Episode 66: Dennis Jaffe on Governance, Legacy, and the Family Business Enterprise

FBA65 Dennis Jaffe === R. Adam Smith: Welcome to the Family Business Audiocast on LinkedIn. I am R. Adam Smith, creator of this Audiocast series.

As an entrepreneur, investor, founder, investment banker, and board leader the last twenty-five years, I'm fortunate for my many experiences within the family firm industry. A brief comment on why I created this broadcast. Private companies are a passion of mine, having grown up in a family of entrepreneurs and having engaged for two decades in deals, strategic transformations, investments, and boards with an array of fascinating family enterprises, family firms, and family offices.

I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the fast family firm ecosystem. Whether you're a family business owner building, running, or advising a family office, or just expanding your family office activities, I hope these conversations are useful and enlightening. And now it's time to turn our attention to our accomplished guest on today's episode. Welcome to the Family Business Audiocast, and a warm thank you to our live audience today and for those listening in the future.

On this episode I am joined by Dennis Jaffe, one of the original architects of the field of family enterprise consulting and a defining voice globally on multi-generational wealth, governance, and continuity. Very pleased to have Dennis here today. For more than four decades, Dennis has worked with global families navigating one of the most complex transitions any institution can face: how to transfer not just the wealth and ownership, but also all the values, purpose, and responsibility across generations.

And what makes his work distinct is his dual lens, essentially as both an organizational elite consultant and a clinical psychologist, allowing him to operate where most advisors struggle at the intersection of both family dynamics and enterprise design. His work has helped shape hundreds of families and modern family offices, how they think about succession, not just as an event, but a long-term system. Dennis is a legend in the industry. He is a senior research fellow at Banyan Global, a founding member of the Family Firm Institute, as well as a family business fellow at Cornell's Johnson College of Business.

He is on the board of the Ultra High Net Worth Institute. He's also a columnist in Family Business Magazine. And for thirty-five years, he was a professor of organizational systems and psychology earlier at Saybrook University in San Francisco, where he lives and where he is now professor emeritus. Earlier, he received a BA in philosophy, in management, and a PhD in psychology from Yale University.

Also, Dennis is an author, a writer, a presenter, a thinker, and has recent work in collaboration with J.P. Morgan Wealth Management. This particular work outlines a practical framework for moving families from intention to action in succession planning.

We'll talk a bit about that. So today's conversation is really about that gap essentially, and what it takes to close it. Dennis, really wonderful to have you finally on the podcast and wonderful, to include you, a big fan of yours. Dennis Jaffe: Thank you.

Thank you, Adam. I'm delighted to be here and delighted to share some ideas and, hope that they'll be useful to the people that are listening. R. Adam Smith: For sure they will, no doubt.

Okay, so we'll talk about the succession gap initially. Your early work really in the industry before the field itself really had a name, you were talking about intention without execution and how there is some, complexity and avoidance patterns in succession planning. So let's start with, your thoughts after decades of working with families. The issue is not usually anchored in knowledge, it's more in action.

So let's talk about why families who clearly know what they're doing should also avoid starting and get to work. Dennis Jaffe: There's two things that happen. One, which is actually the most common, is people just don't do it. They say tomorrow, it's not time yet they're not ready and I have a lot of time.

So that's one fantasy, is that you have all the time in the world. But a lot of people say - "We've done it. We have an estate plan, we have a thing." And they haven't really thought about how it is that the family will actually implement them.

So a lot of families even go so far as to keep it a secret. And their intentions are they wanna go into the next generation, but right now they feel like if they talk about it and start to plan it actively they'll create anxiety. Which is true. They'll disturb the status quo.

They'll ask people to take on new tasks that they're not fully prepared for. The younger generation doesn't know things and the older generation is very wise. Why stop? So there's a whole lot of things that make people uncomfortable when it comes to actually taking action.

And our working paper is about all the different ways that succession, while intended just doesn't take place. Very often the older generation, for example, puts the papers in, does the legal work, sets up the estate plan, but doesn't do anything about it and just assumes that when they pass some kind of magic wand will go and the next generation will be there and be ready and just take over. And you think about that doesn't make a lot of sense. There's a lot of things in these families, wealthy families, that have to be attended to.

And how is it that, you know, it's just gonna happen when you leave if you're in the elder generation? It's a lot of good intentions, but not really backed up by actions. R. Adam Smith: Okay, thank you.

Yeah we know that's challenge from a humanist and psychological, emotional perspective. But of course, family offices and family businesses are as a majority of the world's economy and getting bigger and therefore more important. So there's no shortage of importance and work to do for the industry and for the large families. Let's move into really redefining succession then as a system and not just a decision and the parallel challenge between stepping up in action, those decision-making processes, but also the emotional step of letting it go, which also has some fear associated with letting go.

Maybe let's talk about that leadership and the courage of the decision-making processes. When you say succession is designed for continuity, what are they actually designing and how important is that leadership, the courage in that equation? Dennis Jaffe: A lot family leaders think that leadership is just doing the same thing over and then turning it over to someone else. And I think the reality is that they need to create and really spend the time creating and building the plan for the future.

And one of the things that we focus on a lot in the paper is the mindset. And then this is a means, the kind of assumptions that you make coming into it. And we've worked with a lot of families, and they have they make assumptions about the next generation, about what needs to happen, and these assumptions actually, A. they're based on, sometimes faulty reasoning and they're mindsets that stop people from action.

For example, take the most common one, which is somehow that knowing about wealth and knowing how much the family has will hurt the next generation. If they know what they have, wealth is bad for them. And if you think about, this is very weird. Number one, they're your children, and you've spent a lot of time with them.

You should know something about what will happen and instead of worrying you should be preparing. Wealth is a responsibility. It's not a reward, and it's not something that you could just use. It's something that you have to be thoughtful about, and there's a lot of education.

The assumption about wealth will spoil my kids, and therefore I'm not gonna tell them anything about it, is what we call a limiting assumption. It stops people from doing things that they need to do. And we find that there are a lot of assumptions that people come into, and they just start with these ideas in their head, and because they're in their head they don't notice them, and they act on them. In first stage of the succession process that we focus on that isn't often mentioned is that, people have to look at their own assumptions and question them.

Not necessarily throw them away. You can't throw away your assumptions, but you can look at it and say, "Gee I'm worried about my kids being prepared. What can I do about it?" Educate them and teach them what they need- R.

Adam Smith: And also the self-reflection you're talking about, actually we spoke about this with James Grubman earlier, your friend and colleague Richard Wolkowitz, David Werdinger, Emily Bouchard, some of your friends in the podcast like this importance of reflection. Actually, ironically, David Werdinger has launched a new theme on the power of pause, he calls it, which is quite interesting. So I think just, having the courage to pause and reflect is a important psychological, sociological factor, and it's very important in large M&A transactions as well because that's when the shit hits the fan, and there's massive numbers in wealth and ego, and pride and change going on.

That also results in succession planning complexities. Just as an aside, so Dennis is referring to a paper coming up he has created in conjunction with JP Morgan, you will see this coming up, and we can talk about it later. You can also reach Dennis on LinkedIn and see it coming out soon. So at JP Morgan Wealth Management there is a head of family engagement and governance, Stacy Allred.

She is a managing director at JP Morgan. She's worked on that paper with Dennis, so we're very excited to see that coming out. Also as an aside, I'd love if you could just talk a couple minutes on what I was saying before. That the succession particularly in large transactions where there's hundreds and hundreds of millions of dollars, billions of dollars at stake, right?

Can be a real impact on legacy and also affect their own part of the world, right? Like economies, local towns, community, philanthropy, employees. Not just the act of succession, but the impact on the reverberations of those big changes in a company. If you could just talk about that for a bit.

Dennis Jaffe: Succession is often seen, as you said, as an event. Somehow it's like you tap somebody on the shoulder and say, "you're the successor." But if you look at large companies and a lot of family enterprises and family wealth are as large as large businesses, you say the successor has spent years preparing for their role. They've developed experience.

They've worked with other companies. They've done projects. And if you carry that out into family succession, you say gee, I'm concerned about successors." Well, of course you are.

But what are you doing about it? And this is where people say - "Well I want them to be prepared. I want them to develop competencies. I want them to be ready for it."

But they don't actually set up program. For example, you are the next generation and there are some things, some responsibilities that come with the wonderful resources that you're gonna inherit. And these responsibilities are things that you need to learn and you need to do. So families have to create learning plans for each of the next generation.

And it isn't just who's gonna be the leader. In families that have wealth, there's many forms of leadership. There's investments, there's philanthropy, there's setting up family meetings. There are all kinds of tasks and basically, in many families, everybody in the family has a responsibility.

They need to learn these responsibilities and talk about them. So instead of thinking of a succession as an event and a naming of somebody, you think of it as a collaboration. Between two generations or now sometimes three generations, where each person is learning new ways and practicing new things and taking over. Succession is something that has phases and stages, and then that's what we talk about in the paper.

We talk about the different phases of it, and most of them are activities where the two generations and also the family advisors are working together. R. Adam Smith: Okay. I think you also see that in the Ultra High Net Worth Institute framework and mission around family capital.

So in the book, you talk about the five-step journey, which is really applying steps of the journey, not just theoretical, but practical steps that are grounded in reality that create that structure, right? You've talked about reflect, align, design, develop, execute to create a clean framework that is holistic. And again, that'll be coming up in your paper. So let's talk about this credible framework and what's gonna be in the paper, just as a sneak peek.

Dennis Jaffe: The framework talks about, that succession is a evolution in stages. It's not an event. So there are five steps that we talked about, and the first step is one that isn't often noticed before, which is to reflect and to think about your own role and to think about what you need to learn and what you need to do differently, and what assumptions you need to question. And we work with people to develop what we call an appreciative mindset, a mindset that looks to the future and looks at, what do we wanna do together.

It's not rehashing the past and arguing over, "You did this to me, and you did that to me." But it's really, what's the challenge in the future? The world is changing, and reflecting on what you have to do. And so after you do your reflection, the next step is to align.

And one of the things that we see in succession is that if the older generation makes a plan, that's nice, but they have to take into account the wishes and needs of the next generation, and married-in family members, and other people who are not decision-makers, but they're sure important. They raise kids, they're around, they contribute. And so everybody has what we call a voice, rather than a vote. And you need to have alignment, not just over what the plan is but where you're going in the future.

So the process of succession begins with the family getting together and saying, "What are we gonna do? What do we want? We've created wealth. We have resources, we have reputation we have all kinds of things that we've done.

What do we wanna do with it?" We transition from how do we make money and how do we build resources, to how do we preserve and what are they for, the focus. And then there's how to develop it what kind of skills, what kind of stages do we have? We call it creating a roadmap.

The final step is execution, we need to be accountable, and we need to say, "have we achieved success?" You're successful before you go on to the next step. So a lot of people assume that things are gonna work, but they run into problems, and they, they haven't prepared. Discussing, "well, gee, this isn't going right."

R. Adam Smith: The ongoing conversation and governance frameworks, advisory boards, councils, management retreats, KPIs, I think what you're saying is really important because as there's a lot of effort that goes into the larger family business planning for the, let's say, the five-step journey, and getting to the end of that with a, what presumably would be a very large paper, a very large structure of, let's say, tens of pages. So that's a great outcome and you can implement that.

But I think that as we're seeing in the industry you guys see this at Banyan, at Ultra High Net Worth Institute, we also write about this of course in the Family Business magazine and familybusiness.org, which I also write with as well. I think the ongoing conversations and measuring and testing and evolution is really key to, like you were saying, essentially looking at it as you're running a big corporation for best practices and to embrace those best practices. Which then brings us into basically the long-term view.

The next topic is really the values, right? To elevate the work into long-term values and the legacy. So what's sitting underneath is this purpose. You wanna talk about that?

Dennis Jaffe: Family wealth is different than just running a corporation or, a non-family business because family members have a personal relationship. And the complexity of estate planning and the complexity of succession, which we haven't talked about yet, is brought about by the fact that people are family members, with a relationship and with a history and with an agenda together that is about more than money. So they're not just investors. If they were investors, that's easy.

But they're also siblings, and they're also brothers and sisters, and cousins, and parents, and children, and people who are married in. And they all have different views. And because they're family you feel like you can talk about them and you should be listened to. And if your father is the CEO and owns the company that's nice.

But if you're also his daughter or his son, you feel like you can talk to him. You can say what you want. So the challenge in family enterprises is that people need to have what we call a governance structure that has to do with the family relationships, and we need to align the agendas for the family relationships with the financial and the business things. For example you may have a family member who is designated to run a family business or a family office in the next generation.

But for example, what if this is also a younger brother, but he has three older sisters who are all professionals and they have opinions? He can't just be the successor, and be like the wealth creator who was his own decision-maker. He has to take other people into account. So the challenge of succession is to move from the first generation, where there's one person that is in charge, the decider, the person who makes the decisions, who doesn't answer to anybody.

So the group has to deal with family issues, and we talk about how there needs to be a family governance structure and a family council to talk about family activities and how the family uses the wealth, and family responsibilities and misbehavior and expectations. And that's family things. And then there's also financial and investment in business succession. So there's two kinds of succession in the family relations and who's running that, and the business financial relationships, and these two kind of groups have to meet and make decisions, but they also have to work together.

So the process of governance gets very complex in a family business because it's a family and a business. And it's not, as we all know, 'cause we all come from families, it is not easy. And to make decisions and talk with your parents and your spouse and your brothers and sisters and cousins, there's a whole agenda that goes along with it, and sometimes just staying in the room together and talking- R. Adam Smith: Let's talk about the human reality side.

You're talking about this collaboration framework and the courage, let's say, to especially as I said, talking about complex transactions, it takes a lot of courage and collaboration to get through a large sale. Often, as you know well, as you guys consult on this, is the typical is that there is a large single operating company that created, or holds most of the family wealth. And so when that asset, it needs to be sold or is going to be sold, it's gonna create a lot of uncomfortable conversations.

And we also see related to this is, two factors. One is, what is the next gen going to do when that company is sold that they work for or they were going to work for? So there's a lot of cash and wealth, but there's no longer a job. And then there's also the founder identity attachment, which is, can be related to imposter syndrome and psychological detachment and so on.

Love to hear your thoughts on that catalyst. Dennis Jaffe: So family businesses in the second, third generation, and I did a study of 100 global families interviewed from 20 countries, and it's all been collected into another book called Borrowed from Your Grandchildren. And what I found is that successful families over generations, probably a majority have sold the legacy family business, or they bought several businesses, or they have a non-family leader in the business. So the divergence from just being a single business, legacy business to going beyond that, and when a family sells the business, the first question is, what's gonna happen to the money?

And of course the owners decide that, but if the owners have children, and the children are part of the family, and they're together, and they've worked in the business there needs to be a little bit of family discussion and, and collaboration over what's gonna happen to the wealth. Are they gonna divide it up? Are they gonna invest it together? Are they going to make it available for people to spend, or are they gonna reinvest it?

Are they going to invest in philanthropy? And if so, what values do they have? So the family has to talk about purpose and the use of their wealth in the second or third generation, and the kind of leader that they want depends on what they're gonna do with it. If they're gonna be socially responsible and involved in philanthropy, they need a certain kind of leader.

If they're gonna buy another business and create more operating, larger operating business, they need another kind of leader. If they're gonna invest in multiple directions they may need several leaders. The family has a lot of complex choices to make, and if they sell the business that's a huge challenge and a huge transition for the family, and the family has to come at it together. You can't just say we've sold the business.

And from the parents' point of view, they're all of a sudden from running the business, now they're- they have wealth. But the children assume, "Aha, we're gonna share the wealth." But are they? There's a lot of questions that come up.

So succession is a learning process, exploratory process for the family, not a decision. And what are you gonna do with the wealth? They certainly wanna hear from their children, their in-laws, and the other people in the family about what they want. What kind of a world do they wanna see?

What do they want for their families? R. Adam Smith: I'd like to add to this two related topics. So one is the theory of the next gen essentially buying into the business and doubling down.

We see this theory with Tom Deans in his book is, for a select portion of the next gen, the family children that have the ability, let's say the intellectual ability, if they have the financial ability to buy into the business as opposed to inheriting the business. I'd love your thoughts on that. And then also, I think that, dealing with the M&A and the bigger chunkier matters of transactions occurring, is that succession as a term is not really complete in the sense that it presumes that there is going to be a succession, but sometimes the next gen is just not gonna wanna do the job, and they're gonna wanna do other things.

So there is no succession, essentially, sometimes. Dennis Jaffe: Do the job. It's like what is the job? Look at the, look at the situation of a business.

One of the assumptions that I think is most destructive and unstable for a business is when the elder says never sell the business. No business is gonna last forever, and very few businesses from 100 years ago are still with us, and if they are, they've gone on other kinds of work. They've redefined themselves. So if you say never sell the business, what happens when the technology becomes obsolete?

What happens when your competitors begin to grow and go global and begin to buy up competing businesses? Maybe you wanna keep it alive, but keeping the business alive is not something that every business can do, and trying to keep a business alive and reinvesting in it when the business is maturing and the technology is obsolete, and you don't have the capital to expand it, is a pretty foolhardy thing. So I think every family has to consider every generation, do we want to be in the business that we're in, and considering what to do, and how to shift.

Do you have the wherewithal to run the business is a limiting belief. And the question is what does the family- wanna do with its wealth? How do they wanna sustain the wealth, and what direction do they wanna go? R.

Adam Smith: Got it. Yeah of course, we have the very well-known business theory, business school theory of built to last, which is the longer term theory. But I think it is viable to think longer term, but in a less rigid context - Dennis Jaffe: Pride keeps people going, and keeps them saying it's gonna continue forever. And the innovator's dilemma is pride keeps you from saying, "This business has been really good to us, but now we have to start looking to invest in something else."

Or look to sell the business, and go into another business because it's not gonna last forever. R. Adam Smith: That really relates directly to my main theme in the podcast, which is legacy, in a sense that each family defines legacy differently. There is no single answer.

But I think it's increasingly important as we're talking about looking at the world that we're in, that private enterprise and private large family businesses, family offices are very important, very large, and they have implications on the world and people and communities, and they're not just insular islands. So legacy therefore is larger than pride and larger than wealth. It really is important to have a broader conversation and lens I think. Dennis Jaffe: And this brings up, one of the things that we have observed about succession, which is we need a plan that has three parts to it, and one part is the legacy, the values, what we stand for, what we've done that's successful.

Our capabilities that are unique. That's our legacy. But then we have today, what are the challenges that we're facing, and what are the things that are coming up that make us have to develop some new ways and new things? So there's a current situation which challenges the legacy, and then there's the vision and what we wanna create in the future.

Do we wanna stay together? Every family in the next generation can say, "maybe we just wanna divide up all of the wealth that we've created and let everybody go their own way." Some families, many families do that, and that's the best thing for them because they don't agree on anything. They don't have a shared vision.

Other families say well, we've created something really wonderful, we have a reputation and skills and capabilities that are very special, and we wanna stay together." Other families you say, "We wanna do a little bit of both." And so this is in the succession, before you can create a succession plan, you need a, a clear idea of your purpose and where you're going to, what you value and wanna do in the future. R.

Adam Smith: And in a sense, because legacy is so multifaceted and imperfect and personal, as one of the elite advisors in the world, I think it would be fair for you to say that families can consider lots of different information and decision-making and try to do the best they can, but ultimately there is no right or wrong answer, right? In terms of what they do with legacy, it's up to them ultimately. It's their own decision. They've earned the right to make that decision.

Dennis Jaffe: It's a challenge because the older generation has been used to doing things their way, and they've been used to making decisions, and they're used to being successful. And so it's very hard sometimes, if you've been the leader for 40 years, to step back and listen to the fact that your children, who have just been working for startups and just graduated from business school, to see that they have some valid ideas and that you have to question some of the things that you've been doing for many years.

It's very hard for an older business founder to look at that. They can talk about it, but in action it's really hard. And it's not something that everybody can do. R.

Adam Smith: So let's wrap up there and talk about a clear idea and question about legacy and the overlay of emotionality and humanity, right? In a sense of making clear decisions. So if a family knows they have to do certain things, start a process, enhance the process, create a flow, a dynamic interaction, collaboration like you're saying, but there are delays, what are the cause of those delays and not really implementing best practices and thoughtful procedures, holistically?

What are those costs, essentially? What are the things we're trying to solve for essentially? Dennis Jaffe: The costs of, of waiting in a world that's continually changing is you lose leverage. For example in some families, the younger generation gets the message from the older generation, "We wanna continue what we're doing.

We don't wanna listen to your ideas." And they work somewhere else, and they begin to develop a career outside. And then when the family says, "Gee, we need your input," they say, "Gee you should have asked me 10 years ago. Now, I've got a great kind of career outside.

I'm not available." So you lose opportunities by waiting. And the other one is you don't bring the family together. You give up and say, " we're going in different directions.

There's nothing we can do." And so the family drifts apart, and this is what we call entropy, where the family goes in different directions and splits up the resources and doesn't develop a shared vision. And this is the default that we find in a lot of families over third, fourth generation. They just can't generate a shared purpose and shared vision so, they drift apart.

You're always fighting against that in succession. You're always having to spend a lot of energy and time to keep it together, because otherwise it'll split up and drift off in different directions. R. Adam Smith: Okay, good.

And those challenges, of course, are where you and experts in the industry come in to bring value externally. We'll wrap it up now. I just wanted to say, you can reach Dennis Jaffe on LinkedIn, of course, also his website dennisjaffe.com, and the associations he's involved with as well.

I've really learned so much today, and I think we covered a lot of ground. I think, why don't we wrap up with, what is your favorite part of working with large families? That would be a good place to end. Dennis Jaffe: The creative engagement, that a family can bring to the fact that they have wealth.

We talk about wealth inequality and the fact that people are developing more and more wealth, and what really excites me is when people are taking that wealth and seeing we are very lucky, we are very privileged, and we want to do something not just for us, but for the future of the world and our community. And they see their vision and purpose as being expansive and work together on a wonderful project to use the family wealth in a responsible way. R. Adam Smith: Love that.

Thank you. I want to thank our audience today and our guest, Dennis Jaffe. What really stands out from this conversation is I think that families don't fail at succession because they lack resources. It's more because they delay or procrastinate, or there's a psychological constraints in that work across conversations, the alignment and clarity to move forward together in a collaborative way, like Dennis was saying.

The families that endure really therefore are not the most sophisticated. They're the ones that begin early and stay engaged, take it seriously, treat succession as a shared responsibility and not just an internalized decision. So Dennis, thank you for today and all your decades of leadership in this field, and keep pushing families and advisors to these effective and honest approaches to work. Dennis Jaffe: It was wonderful Adam, to be with you and to have an exchange with you, and I hope we gave some practical thoughts to the people that are listening, and we helped them take a wider view of succession.

And the working paper is available from J.P. Morgan and on my website, dennisjaffe.com, and you can download it free.

R. Adam Smith: Wonderful. That's the best bargain in the industry, so please go find it on his website. And thank you and J.

P. Morgan for doing that and for all of your hard work. Thank you so much. This is R.

Adam Smith signing off. Please stay tuned for the next episode of the Family Business Audiocast. Dennis Jaffe: Thank you.