MAKING THAT IMPORTANT DIFFERENCE
Using philanthropy to drive generational succession planning
By Professor Joachim Schwass (December, 2006)
Professor Schwass is Director of the Leading the Family Business Program
Succession planning is essential to the long-term survival of family businesses. Yet it is precisely during this period that they are particularly at risk.
While most families seem to acknowledge this risk, often they appear to have difficulty in finding an approach that best addresses the needs of 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 a successful 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.
However, 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.
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 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.
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.
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, shows 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.
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:
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 that 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.
Joachim Schwass is Professor of Family Business at IMD and Director of the Leading the Family Business program.