Family Business & Entrepreneurship Research Presentation Series | CFBE, SPJIMR | Dr. Luca Manelli
SPJIMR’s Centre for Family Business & Entrepreneurship (CFBE) organised an online research presentation on “The experience of institutional paradoxes in next-gen family members as the driver for purpose change in the family office” by Prof. Luca Manelli, Assistant Professor of Strategy and Enterprising Family at Politecnico di Milano.
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LearningTranscript
00:00:00This is our fourth session of the research presentation series.
00:00:10We've had in the past Yosef, Fernando Munoz-Boulon, and Maria Sanchez presenting, Emanuela has
00:00:24presented, and Luca, you are the fourth speaker in the series.
00:00:28I think I have been able to get Jeremy to come in to the next session.
00:00:33So we will have that.
00:00:34We are having this series once in every two months.
00:00:37It's a bimonthly effort, and the idea is to get a bunch of scholars and researchers to
00:00:42converse with each other.
00:00:44Luca Manelli, friends, is the assistant professor of strategy and enterprising family at
00:00:49Politecnico di Milano.
00:00:51His research interests lie broadly at the intersection of family business, organizational
00:00:56theory, and strategy, and his research has appeared in journals such as Strategy Science,
00:01:01Technovation, and FPR, Family Business Review.
00:01:05Today, he is going to present on the experience of institutional paradoxes in next-gen
00:01:09family members as a driver for purpose change in the family office.
00:01:14So over to you, Luca.
00:01:15Thank you so much for accepting our invite.
00:01:18Thank you. Thank you so much, Tulsi.
00:01:20Thank you to everyone that is attending this seminar.
00:01:23Thank you for the invite.
00:01:24And I feel very honored to continue this long, long legacy of researchers that have been
00:01:33invited to this seminar.
00:01:35I hope I will be up to the level of the previous of the previous participants and panelists.
00:01:45So can you see my screen, first of all?
00:01:48Yes, please.
00:01:48Awesome. So, as Tulsi was saying, the seminar that I'm going to deliver today is about a
00:01:59topic that I came across a few years ago, which sparked my interest from the beginning,
00:02:09which is the purpose of the family office and the transition towards the impact of family
00:02:17offices. And I think that during my career and during my position as a co-director and
00:02:30lead researcher of the Family Office Observatory at the School of Management of Politecnico
00:02:36di Milano, I think I've seen a few examples of multigenerational family offices that are
00:02:44transitioning towards the logics of impact, sustainability and processuality within their
00:02:53family office. And for those who don't know, the Family Office Observatory is an applied
00:02:59research project that we run every year.
00:03:03So it's an evergreen research project which renovates every year, which tries to gather
00:03:12primary and secondary data on the emerging trends that family offices and their prizing
00:03:19families are facing.
00:03:22And as such, we do a lot of outreach with stakeholders, with families, with advisors, with
00:03:31bankers, with lawyers, with accountants.
00:03:36And so I'm very glad to say that every year we do around 100 of interviews.
00:03:42We run a survey.
00:03:45We do secondary data scratching, scraping and analysis.
00:03:51So every year we collect a vast amount of data on the topic of family offices, family
00:03:58wealth, wealth management and so on and so forth.
00:04:02Today, I'm going to talk about purpose changing the family office, the role of institutional
00:04:06entrepreneurship by NextGen family members.
00:04:10The title seems very ambitious and quite complex, but I hope I will try to narrate and
00:04:22diminishing the complexity, the perceived complexity of the topic as we move forward.
00:04:28And I would like to diminish the complexity, first of all, by investigating the phenomenon
00:04:34at hand. So we are witnessing a rising tide of impact investing integrated and grafted
00:04:48within the family office and within the strategy of wealth allocation of owner families.
00:04:55Here, I put a few headlines from the Financial Times, which says rich millennials pushed
00:05:01to put family wealth into impact investment.
00:05:04Young urged elders to back ESG linked projects instead of traditional philanthropy.
00:05:10Or another headline is climate concerns, climate concerns reaching tipping point for
00:05:17family offices. Younger members of wealthy families are exerting their influence on
00:05:23wealthy families, are exerting pressure on their elders to review their investments.
00:05:28So these are all articles that were published in the Financial Times just a few months
00:05:35ago. So what I'm talking right now is really something that is really ongoing and it is
00:05:44getting momentum. It is getting momentum also because service providers like banks and
00:05:53trust advisors and wealth managers are increasingly having interest or implicitly having
00:06:02interest in how to transition family offices towards impact.
00:06:08And on the right hand side of the screen, you can see a report supported, published by
00:06:14the Impact Investing Institute and supported by the Schroeder's Wealth Management, which
00:06:20focuses on family offices or roadmap to impact.
00:06:25So people, stakeholders are building something that previously was only captured by
00:06:34traditional philanthropy.
00:06:37If you read these headlines, there's not only the topic of shifting the strategy from
00:06:46wealth preservation towards impact, but there is also the role of next generation family
00:06:52members. So younger family members that apparently are leading change within their
00:06:58family offices. And this is what I will talk about today.
00:07:02This is the heiress of the family that founded BASF, the Engelhardt family.
00:07:18BASF is one of the most important chemical companies in Europe and probably also in the
00:07:24world. I think it is located close to Frankfurt in Ludwigshafen.
00:07:33And Marlene, who is around 31, 32 years old, has been making headlines in newspapers all
00:07:45over the world because she's a great advocate for redistribution of wealth, land and
00:07:52power and for a vocal advocate for taxing billionaires and taxing wealthy families.
00:08:03And this is interesting because she comes from one of those wealthy families, is
00:08:08actually probably one of the most important business families in Europe.
00:08:14And so I think we are witnessing a trend that we cannot ignore.
00:08:25And as I said, this trend is coupling societal trends and specifically shifting the
00:08:32shifting practices within the finance and financial industry with generational trends.
00:08:41So we know a lot about millennials, Gen Z, baby boomers, and the fact that our societies
00:08:47are getting more and more wide in terms of number of generations that coexist together
00:08:55thanks to the fact that the length of human life is increasing over time.
00:09:04And but also having different generations inhabiting and coexisting together also
00:09:11implies managing differences in values, differences in resources, differences in
00:09:19interests, differences in positions and also all the processes that link one
00:09:27generation, one societal generation to the other.
00:09:29This happens, for example, this is very important, for example, I come from Italy.
00:09:34We know that this is very important for the sustainability of our welfare system because
00:09:41without, you know, people paying taxes and people creating jobs, it is difficult to
00:09:48sustain a large amount of people that have retirement and depend on the state to get
00:09:56retirement. And it is also important for companies, because if you have a company where
00:10:03you have three or four generations that work together, this, of course, it implies very
00:10:11taxing issues in terms of leadership, culture, strategy, and how to develop a common
00:10:20vision for the future of the company, which is often what makes or breaks successful
00:10:25companies. Here you can see some of the associations that are at the forefront of the
00:10:35impact revolution in private investors and family offices.
00:10:40You can see the impact, which is an association made by wealthy family members,
00:10:48currently led by the next generation of the Rockefeller family.
00:10:53We have Generation Pledge, which is an association of, again, family, wealthy family
00:11:00members that pledge to donate a portion of their wealth across their lifespan and pledge
00:11:11to ensure that such wealth is deployed to exert significant and positive impact in the
00:11:21world. And then there is Tonic, which is an association where members exchange best
00:11:28practices and knowledge around impact investing practices, strategies and so on.
00:11:38Is there any questions so far?
00:11:41Sorry, no questions.
00:11:43No questions. OK, let me move on.
00:11:48So so this is a phenomenon.
00:11:51So I'll just I'll just make one point, Luca, it's very interesting that you're talking
00:11:56about this, because I think some of my people who have joined in, because some of them
00:12:01are not from SPJMR, would also be able to attest to the fact that in India we are going
00:12:08through a very interesting discussion about inheritance tax.
00:12:13Right. And for the wealthy to say that, you know, you need to have a 90 percent tax is
00:12:22very interesting.
00:12:26Absolutely. And this is another point that is interesting to address, because.
00:12:35Intergenerational wealth transfers are predicated on also tax efficiencies, right?
00:12:43Yes. And the sustainability of family wealth across generations is also predicated, not
00:12:50entirely, but partially upon tax efficiencies.
00:12:54And of course, this also implies, but it also it is a very complex and important issue
00:13:00though, an issue, though, because it also implies issues of whether value is created or
00:13:07destroyed thanks to these taxes or whether families should be, you know, considered or
00:13:17pressured to be responsible citizens and avoid, you know, not to and avoid to engage in
00:13:24those tax erosion practices.
00:13:26So it is something that not only research and family members are talking about, but it is
00:13:33something that is an ongoing conversation also in professional associations, in tax
00:13:40advisors, managers and so on.
00:13:42So, again, what I'm describing is only probably the tip of the iceberg of broader
00:13:51societal discourses that are shifting logics from what we have been witnessing in the past
00:14:02and the present and the future.
00:14:05Thank you for the question.
00:14:07Sure. Very interesting.
00:14:10So, however, my focus is not on finance.
00:14:16I am not a finance researcher, but a family business researcher.
00:14:21So before engaging in, you know, talking more about what our family office is, let me just
00:14:29give you a few a brief distinction that I think it is, however, important to make to ensure
00:14:36that, you know, we are on the on the same page.
00:14:40And the distinction is the shift in focus between from the family business to the business
00:14:45family. So.
00:14:49The family business field has been, you know, ripe with studies and investigations about the
00:14:59firm, the family firm, the family owned company, it has been investigated whether family
00:15:06businesses outperform non-family businesses, what are the most efficient and effective
00:15:12succession processes, what is the best governance configuration for family businesses
00:15:19and so on and so forth.
00:15:22However, it is important to notice that in recent years, family businesses, family business
00:15:30researchers have been questioning the centrality in their perspective on the family
00:15:38business. And instead, many of them are advocating for a shift in focus towards the
00:15:45business family. So a shift from the business to the family and ownership components of the
00:15:53three circle model. Right.
00:15:56So, for example, one implicit assumption of the family business perspective is one business,
00:16:04one family. And this is, you know, the classic assumption that family business researchers do.
00:16:10Right. So there is one family which owns one business.
00:16:16While this is not always the case, we know and I'm sure you know, many families that do not
00:16:24own only one business, but they only they own a portfolio of businesses.
00:16:29And within such portfolio, you have businesses at different stages.
00:16:35So you might have, you know, very early stage ventures and small businesses.
00:16:41You might have businesses that are mature and which are already doing, you know, revenues are
00:16:48growing and so on. You might have businesses that have been sold.
00:16:53Right. And this is the big sell harvest cycle.
00:16:56Right. The cycle of entrepreneurial recycling of family equity that Beerle and Kamerlander talked
00:17:02about in the 2019 paper.
00:17:05And this is how family owners think.
00:17:09Right. They don't think if you are a family investor and a family owner of multiple businesses
00:17:15that is diversified and not connected to one core operating business, they think like this.
00:17:22So thinking as owners of a portfolio of companies and thinking strategically about whether
00:17:31they could add value to each and how.
00:17:36So another assumption of the family business perspective is that family owners accrue social
00:17:41emotional wealth, SCW, by exerting influence on the family business and by pursuing non
00:17:49economic goals through such business.
00:17:54And this is this has been, you know, considered the main driver for the distinctive behavior
00:18:03that family businesses exert or perform or have compared to professional non family
00:18:10businesses. Family businesses have non economic goals because there is a family behind it.
00:18:16If you shift the focus from the business to the family, then we think of a diversified
00:18:23portfolio of businesses potentially where not all of them, not all of the business are
00:18:29equally conducive to effective attachment by the family.
00:18:34Some businesses might be more core to such effective attachment.
00:18:38Some people, some businesses might be more peripheral to such effective attachment.
00:18:44And so they might just be invested and divested as as they want without much family
00:18:53influence. Within the family business perspective, you have this idea of succession,
00:19:00which is a transfer of ownership and or management power from members of one generation
00:19:05to the other within the business.
00:19:07So I am the father and I transfer and I'm the father and the CEO of the business.
00:19:13I transfer the CEO role to my son or to my daughter.
00:19:17I am the shareholder of the business.
00:19:19I transfer my equity shares to my nephew, to my aunt, to my to my children.
00:19:29And this is the classic succession process.
00:19:31While if we think about the business family and here I come to what Tulsi was saying, I
00:19:38need to consider intergenerational wealth transfer issues because it's not only about the
00:19:43business, it's also about the wealth.
00:19:46So about the stock of resources that are not mobilized in the business, but maybe real
00:19:54estate assets, liquid investments, illiquid investments, passion assets and so on.
00:20:02So another core issue for the business family is to sustain family entrepreneurship beyond
00:20:09the family business. So ensuring that next generation family members, for example, are
00:20:15entrepreneurs and are able to create businesses and create value for society.
00:20:20But this does not mean that these family members need to get involved in the family
00:20:25business. They can found different businesses.
00:20:29So as you can see, different perspectives and I think they are both important and both are
00:20:36useful. However, we know a lot about the family business perspective.
00:20:43We know less about the implications of having a business family.
00:20:49You know, one question, Luca, if you can just go back.
00:20:54I think it is such an interesting perspective, especially a third bullet point under the
00:20:59business family. And this is just my observation that when you're talking about the
00:21:07growth of the family business and the fact that the business family itself has this
00:21:12portfolio of businesses at various stages of maturity.
00:21:17It just strikes me and I find this perplexing.
00:21:20What is it that the family is going to consider as as the family business?
00:21:28Has to do more with the effective.
00:21:31Yeah. Right.
00:21:32I mean, I know of this large Indian family business, which has been typically into soap,
00:21:40into detergents.
00:21:42OK, and now they have diversified into various other businesses, cement and pharma and
00:21:48chemicals and all kinds of things.
00:21:50They've had some acquisitions in the U.S.
00:21:53as well. But the family considers the detergents as its business.
00:22:01And the ones which it has acquired, they are technically family business because it kind
00:22:08of ticks all the boxes of what is a family business.
00:22:11But the effective attachment is not there.
00:22:14So are you going to consider that as your family business is a very interesting question.
00:22:21And I totally agree.
00:22:23And, you know, there is plenty of implications here, for example.
00:22:28Right. So if you consider your family business as, you know, one business or your
00:22:38flagship historical business among a portfolio of businesses, then I suppose that.
00:22:48You might have different risk preferences for family business and for the other
00:22:57businesses, but at the same time, there might be additive effects in the sense that.
00:23:05If you are a family owner, you usually think you have an architectural vision of the family
00:23:11portfolio of businesses, right?
00:23:14So. You don't see your family business as being at the center.
00:23:21Only of your architecture and portfolio of businesses, but you see also different
00:23:28businesses that.
00:23:32Create value, create resources that can be invested.
00:23:38Within the core business or family, that's the galaxy.
00:23:43Exactly.
00:23:44Alfredo and Kotler.
00:23:45Just yeah, yeah, yeah, exactly.
00:23:49So and this is very interesting.
00:23:50And so and so much underexplored.
00:23:53So I think it would be very interesting to know more about this is very, very exciting.
00:23:58The effective part is very exciting.
00:24:00And there is also the family identity side, right?
00:24:03Because. Family businesses sometimes also provide a source for identity meanings for the
00:24:12family, right?
00:24:13So they say, you know, a family member can say.
00:24:17We are a family of.
00:24:20Detergent sellers or detergent manufacturers, right?
00:24:24And if this is your identity, then you have a certain view of what the market is, what
00:24:31strategy is and how you see yourself.
00:24:34And this obviously has implications for.
00:24:38How you run the business and how you run other businesses.
00:24:42But let me tell you this, for example, however, think about a family that says.
00:24:49And. We as a family are in the business of improving people's health.
00:24:58Right. So in this case, you don't have an attachment or a connection to just a one
00:25:07business line or one specific market, but you can source your pride, meaning and
00:25:15connection to not to a specific function of business, but to a multiplicity of
00:25:23businesses that are coherent with the purpose of your family.
00:25:28And this is very interesting, by the way.
00:25:30So again, this is, I think, one of the drivers that can enable or one of the mechanisms
00:25:36that enable family families to survive and thrive after they had a liquidity event,
00:25:45after they sell the family business.
00:25:49Which is so they become business families and they can become investors.
00:25:54OK, so.
00:25:58So. The family, the business family perspective is important to make sense of
00:26:05specific processes and phenomena and mechanisms that deal with wealth in general.
00:26:14The wealth of the family. We also know and you have plenty of examples of
00:26:23plenty of books that sustain this, that the family wealth and the sustaining and
00:26:36preserving family wealth across generations is not a technical issue or not entirely a
00:26:43technical issue. But most of the times it is a relational and emotional and a family
00:26:52in a sense that. There might be different problems that emerge that arise as families
00:27:00evolve and grow. I'm pretty sure you have heard the term or the expression shirtsleeves
00:27:07to shirtsleeves in three generations.
00:27:09Right. So you have one generation that built the business.
00:27:13The second generation tries to grow or preserve the business.
00:27:17The third generation either destroys the business or sells the business.
00:27:24This implies that there are some issues that are implicit within the family development
00:27:32over time, the family business development, the business family development over time.
00:27:37And what are these issues?
00:27:38So one issue could be the increasing number of family branches that lead to the exclusion
00:27:44of specific branches in the management of businesses or wealth.
00:27:47Or the decrease of the sense of legacy, identity and unity and purpose that family
00:27:55members feel and experience over time.
00:27:59Right, especially if you have sold the family business.
00:28:03Because you see yourself only as an owner of money, an owner of wealth, but you don't
00:28:10you're not building business, you're not an entrepreneur, you just own money.
00:28:16You can have conflicts between cousins and between branches.
00:28:20You have decreasing family social capital.
00:28:22So you don't have that strong, effective ties between family members that your family
00:28:31used to have a few generations before.
00:28:34But you have many relatives, many family members who, however, are not equally strong
00:28:43ties to you. Right.
00:28:45There might just people that you meet once a year or once every three years, they might
00:28:51or might not share your surname.
00:28:54You might have a very old ancestor in common, but not much, not much else.
00:29:04And there is also the detachment of next generations from the businesses or even wealth
00:29:09shame. So being ashamed of owning wealth.
00:29:16And I think this is also very culturally specific and it will be very interesting to to
00:29:21know more about it. And in this regard, I suggest the books by Jim Grubman and Dennis
00:29:28Jaffe on on this wealth shame.
00:29:35So what were the names you said?
00:29:37So one is Jim Grubman, G-R-U-B-M-A-N.
00:29:45And the other one is Dennis Jaffe, J-A-F-F-E.
00:29:53That is Grubman, Jim Grubman published a book a few years ago called Strangers in
00:30:01Paradise. It's very interesting because in that book, he says.
00:30:08While wealth creators are immigrants in the land of wealth.
00:30:16Because they may start from a low class or middle class background, and then they come
00:30:21to have become wealthy.
00:30:24The next generations, the heirs are usually natives of the land of wealth because they
00:30:35already they are already born and socialized within that system, within that broad set
00:30:40of norms. And of course, this is important to consider.
00:30:46So family office.
00:30:49So we talked about the importance of having a business family perspective and that this
00:30:58perspective implies a focus on the wealth of the family.
00:31:01And the family office is the organization that is dedicated to manage the wealth of
00:31:07the family. And in this in this article, we define the family office more specifically
00:31:12as an organization that is dedicated to providing tailored and holistic service to
00:31:17respond to the family needs in order to maintain transgenerational control over the
00:31:22financial, human and social emotional wealth of the family.
00:31:25So, again, there is this idea of wealth preservation.
00:31:31If you have a family office, you have more chances to ensure that your wealth is
00:31:36preserved across generations because.
00:31:40Along the development of the family, the business family over time, you have
00:31:45problems, you might you might experience problems, issues, conflicts, traumas that
00:31:53split the family and destroy the unity of wealth, essentially.
00:32:01So the family office is a is a is a tool that families can use to counter this this
00:32:07trend. Why are family offices created?
00:32:13You might have different functions of the family office.
00:32:15You want to preserve the heritage and the legacy of the family.
00:32:19You want to ensure wealth and prosperity across generations.
00:32:23You want to establish family governance structures like a family constitution or the
00:32:28family council. You want to provide a strategic guide to family wealth, especially after
00:32:33the sale of the family business.
00:32:36You want to develop an institutional approach to investments.
00:32:39You know, family offices are usually dedicated to asset allocation and investing and
00:32:46managing wealth across asset classes or and or diversification.
00:32:53So the function of the family office might be diversification of wealth from the
00:32:59business or if you don't have a family business, of course, diversifying the wealth
00:33:03itself. We also know that the family office, which is here, I'm talking about single
00:33:13family offices, so organizations that are wholly owned by a family.
00:33:22And they're an organization that provides services only to such family.
00:33:28So this idea of the family office is very old because we have been dealing with with
00:33:36wealth preservation since people have started to accumulate wealth thanks to the vision of
00:33:41labor. So it is a thousand years old concept.
00:33:46But the family office as an organization, as we know now today, started around in the
00:33:5319th century in Europe by aristocratic families for the function of diversifying real
00:34:03assets, real estate assets.
00:34:06And a few decades later, also U.S.
00:34:10Anglo-Saxon families started to implement a family office.
00:34:17However, I would also say that while in Europe, the family office has a an aristocratic
00:34:26origin that is built by noble people of European aristocracy.
00:34:32In the U.S., such families are not noble families, but in the U.S., family offices are
00:34:40born due to industrial families, to entrepreneurial families who didn't have
00:34:48inherited money since the 13th century, but they built wealth in the mid-19th century and
00:34:58they built, of course, a lot of wealth, such as Rockefeller, such as Pritzker, such as
00:35:07the Phipps family and so on, the Morgan family and so on and so forth.
00:35:12All names of families that are very well known in around the world.
00:35:21Let me just take, for example, the Bessemer Trust, which is now a professional service
00:35:28company. It was founded in 1907 to administer a part of the wealth, 50 million dollars
00:35:37of that time.
00:35:39Of course, in real terms, it is way, way more today, received after the sale of the
00:35:47Carnegie Steel Company to J.P.
00:35:48Morgan. And it was set up by Henry Phipps, which was the partner of Andrew Carnegie in
00:36:01the Carnegie Steel Company.
00:36:06Any questions so far?
00:36:07No. No.
00:36:08OK, so this is a.
00:36:12Any questions? Just one minute.
00:36:14Yeah. Francisco, is there any question?
00:36:20OK, he wants to write.
00:36:23OK, I'll proceed and then and then I'm just going to do the question.
00:36:28So. Here we have a representation of the family office ecosystem, so.
00:36:38Very basic. On the one hand, you have the family office, which is this.
00:36:43Organization is captive and provides professional services to the family.
00:36:50And on the other hand, you have family principles that own and control the family
00:36:55office. So in theory, what happens is that family principles, which are usually, you
00:37:03know, the senior generation of the family who holds the control over the strategy and
00:37:11the vision of the family ownership group.
00:37:15Sets the objectives, monitors and gives a strategic vision of where to go next, you
00:37:24know, in terms of of of strategy.
00:37:28I think Francesco is saying, writing a question.
00:37:34So are there fundamental differences between European family offices, American ones, I
00:37:38mean, purpose, operational and so on?
00:37:40So I think so.
00:37:45So in terms of purpose, I really don't know because it is very specific and it's very.
00:37:54Very, very ideographic, so it cannot be generalized, but usually American family
00:38:03offices are are larger.
00:38:06On average, so and this is interesting because the US context have been captured by, you
00:38:18know, many decades of saying that.
00:38:23Under one billion dollars, you cannot have a family office.
00:38:27While so all the other families that under one billion usually don't have a single
00:38:31family office. So in the US, you generally have these very large, very structured, very
00:38:38organized family offices, while in Europe there is more heterogeneity in the sense that
00:38:44you have also smaller family offices.
00:38:46And then also in the US, there's also, I think, a bit more attention to intangible aspects
00:38:54because the American, the American context has been for decades now, again, trying to
00:39:04make it very, very clear that there is a family office, there is a purpose, there is a
00:39:11the American context has been for decades now, again.
00:39:18Focused on building a conceptual concept of wealth that goes beyond financial wealth and.
00:39:28Economic wealth, so spiritual wealth, intellectual capital.
00:39:32OK, so OK, so let's go back to the presentation, this is the more or less the situation where
00:39:43describes who owns the family office, who gives services to what and so on.
00:39:50The point here is, however, that there is an elephant in the room that our next generation
00:39:57family members. And why is it important?
00:40:02It is important because the next generation family members are to be principals.
00:40:09So they are family members who will become principals eventually, but at the moment,
00:40:16they have low power within the family ownership group because they might not be involved in
00:40:23setting the strategy of the family office or the family strategy in general.
00:40:28And if they're not involved in controlling and setting the strategy of the family office,
00:40:36they have virtually no authority over the location of capital.
00:40:42And this is something that it is very, very important.
00:40:50And it is very important in family offices because oftentimes family offices are run with
00:41:01a very old mentality because owners and principals are old.
00:41:06So they are sort of resistant to change. But we see it also in the family business
00:41:12as well, of course. Right. So we have many cases of family businesses that are run by
00:41:19you know, senior gen family members. And when the next generation family member comes in,
00:41:27they try to renew everything. Right. But at the same time, it is difficult because there
00:41:31is also always the founder's shadow. We know that the shadow of the founder is very persistent.
00:41:38And so it limits the scope of action of next generation family members.
00:41:44So now I'm not going to cover the operational aspects of the family office, but I want to
00:41:56since the topic of today's purpose in the family office, I just want to make a few disclaimers.
00:42:04So let's try to understand what is not the purpose of the family office.
00:42:09So the purpose of the family office is not a purpose statement.
00:42:15It might be a statement, but it's not overlapping.
00:42:20The purpose of the family office is not necessarily the purpose of one family member.
00:42:27And the purpose of the family office is not the purpose of the family business.
00:42:31Okay. Why is that? Because the purpose of the family office,
00:42:40the purpose statement is just a statement and not a shared belief necessarily.
00:42:46The family office gathers multiple family members. So it is connected to the family vision,
00:42:54but not the one family member vision for the family itself. And the family office,
00:43:02since it deals with the management of wealth, cannot be entirely consistent with the purpose
00:43:07of the family business. Might be, might not. Usually it is not consistent with the family
00:43:15business purpose. So there are different perspectives that we can use to make sense of
00:43:28what is purpose in the family office. And the research has shown two perspectives.
00:43:36And again, disclaimer, these are perspectives. So I'm suggesting the inside out perspective
00:43:46on purpose and an outside in perspective on purpose. I build on John Almond's typology
00:43:53of organizational purposes, but they're not distinct purposes. They're just perspectives
00:43:59that we can use to make sense of the purpose of the family office.
00:44:05So the inside out purpose of an organization is consisting the shared beliefs about
00:44:16why the organization does what it does. It is usually connected to the character of the
00:44:21organization, to the historical character of the organization. So how the organization
00:44:27built an image and an identity across time, right? So if I say, for example, Patagonia,
00:44:35every one of you might connect it with a very sustainable company that is
00:44:41authentic and committed to a more sustainable world. This is historical character.
00:44:48Purpose enables distinctiveness and specificity for each organization because
00:44:54since it is built over history by one organization, it is distinctive.
00:45:01A purpose in one organization is different from the purpose in another one.
00:45:05Why is that? Because they just have had different trajectories by definition.
00:45:10And most importantly, an inside out organizational purpose also is supposed to generate meaning,
00:45:15worth and value for the work that employees and managers do. And here I quote a janitor
00:45:22in the NASA agency during the John F. Kennedy tenure. So during the
00:45:32lunar explorations and missions, there's a janitor who said, I'm not bumping the floor
00:45:39and putting a man on the moon. So there's this sense of connection between what you do
00:45:47as a day-to-day task with the ultimate purpose of the organization. So why you do it?
00:45:53You don't do it because you want to get money necessarily or something else or because you want
00:45:59to make your boss happy, but it is because you are fulfilling the purpose of the organization,
00:46:06which in the NASA case was putting a man on the moon.
00:46:10Inside out means that starts from inside and it is connected to the outside.
00:46:20The other perspective is exactly the opposite. So it captures the purpose as the outcome
00:46:29of societal pressures and discourses. And usually it is not the purpose of one organization,
00:46:38but it's the purpose of one organizational form. For example, what is the purpose of the
00:46:44corporation? The general answer to this question, maybe not now, but a few years ago, it would have
00:46:54been shareholder value maximization, right? This is the purpose of the corporation.
00:47:01It is evident that not every corporation has this purpose because every corporation has
00:47:08a distinctive activity, a distinctive way of conducting business and so on. But if we think
00:47:15about the corporation as a form, as a template, then it is possible to say that the purpose of
00:47:22the corporation is shareholder value maximization. And this idea of shareholder value maximization
00:47:29is not equal for every corporation and it is part of the institutional fabric of the field
00:47:35that such form inhabits and as such generates pressures to maintain legitimacy.
00:47:42So a few decades ago, if you were a corporation and you claimed that you were not maximizing
00:47:51shareholder value, you would have got into big trouble by your shareholders, right?
00:47:55Legitimacy, right? When you try to diverge from the legitimate practices and what it is appropriate
00:48:03for an organization to behave, then you incur into costs, stigma, illegitimacy, and so on and so forth.
00:48:13This also means that this purpose can change over time because logics change. Logics that
00:48:21operate in societies change. So today, the shareholder value maximization purpose is not
00:48:28fully legitimate anymore because we know that there are stakeholders concerns that have started
00:48:34to gain legitimacy. And the 2019 Business Roundtable statement on the purpose of the corporation
00:48:41clearly says this, that the purpose of the corporation is not to maximize shareholder value
00:48:48but also to consider stakeholders concern into business conduct.
00:48:59Now, how does it relate to impact investing and to, you know, shifting the purpose of
00:49:07infamily offices? Well, my claim here, my argument here is that the impact investing revolution
00:49:15is shifting the outside-in purpose of the family office from wealth preservation only to something
00:49:24else. And why is that? Because the family office as an organizational form have been predicated,
00:49:34built over the purpose of preserving wealth. While with impact investing, which is a financial
00:49:42practice that aims at generating a measurable social impact alongside a financial return,
00:49:49you have a combination of different logics where one is more established while the other one is
00:49:56more emergent. The impact investing logic is different from traditional investing and from
00:50:05traditional philanthropy. Impact investing is not a very consolidated field yet, so there is still
00:50:15a lot of ignorance and, you know, experimentation with what impact investing is actually in practice.
00:50:25You need to have new instruments, tools, measurements, but also changing the mindset,
00:50:32changing what your money is about. And also, and more specifically for family offices,
00:50:41impact investing might come across to some family members as a practice that negatively influences
00:50:47the rate of return on investment and therefore on the amount of resources that are under the control
00:50:52of the family principles. So it might be perceived and framed as a direct enemy to
00:50:59the sustainability of family wealth. And I think this is why this is so difficult to integrate
00:51:08impact investing. Yeah. Luca, can you just go back to that inside out versus the outside in perspective?
00:51:14Yeah, sure. So you're basically saying that the family business purpose might be inside out,
00:51:23whereas the FO has an outside in purpose? So I think, no, so here I'm only talking about the
00:51:33family office. Yeah, I understand that. Yeah. Why I'm asking you is because in your previous slide
00:51:40you also spoke about the next gen coming in, you know, that slide which you had. Yeah, yeah.
00:51:47So the nature of the family principle is then going to, the constitution of the
00:51:55family principles will then change the kind of purpose of the family office itself.
00:52:05Right? Because if you have a next gen, which is far more socially sensitive,
00:52:11then whether the organization is going to transform
00:52:17is my question, or is it going to be only the FO which transfers?
00:52:23I have a process model on this.
00:52:28Okay. So maybe I can go directly to this, which is my theorization.
00:52:35Is this a 2021 paper? No, this is a working paper that I'm currently
00:52:46working on, which is close to submission. So here I am proposing a process model of how
00:52:56next generation drive purpose change in the family office. So we know that family principles
00:53:04are usually entrenched in the current strategy of the family office. We know that next generation
00:53:11family members have comparatively low authority and power over the family office.
00:53:19And also next generation family members and the family principles might have
00:53:27diverging visions about what is the actual purpose of the organization
00:53:34and whether it is appropriate to engage in impact investing or not.
00:53:41So in this process model, I suggest that next generation family members engage in a four stage
00:53:53process where it starts from a sense of discomfort where next generation family
00:54:00members experience the contradiction between the position of the family member as a member,
00:54:07a wealthy, rich member of a elite family and the dominant logic of the group that she inhabits,
00:54:17that is the wealthy family. And so this sense of discomfort is usually connected to
00:54:30a discomfort regarding the capability of the next generation family member to do anything.
00:54:38And this is the problem that heirs have usually. They inherit money that did not contribute to
00:54:45make. And so they find themselves with these large buckets of money, but without any real purpose.
00:54:54So this sense of discomfort between the current situation and their desired future state is what
00:55:04leads them to initiate change. And in order to initiate change, they need to usually engage in
00:55:14political tactics to integrate an emerging and not legitimate logic within the family office.
00:55:24How do you do that? They usually build sub coalitions. They engage in issue selling
00:55:29tactics vis-a-vis the family principles. So they convince them that they are competent in what
00:55:36they're doing, that they can do a lot by gaining small wins over time and to gain momentum for
00:55:45change. The third phase is justifying change. We have seen in our research that
00:55:54next generation family members cannot only engage in political tactics. So tactics that lead to
00:56:03a shift in resource allocation and power position within the family ownership group.
00:56:15So it's not only about influencing decisions. It's also about justifying such decisions.
00:56:22And we have seen that there are at least two rhetorical history strategies that enable next
00:56:28generation family members to connect their activity with the history of the family.
00:56:35And I see here two strategies. The one is picturing continuity with responsible ancestors
00:56:44and saying, you know, our ancestors two centuries ago was a very sustainable driven person. And now
00:56:53we're just adopting his or her vision to today's world. So we are just renewing the legacy of our
00:57:04ancestors. The second strategy would be repent in the sense that this is specifically important
00:57:12in cases of legacies of irresponsibilities. So whenever you have family businesses or families
00:57:20who have these legacies of irresponsibilities, such rhetorical strategies are led towards
00:57:32repenting, towards making amend of the past and start again, take responsibility and start again
00:57:39on a blank slate. The fourth stage is also the main thing. So initiate change, justify change.
00:57:48So you convince the family principles that impact investing is good. It should be implemented,
00:57:54it is implemented. The fourth phase is about maintaining such change and ensuring that such
00:58:00changes are not just ephemeral and momentaneous, but they are actually long lasting. They're
00:58:06producing real effects over the long term in the family office. And here we theorize three main
00:58:14mechanisms. The one is recreating intergenerational family unity, which might have been broken
00:58:21during the previous stages, creating family and investment governance structures like an
00:58:27investment policy statement, or a family constitution where everybody is on the same page
00:58:33and everyone agrees with and ultimately generating a common frame across family members
00:58:39or the purpose of the family and the family office. And you can see below, and we don't have time but
00:58:45for your information, you see below also potential disengagement consequences in a sense that
00:58:55not all processes of integrating impact and change in the family office are successful,
00:59:02but you can also have disengagement by the next generation of family members, right?
00:59:08It can exit the family, it can stay loyal to the family logic as it is and not initiate
00:59:16change and maybe leave with a sense of discomfort for his or her life. And of course this also
00:59:24creates a lot of trauma as well and dysfunctional psychological problems. You can go back to the
00:59:31world order or it can breach the family identity. So all of them, I see that they might be also
00:59:36potential intended consequences of the process. So this is what we have, this is my process
00:59:47model and my working paper. And I know that we are already late, but if you have any question
00:59:55either here, you can do it. Of course, feel free to connect with me on LinkedIn or send me an email
01:00:03and I would be very glad to respond to your questions. Thank you so much.
01:00:07Thanks Luca, thank you so much. Any questions?
01:00:10Adriana, hi. Adriana has dropped off and she's there.
01:00:30Francisco has a question. How many FOs are in this process?
01:00:34In percentage? Well, it's very difficult to do any kind of estimate in this,
01:00:45but at the same time, I think the impact investing field accrues to a few trillions.
01:00:55So family offices are considerably shifting to impact investment. Not all of them do. Some of
01:01:05them might just use traditional philanthropy and this is very, you know, very like easiness is that
01:01:15families have been doing this forever. So I cannot provide any figure.
01:01:27Thank you, Luca. Thank you so much. Thanks, Francisco, for that question.
01:01:31I think it's a very interesting work in progress, Luca, and wish you all the very best.
01:01:37I would have my own views on what I'm seeing in India, because I'm not so sure because this
01:01:45gives a certain, and that's my opinion, it gives a certain unidimensional picture of the next gen
01:01:52coming into the FO. And the way I look at it is that, and anecdotally, what one has seen
01:02:02is this conflict, not just of the next gen, but among the next gen.
01:02:15Right? It's not just a conflict. It is not just an intergenerational conflict,
01:02:20which leads to cessation, or, you know, the next gen trying to breach the family identity,
01:02:28to breach the family identity, because that in itself, holds the key to a very different
01:02:35set of conflicts. Yeah, yeah, I agree. You know, so, and what we are seeing here is also a lot of
01:02:45the next gen using their wealth, private wealth, to kind of run with whatever they want to do.
01:02:54Yeah, the family office, then kind of focuses on a family purpose. And that's the reason why
01:03:00I was asking you, is there a difference between the purpose of the family itself changing,
01:03:07which then leads to an FO purpose being different? Or is it that the FO is transforming from an
01:03:13outside into an inside out? So I think there's a lot of scope here. Yeah. And, you know, the topic
01:03:21is just emerging. My take on the last point is that in phase four, in the maintaining phase,
01:03:34the outside in and the inside out purposes are coupled together. Are? Are? Are coupled,
01:03:40coupled together. So in a sense that on the one hand, you have the family office that integrates
01:03:47impact. On the other hand, you have the restoring of family vision that cuts across
01:03:54generations and, you know, unity. Right. Mahesh, that was the question that I had asked also.
01:04:04How does this dynamic change? Yeah, no, this is, yeah, no, this is, it is a,
01:04:12um, I mean, it is, it adds another layer of complexity. I think I tried to capture this
01:04:21in the building sub coalition mechanisms. So it's not just, I agree, it's not just about
01:04:29next generations versus the family principles is also being able to bring people on your side.
01:04:37And this might come from your cohort, your generation. So I agree. And this is only for
01:04:48the family office change. Of course, you can also do secession, right? You can exit to the family
01:04:56strategy and the family structure, and you can pursue your own investments. That's perfectly
01:05:02fine. But in this way, you don't initiate change, which is fine as well. You know, it's just,
01:05:10you know, different, different outcomes and different processes. Yeah. Thank you for your
01:05:15question, by the way. Thank you, Lucas, so much. It gives us so much food for thought, I think,
01:05:20because this is, as you said, a completely emerging topic. Maybe we can just stop the
01:05:25screen share. Yeah, sure. Thanks to all of you who were here today. Thank you all for being a
01:05:34patient audience. And I believe that, you know, we are going to see some more papers from you,
01:05:41Luca, on this. I hope so. We look forward to it. Thank you so much. Thank you all so much. And
01:05:46thank you to Luca on behalf of SVGMR-CFP. Thank you. Bye-bye. Thank you. Bye.