Academic Insight: Values Affinity and Beyond (part 2): Managing the Partnership between HNWI and Family Business

Managing Partnership between HNWI and Family Business

In this article we review some important elements of the mutual attractions and the consequential key issues in managing the relationship over time. How do you keep the emotional flame alive over the longer term? How do you manage and eventually increase the emotional rewards part of the equation to satisfy the HNWI investors?

Stephan Schmidheiny Professor of Entrepreneurship and Finance

KPMG Switzerland

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In a prior article entitled “value affinity and beyond”, we analyzed the results of the KPMG Family Business Global Survey to find great support for the natural affinities between HNWIs and family businesses. Many HNWIs were either rooted in family businesses to start with, having inherited money from a family business or still being connected to one. Others were first generation entrepreneurs not having formally transitioned to a family business model on their own yet. In either case, the consequence was the same: an amazing convergence of values, cultures, processes and perspectives. Prior articles in this series focused on this convergence of values and how to make them work for you, as investor looking for investment opportunities or as family business looking for capital for growth. Below we review some important elements of the mutual attractions and the consequential key issues in managing the relationship over time. How do you keep the emotional flame alive over the longer term? How do you manage and eventually increase the emotional rewards part of the equation to satisfy the HNWI investors?

Values Affinity Redux

As outlined earlier, HNWIs were most appreciated by family businesses as potential capital providers as they shared a longer term view on investments, demonstrated patience when it comes to exiting, attributed value to the quality of the relationship, demonstrating both a high level of trust, great flexibility and a good level of business acumen. The convergence of values between the two parties is clearly one of the most interesting findings of the global survey, suggesting the possibility of extending the deal-making abilities of the two parties for the benefit of both.

This emotional dimension of the relationship is the glue that holds it together and justifies a number of financial trade-offs. In a way, these investors are willing to accept emotional rewards with a face value almost equivalent to financial rewards, or in various combinations that prove very attractive to the family businesses. Affiliation is both the reward and the mechanism through which flexibility and convergence of objectives is achieved. In the next section, we examine what actions would lead to the sustainability of the affiliation perception.

Affinity Sustained

Affinity and emotions are soft factors that do not preclude professional management and governance. In fact, the very fact that the terms are a bit lose in their definition underlies the importance of trust in the relationship, trust which can be ascertained through robust control mechanisms. Trust… and verify! Affiliation also implies involvement. How best to demonstrate trust but to involve intimately the partner in the key decisions of the organizations? This can be done through the usual governance processes and bodies but also the unusual ones, those closest to the family heart. A number of family firms with outside capital have taken on the habit of inviting those precious partners to key family activities, taking them on as quasi-members of the larger family assembly. Outside perspectives on boards, panels and committees can be invaluable contributions, especially in times of rapid change and transformation. Outside investors not only can provide this perspective but expect that deep involvement as part of an emotionally driven relationship. Be ready to make them part of more than the shareholders’ assembly: they are buying into the family as much as they are investing in the business.

To summarize an argument made previously, when the family business is building its value proposition on a strong alignment to its family values, it must also make sure that the investor will be full exposed to those values, upfront and personal, not just cosmetically. You cannot trade emotional returns for real ones without actually delivering them.

The Secret of the Relationship… is No Secrets!

There is a natural interest by HNWIs to invest in family businesses. Their long- term investment horizon, their commitment to strong values and legacy, their deeply personal relationships, etc. are very attractive to many outside parties. To help make that relationship last, one has to recognize that the emotional rewards need to be earned as regularly as the dividend checks. The hard work starts after the investment has been completed: this is when one needs to go beyond the passive alignment of values to an active governance and relationship participation. The secret of a lasting relationship is, not surprisingly, an active management of the elements that made it flourish in the first place, i.e. combining solid emotional benefits with best practice governance. The burden of managing that relationship is not light, and to a large extent should be treated as an additional “cost of capital” from HNWIs. But when one takes into consideration the additional benefits brought about by this category of investors, it is easy to see that the net balance is still massively positive, which can provide a superb return on the emotional investment.

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