studying them. And all of a sudden it was like the two parts of my life came together and I got involved, and that was forty years ago. And now, from a group meeting in one room, it’s become a global field. So every country has family businesses as their kind of central economic units. And all over the world there are family businesses, and now there are hundreds of people studying them and guiding them and helping them be more effective. And so I’ve been doing that ever since. And I’m both a researcher, and in order to do my research, I do consulting and work with and guide families. So I’ve been working all over the world, looking at what makes long-term families really thrive and grow and do well.
Stephan Shipe: And where did the interest come from for the multiple generations? Has that always been something that you’ve looked at, or is that third-generation problem something new that you’ve been jumping into from the research perspective?
Dennis Jaffe: Well, that’s the thing. So what I wanted to look at was — we look at first-to-second-generation families and that’s the most common thing, but there are a lot of families that have lasted longer. And I wanted to look at families that had gone past their third generation and were successful, not just as businesses, but also as families.
And the other thing I wanted to do is I wanted to get beyond the US and the Western world and really see — family businesses exist in every country, to what degree they’re different and similar to each other and how they do that. And I also wanted to have them look back after being a hundred-year family and say, well, what did we do back in the first generation to make a difference and to really set us on the path we were on. So it was a wonderful thing. And I started the research eight years ago when I made a very, very good career move, which is I retired. I had been a professor for 38 years, and I stopped, and all of a sudden I had complete freedom to travel, to do what I want, and so I traveled around the world.
And I interviewed a hundred families from twenty-two countries, people from two different generations in the family, about how they evolved over a hundred years, how they were a family, how they were a business, how they evolved and changed, and what some of the things were that they did. And the biggest focus, of course, was on how do we move across generations? How does one smart, fabulous generation pass it on to the next generation? And this myth that families lose their money after three generations, which I’m glad to tell you is totally untrue. There’s no research — and actually research shows that families that create wealth maintain it. The problem, of course, is that by the third generation it’s not one person and not one family. It’s a bunch of families. It’s sometimes twenty, thirty, forty families. So if you have wealth and you divide it into forty different families, you’re not going to be as rich as the first generation. So that, I think, is where that mythology comes from. Families can be very successful over generations, but the wealth can’t keep multiplying as much as the family can.
Stephan Shipe: Yeah, and I think the gap there has always been the wealth versus the enterprise scenario. So how do you handle the enterprise issues? The failure perspective starts to become more of a problem, because now you have forty different controlling interests of a business after the third generation.
Dennis Jaffe: Well, that’s what I saw. So I learned a number of different things. One is that family businesses are fundamentally different from public corporations and non-family businesses, because of two things about them. One is they want to create a great family. There are the number of people in the family, and the people in the family are not just shareholders, but they’re family members. And so the families have to be both effective businesses — and very often they sell the business and they become what we call family offices. And so they evolve over time and they create new businesses and do things, but they also are concerned about passing it on to the next generation. And this makes them very different than some corporations where we say, well, they’re concerned with this quarter’s profits and they’re short term and they’re not looking ahead. And family businesses are always looking ahead. They’re always looking ahead three generations.
So in my research I found out some of the wonderful things that families were doing when they were successful. And the first one being that they’re not just a business. They’re a group of families by the second generation that are all shareholders, but they have a wider agenda. So after you’ve made a lot of money in the first generation, the people in the second and third generation have a bigger non-financial agenda. And so by the third generation, family businesses are looking not just at themselves as a business and investments — which they certainly want to keep increasing their wealth — but also, what is the wealth for? And that’s where family businesses become very different, because they get together and they say, well, what do we want to be as a family? Now that we’re wealthy in the second and third generation, what do we want to do? What matters to us? And they go beyond wealth to talk about what is the wealth for? What is our goal, what do we want to see in the world? And this is what family businesses do. They’re businesses, but they’re also creating a great family and investing in the family, which is something that families have the opportunity to do with their wealth.
Why the Transition From First to Second Generation Is the Hardest
Stephan Shipe: Do you think that change in focus that happens through the second to third generation is where you tend to see some of that struggle come in — of regaining the same profitability or the same drive that the first generation had? Because from what you’re describing, right, you had that first generation, it’s survival mode, it’s very much a creation mindset. And in the second and third, it’s a different focus.
Dennis Jaffe: Well, the first generation, they don’t start off wealthy. So the first generation, they’re not wealthy and they’re striving and they’re focused on the business, and that’s their narrow vision. So they don’t really understand the next generation. They’ve created wealth and they’re really new to wealth. We talk about how they’re entering the land of wealth, but their focus is on the business, not on being wealthy. And the other thing about the first generation is they don’t answer to anybody. They’re entrepreneurs, which means it’s my way, I make the decisions, I do what I want. So when they have three or four kids and the kids get married and the next generation have more kids, they have a very hard time understanding that all of these people have to work very hard to create a common vision, to get along together, to work together. And the older generation has no idea how to do that.
So what I found in the research is that moving from the first to the second generation is not recreating the entrepreneur. I mean, there’s one entrepreneur in the first generation, and that person is in charge. But the next generation has to create a new culture of collaboration. They have to work together. All the people that become owners of the business have to create a common purpose. They have to share values. They have to get over differences in their different families. And so the second and third generation has to be a cooperative community rather than a single person. So they’re not going to be clones of the original founder. They’re going to be a community, they’re going to be working together, they’re going to be sharing ideas, they’re going to be diversifying, going in different directions. Some people will be involved in business, some people will be involved in the family. There’s a whole lot of things that happen in the second and third generation, and the first-generation entrepreneur doesn’t have any idea what that is. First-generation people have a mindset: I want to create it, I want them to struggle, and I want the next generation to be like me.
And in reality, their next generation are very, very different people. They’ve grown up unlike their parents — they’ve grown up wealthy. They’ve gone to good schools. The older generation tends to be self-educated, or very narrowly educated. The younger generation have traveled, they’ve met other people, they have a broad perspective, they have great education, and they have different concerns. And so the issue across generations is to work that out so that the older generation says, well, the legacy that we have, these are the values that we have, but the next generation can create something very different.
Stephan Shipe: So what skills do they pass on then? If you have the first generation and you’re talking to them, clearly there are first generations that have successful second and third generations, and then there are first generations that don’t. What is the difference between those two types of families, if they all have this kind of entrepreneurial mindset in the first gen? What are they passing down?
Dennis Jaffe: Well, they have the entrepreneurial mindset. They sometimes think in terms of creating that — so who’s going to be the successor? And a lot of families, for example, they set up kind of a rivalry in the family rather than teaching the next generation to collaborate. So the challenge is that there are values, and sometimes the values are about integrity, honesty, creating a great product. There are wonderful values, but they have to add on to the values of the next generation. So how does that happen? One of the things that’s interesting is I asked all these families what were the significant innovations in the second and third generation. And they talked about a couple of things. One is in addition to running the business, they created what we call a family organization, a family council where the family got together and said, what do we want to do as a family? How do we want to work together? And they created kind of two parallel organizations, a business organization and a family organization, and they cooperated. And the business organization very often funded the things that the family did. And the family saw it as an investment in creating a thriving next generation.
They teach values to the next generation, but they don’t control them. There’s a real difference between teaching values and enforcing your vision on the next generation. And I found that the families that were successful were ones who allowed the next generation to have a voice and to have influence. And, very often, the older generation has to learn how to step back. And I’ll tell you, one of the things that we see now is that the generation of entrepreneurs today are living on average 20 years longer than people did a generation ago. So when people said, well, I want to work till I die, and you have a 50-year lifespan, so you’d work till you get old when you’re 50 and your kids are 25 and they take over — that’s perfectly reasonable. If you are very, very healthy and you work till you’re 95, then you have a problem. You’re thriving, you’re using your wisdom, you’re creative — that’s really great, but that’s not so good for your children, and then even your grandchildren are becoming adults.
So the older generation has to find ways to step back from being in control, from saying, this is what I want to see happen. They can say, I have preferences, I have values, but they have to find ways to allow the younger generation to take the business and take the family in new directions. And the families where there’s cooperation and openness and give and take across the generations are the ones that are successful. In my research I asked the families what was the most important thing about moving between generations, the most important things that happened. And two-thirds of them said that the important ideas came from the younger generation. Now the younger generation has probably more ideas, but the challenge is that the older generation may challenge and say this is not practical, this has to be adjusted a little bit — but they can’t stop the ideas from coming, and they can’t be closed and say, well, you know, I’m running this business, and when I’m gone you can do it, but you just have to be patient.
There’s a real sense of collaboration. And a lot of these businesses diversify. So the next generation, for example, they start new businesses or they go in new directions. And one of the things that I find is very important is the older generation has to set a time to step back and allow the new generation to take over when they’re still active and vital. So they have to shift their role as elders and become mentors rather than bosses. And that’s a shift that’s hard for many entrepreneurs to make. But when they’re able to do it, they really allow the next generation to grow and thrive.
But the other thing that these families do, which is really important, is the business is not a prize, not something that you win like winning the lottery. It’s a responsibility. And the younger generation has to understand that they need to develop skills. They need to, for example, work outside the business. They need to learn things that are going to be helpful to the business and bring ideas back. The families that are successful have not just rewards for family members, but responsibilities. For example, being informed, being financially responsible. If you inherit wealth, or there’s a lot of wealth in the family, you need to have values about how the wealth is used, what kind of expectations there are in terms of being part of the family. For example, families often have family meetings or family boards or responsibilities where people have to be involved in the business even if they’re not working there, and they have to be informed.
Stephan Shipe: That seems to be a common theme that we see regularly, whether working with our clients or other people in this space — that when that mindset shifts for the next generation, that a legacy or a business is not the prize, as you’re saying, and it is a little bit of a burden, a responsibility to keep it running and keep it running successfully so that it’s still there for the generation following. That is a major mindset shift that I see tends to lead to a lot of that success.
Dennis Jaffe: It is, and the other thing that I see is that these families are always evolving. So the families that were in the third generation, these hundred-year families, were rarely in the same business that they were in to begin with. For example, by the second generation, half of the families had sold the family business. Then when they sell the family business, they have a major choice. Family members look at each other and say, well, do we want to be partners now that we’ve sold our business? Do we want to create a family office or a family investment fund or invest in new businesses? Or do we all want to go our own way? And some families have great wealth and everybody goes their own way, and that’s perfectly right for them. But the families that are successful long term have decided, when they sell their business or take money out of their business, that they want to continue to invest together and do things together. And so the families make a choice to stay together and to be partners. And every generation has to remake that choice.
And then they have to be free. For example, half the families sold the business. And of the half that didn’t sell the business in the second generation, half of those people hired a non-family member to lead the business. And they had other investments. As the business was profitable, they took money out and invested in other things. They had vacation property, they had a family foundation. By the second generation, they had a diverse set of enterprises, and the family members were involved in leadership in the different things. There was a family leader in the business, there were family leaders in keeping the family together, there were family leaders in philanthropy, there were family meetings, and if they had different types of investments, there were investment committees and family members that just were really good on relationships and inspiring and supporting family members to be responsible.
And by the second generation, there wasn’t one leader as there was in the first generation. There were many leaders, and they all had to work together, they all had to cooperate, they had to communicate. And these are values that the second generation learned that the entrepreneur is not particularly good at — communication, delegation, diversifying, stepping back and letting other people share control. Second-generation family members who grow up together, many of them really are able to do that, and they show their elders how to make that happen.
Do Some Cultures Handle Multi-Generational Succession Better Than Others?
Stephan Shipe: When you talk about that difficulty and those different values that need to be created, one of the things I was really interested in looking at in the research was the fact that it was a global view of this, going to all these different countries — I think it’s 22 different countries. When you look at the different countries, are there certain countries or cultures that do this better than others, that have more of a long-term view? And I guess what comes to mind is, in business school, one of the most famous things you’re taught is that different countries have different timelines. If you go ask different businesses across the world what they consider long term — the US famously, it’s like three years, three to four years is long term. But you go to somewhere like Japan and a hundred, two hundred years is considered long term. Do you see the same idea, of cultures that have that longer-term mindset tending to do a better job at succession planning or having success through multiple generations?
Dennis Jaffe: Well, here’s what I learned. So I started out my research — I was going to actually talk about family businesses in each of the different areas of the world and compare them to each other. And what I found is when I started talking to these families, the differences were there. There were cultural differences, but they were more similar. And what I find is that entrepreneurs all over the world are like each other more than they are like other people in their own home cultures. So what I found is that there was a global culture, what I call, of family businesses, that had many common characteristics.
But then I did find that there were differences in the world. And so at first I wrote the book on the hundred-year families called Borrowed from Your Grandchildren. And that’s the book that kind of describes the stories of these hundred-year families and how they operate. But then after that book came out, everybody was asking exactly what you’re asking — what about the different cultures? So my co-author and I wrote a second book called Cross Cultures, and we talked about the three different types of cultures in the world. This is something that we found — that there are different cultures in every country, and even within a country. Within, you know, like within the US, there are different cultures. Within some large countries, there are different ethnic groups. So there’s a lot of diversity, but there are three themes that we came up with.
And one is the Western, US Anglo-Saxon culture, which is based on individualism and individual rights. And you have a right. You are important. You have a voice. And that’s kind of the culture of what we call individualism, where everybody should be listened to and people should be known for what they can do, not who they are and where their family comes from, and people have their own achievements. So that’s the individualist culture from the West.
Go to the other side of the world, you go to China, South Asia, and you find a culture of collective harmony, the wisdom of thousands of years in China and Asia, that means that the elders have worked together for thousands of years. And if you’re a young person, who are you to tell me what to do? So there’s tremendous respect for the elders and for tradition and things like that. And that’s what we call the collective harmony culture, where people respect the elders and the elders respect the young people, but they defer to the group. Who you are, what village you come from, your past relationships — that’s what’s important. Our family has known your family for 300 years, I trust you. This new guy that’s coming, or somebody from another country, I don’t trust them. So that’s the collective harmony culture.
And there’s a third kind of culture that we see in developing countries and parts of the world where there’s not thousands of years of harmony, which we call the honor culture, which is where you trust the people in your family, you trust the people in your immediate circle, but you don’t trust people outside it. And the example of that is the Godfather. The elder is the authority, and you have to stick together because the world is threatening and difficult, and so you have to be secretive and you have to take care of yourself.
And those are the three global cultures. What we found in our research is that those are the original cultures of the entrepreneurs, but their children had a different experience. The children grew up in a world where the elders grew up in their traditional culture, the traditional environment, and they were often very, very tied to their traditions. But they sent their kids overseas for education. The kids traveled. They met people from other cultures. They went to school with people from all over. So the next generation really could see that cultures were not fixed, that you have to work and respect other people’s cultures and other people’s ways. So what we see in the family business families is that they’re much more of a blended culture, and the different cultural traditions that existed a generation ago, and existed in the original generation, have now become blended, and people marry people from other cultures, they work with people from other cultures, they create alliances. You have families that live in different places. And so there’s a lot of cultural mixing going on in the families, and the next generation are culturally adept, culturally literate we call them, and they understand that cultures are not fixed and you have to respect other cultures even if they’re different than what you believe.
Stephan Shipe: That makes sense from what you’re saying. The strength of that second and third generation has to do with that collaboration and then understanding how to pull that in. So those kind of fit together nicely as a skill set that would lead to success, not only of working within the family, but working within the different cultures — whether the business is moving to different areas or just handling those dynamics over time.
Dennis Jaffe: The challenge being that the older generation, who comes from the traditional background and the old country and the old ways, they have to be learners too. And they have to learn from their children. That’s why I call my book Borrowed from Your Grandchildren, because somebody said in a lecture, you don’t inherit a family business, you borrow it from your grandchildren. And there’s a learning process, and it isn’t top-down in family businesses. There’s also a bottom-up, where the young people teach the elders about this cooperation. They teach about working across cultures, they teach about working together and not having one authority but sharing authority, and trying out new ideas. And the families that are able to listen to each other and respect and cooperate are the ones that are successful, and not the ones that continue the one-person tradition of the entrepreneur.
Stephan Shipe: That is fantastic advice. And I’m really excited that you’ve been doing this research and could come on today to share with us. I appreciate it.
Dennis Jaffe: It was wonderful to write the book. The publisher said we want a hundred-page book, and the book turned out to be four hundred pages, and the reason it’s so long is because it’s full of stories. And I don’t say this is the way to do it. I present the stories of a lot of these families all over the place about how they work together and how they grew and how they built these wonderful families and how they developed their business. And it was great to kind of tell all these stories, and there isn’t one right way. There really are a lot of different paths to being successful across generations.
Stephan Shipe: You were able to curate those for us and find some similarities there.
Dennis Jaffe: Right.
Stephan Shipe: Thank you so much, Dennis. It’s a pleasure.
Dennis Jaffe: Thank you, Stephan.
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
Outro
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