The St Louis Trust Company Multi-Family Office

Mike0:00Welcome to The Business of Family. I'm your host, Mike Boyd. Multigenerational wealth creation involves so much more than capital accumulation. The most successful families cultivate values, stories, knowledge and resources to pass on to the next generation, and they do it very intentionally. On this show I sit down with members of some of the world's most interesting business families to hear how they do it. To see where your own family stands, take the Business Family Diagnostic at businessoffamily.net.

0:42you. Spencer is a principal with the St. Louis Trust Company, a multifamily office for over 50 families in the United States, managing in excess of 10 billion US dollars, where he heads the family business advisory practice. Spencer is also an adjunct lecturer in family business at the Olin Business School in Washington University in St. Louis. Spencer, you bring a vast amount of experience in the family wealth space to this conversation.

1:16I'm really looking forward to learning more from you today. Thanks so much for being with us.

Spencer1:20Love to be here. Looking forward to it myself.

Mike1:22I'd love to start with a brief overview of your background, your work at the St. Louis Trust Company and Olin Business School, and how you found your way into these roles.

Spencer1:33Well, I think today, like everyone, it's a long journey where you end up. And I think this is definitely my last stop or stops. I've taught for many years at Washington University in the law school and in the business school. So I had the opportunity. I was asked by the dean to consider their inaugural effort in family business education to their MBA program about seven years ago.

1:56It was a student initiative and the dean took it up. And now we have a center and an endowed center of all things. We have faculty members doing research. So it's really turned into something pretty remarkable. How I got into it was my professional background was an advisor, both from a securities lawyer point of view, corporate finance point of view in the law, and then 22 years in investment banking, working in what we call over here, the middle market.

2:24And that is almost 100% dealing with certainly private companies. And of those, 90% would be family businesses. So I really like to say that when I was asked by the dean to teach this area, I thought, oh boy, I must know a lot about this. And I was rudely awakened. I didn't know much at all. So it's been a real exciting journey for me to pick up on all the academic work.

2:50And this is a very new profession. I mean, it really mid 80s is when it sort of flourished, but it's really picked up. I mean, now globally, there are hundreds of high quality academic programs around and professors. And there's a lot of new knowledge and new data all the time. So that's been been really fun. And there's quite a network of people in that regard.

3:10How it ties into the business that I'm in. When I retired from investment banking, a good friend had started a multifamily office here in St. Louis in the form of a trust company. We do act as a trust company, but we're what we call in the United States a multifamily office. And the concept is we're basically a single family office for multiple families, and we're staffed to serve the needs of each family independent of the other ones. But the benefit of it is the combined knowledge and sort of the synergy of working with multiple families that are all have similar characteristics. They're all extremely wealthy. They're all over the United States, coast to coast, top to bottom. And of that group,

3:57about 50%, say, are multi-generational families. And then the other 50% are relatively new wealth, often first generation, and more often than not, family business owners. So we have an advisory component of our offering of services. So the way we're set up is to be competitive. We're a smorgasbord of things families with complex affairs need to have. And that list, frankly, gets longer every day. But unfortunately for us, the fees don't change. Our fees are what they are.

4:31And the thing that's really fun about our company is we have roughly 55 families. We have 55 employees too. And we're a majority owned by the families that we represent. So we have a core group of owners that actually are our clients and they control the firm, they control the destiny firm, and they certainly control the key thing from their point of view. And that is it would never be sold because the whole concept is when they came here, they said, we don't want people selling this product. We want the relationship people to be knowledgeable and to serve us forever. We don't want the rotating chairs going on. And by all means, we don't want to be sold

5:13again. If you talk to, in the United States, certainly, if you talk to wealthy families, their account has, without them doing anything, has moved from place to place for a number of years. And so this is the idea here, and the families are going to insist on it, is this is the last stop. So it's really a great environment where we have skill sets that are every kind of financial degree you could possibly have from investment expertise to accounting expertise to tax expertise to legal expertise. So it's a great opportunity. And the way it fits with what I do at Olin is my background, and I've mentioned this before in terms of the ways people

5:54approach family business education, you can go from a organizational behavior or psychology perspective, which frankly is the predominant discipline in family business education. You can look at it from a strategy perspective, which there's some high-end strategy people that sort of get the opportunity there. And then there's a smaller universe of finance people that look at it from a value creation, value destruction perspective. And that's sort of where I am. And it fits with my expertise. I don't try to be a psychologist because that would be a bad thing to try to be. But I do think I can bring to the table a lot of meaningful observation, advice, and direction by using my corporate finance background as it relates to

6:43family business. And that's been a lot of fun. So that fits into our, what we call family business advisory practice, which is a component of what we do. And I feel sorry for the families that get advice when they don't really know what kind of advice they're getting. I'm not thinking good or bad. It's just what discipline is it coming from? Because that could cause them to walk away from a wealth of knowledge because this is not their thing when they really do need the advice that they just have the wrong person giving it to them. So I hope people use your program to learn more about what's available, and I hope I can contribute to that.

Mike7:16You already are. Thank you, Spencer. One thing I'd love to follow up on there, you mentioned the ownership of St. Louis Trust. I wasn't aware of that interesting structure. It almost makes me think of a Vanguard structure.

Spencer7:32It's funny you say that. We're a combination of co-op and an employee-owned firm. Vanguard is a co-op owned by the customers, and that is exactly the structure we have. We can talk a little bit later about this whole thing of where family businesses go, there's this issue of how do you start a family business, first generation to next and all that. And my thesis that I've developed teaching is that multifamily businesses are acts of inadvertence in the initial years or the initial generations. They become, they're inadvertent and they're usually force of necessity. Somebody passes away, somebody's got a man in the office or the grocery store, whatever it is. And then it becomes more opportunistic as the family gets a little

8:18bigger and people get a little older and assuming nobody dies. And then by the time you get into the third generation, it's more process driven. And then it becomes ultimately strategic. And I think that's the exciting part is to, and this came about in the class really by accident. When I got done with the first year, I said to the students, I said, this is going to be a great journey for I said, what did we learn? What did we learn from having 15 companies come in here and tell you everything that you wanted to know about them that they were probably never told anybody before?

8:51What did we learn? We put a big grid up first to seventh generation. We had two that were seventh generation companies, 1836. And I think the other one was 1845. St. Louis is a real old river town in the middle of the United States. We had a lot of immigration here going to the West. But it was fascinating to see this grid when you laid out the generation of the companies and then you identified the standard problems of governance, succession, control, these basic things.

9:21It was just fascinating to see that you wouldn't get to the seventh generation if a lot of that stuff had not been tended to early. And that's why the thought that you have of helping people in the first generation is so valuable, because there is a whole bunch of things that literally are cost free that you can do in the beginning.

9:42And if you have them set up, your chance of getting beyond the second, third generation is that much greater. I like to say that I call this basket of things hygiene. If you take care of the hygiene, you have a good chance of going further down the road. If you don't take care of the hygiene, you have no chance. And the real issue, if you have the hygiene, is do you have the vision, strategy, and purpose and family culture? Do you have those things? Because at the end of the day, it's not about having a board and all that. It's about the quality of the people, the vision, the culture, and the purpose of the organization. That's what creates great companies of all kinds.

10:26And family businesses are just a large subset of great companies in the world. I mean, a very large one. And it's sad that they don't get as much exposure as they deserve. It's not jazzy. I know in a business school, I don't know if you've encountered this, but I mean, you say you're going to have a family business course, everybody runs the other way.

10:44Now, they don't do that with my course because I've turned my course into something very different. I call it, instead of family business, I call it ownership insights. And through that, we cover all the jazzy stuff, Facebook, Alphabet, Alibaba, you name it, the top tech companies. Because interesting enough, they all have the structure that's implicit in a family-controlled business.

11:09They all have it. And it's interesting to see how that works out. And so learning about it is highly relevant to all kinds of businesses today.

Mike11:18So I'm curious to touch on this ownership insights. As you say, you've renamed the course to try and get students in the door.

Spencer11:25Fool people, yeah, trick them.

Mike11:28You're using marketing effectively to get these young people in the door. I like it. But I'm curious, the insights that you draw between the Facebooks and the alphabets of the world to the family businesses, what common characteristics do these enduring companies?

Spencer11:42Oh, I mean, so the key characteristic is total control by one person. And this is a big thing in the United States, but we have super voting stock here. A lot of countries don't have that. But in the United States, you can own 100% of the vote and not own any of the economics of a company. So Zuckerberg at Facebook 100% controls that company because he's got the super votes.

12:07And we could get into that in some detail. In Korea, you can't do that. Indie, you can't do that. So we have all these tech companies, matter of fact, just about every company that goes IPO in the United States has a dual class stock structure, which is the same thing if you'd have if you were at Ford Motor Company or Campbell Soup or any of the other great what they call family controlled public company. And that's that's 180 companies in the S&P 500 ballpark, something like that, Our family-controlled public companies, they have the same governance and succession issues that a private family business has with the added attraction that they have a fiduciary responsibility to a whole bunch of shareholders.

12:57And if you're a shareholder of those companies and you do not understand who owns it, I tell the students, there's not an MBA student that I've encountered yet that knows who owns anything. They just, that's not something they teach. And the reality is ownership is what it's all about. If you own something and control it, you run it, or you're certainly responsible to run it.

13:18And so going back to my specialty, when you run it, as you control it and as you own it, are you creating value or destroying value? And how do you do that? And so that gets into the whole question of taking ownership and control and management and getting them aligned to achieve a result that the stakeholders broadly define want. And this is where it really gets fun.

13:48If you're a stakeholder of Facebook, we know what you want. You want a higher stock price. We know that. But if you're a stakeholder in a family-controlled business, if you're in the family, it's not so clear that you want all the money. You might want dividends. You might want reasonable dividends. You might want reasonable growth. But you also might want not to have a family fight over who owns the company.

14:13There's this concept that is just, I love this. I call it spoils of ownership. So going back to this concept of an owner and ownership insights, okay, why do you own things? What's the benefit of owning things? And when you differentiate the components of what ownership can mean to somebody in a family, you get all kinds of things.

14:35And you get beyond money real quick. You start with a job. Then you start with a salary and that. And then you might go to dividends. Then you might go to capital appreciation. But how about the prominence of the company in the community and how that enures to your benefit? But how about the social connections that are derived from the family patriarch being the head of everything in a community and standing there cutting the ribbon at the big university and all that?

15:04So there's this whole concept of, and this is a big topic in family business today, of socio-emotional wealth. Huge issue. And fascinating to talk about. For short, SEW, because you get all balled up saying it. But there's money wealth and then there's SEW. And I would argue, and I mean, I think it's true, and certainly in most families where there are issues, it's how the socio-emotional wealth, SEW, is getting shared is just as prominent as how money is being shared and people feeling left out.

15:41and all that. We can get into why that is, but it's a very big deal. And that distinguishes a Facebook, but the concepts are all the same and how they get control is all the same. And what the laws are, interestingly enough, are all the same. It's just that they tend to get in force more in the public company space.

Mike15:57One thing you talked about there was the creation of wealth versus destruction of wealth in these family-owned businesses. And you come at this from a corporate finance perspective, or at least a background rather than, as you said before, a psychology or a counseling background. So what are some of the key levers to creating wealth in these family-owned and controlled enterprises when you're looking at it through the lens of corporate finance?

Spencer16:25Well, this is a whole topic in and of itself and one worthy of a whole separate business school, frankly. I call this the tyranny of the internal rate of return versus the creation of real wealth. So I don't think there's anything better to own than your own company. And the ability to compound earnings over a, and I'm talking about a successful business. The predicate of having a multi-generational family business is to have a business that deserves to be multi-generational. And so this is not Pollyanna stuff. It's got to be a good business. But once you have a good business, the question should be, why would you ever sell it? What would motivate you to sell it. Now, I'm a believer that when it's time to sell, that's great.

17:14And that's not a failure. And anybody who thinks that's a failure is out of their mind. This is a key concept in family business wealth management. People don't see it. Family business owners have all their eggs in one basket. And if they just happen to be in a COVID damaged business, having all your eggs in one basket, you know, this is an extreme example, But it's not a good thing. And frankly, to succeed over time, long periods of time, 100 years, the successful families have extracted a great deal of wealth out of the business.

17:48So they have the resources to protect the business when it's necessary. Maybe put more capital in, certainly get it through tough times, not require dividends paying out to starve research and development. My view is that it's a real gift. Now, your tax laws, country by country, have a huge impact on this. But I can tell you in the United States, if you want to know who's got the money, go to the list of family businesses in your region, and that's where it is.

18:19What I think is so interesting, and this is what we tackle in our business all the time, as the family grows and you've had this success in one investment, there's a tendency to assume that we're really smart. And because we're so smart, we can do that again, not realizing just how much luck factors in it and timing, luck, a relative that actually really had a lot of talent, not to say that others don't, but there's usually one generation that really rings the bell. Maybe the third or fourth comes along, does it? But getting families to appreciate the difference between creating wealth and the risks associated with that and maintaining great wealth, on the other hand, and what that takes. It's a whole other

19:09mindset, discipline, takes a whole other perspective. I mean, it's almost genetic what it takes because you really have to ignore it. And the only way you can, certainly in our markets here, I mean, they're so volatile, you really have to have a great plan, stick to it, come heck or high water and look at it, you know, 50 years later is really the ideal thing.

19:30Nobody does that, of course. I understand that. But getting people to make that transition, that's basically what our business is all about. Because when you have the larger families and you get the new generations, you got to figure out, okay, nothing compounds faster than families. I mean, families compound at roughly a six. You can argue about current birth rate versus historically, all that.

19:52But ballpark, six and a half percent, say. And I like to say six and a half percent after tax. So you show me an investment that grows six and a half percent after that. I mean, there are a few and there's people and whether they're lucky or really smart, I don't know, but they're not enough of them to cover everybody that needs to be covered.

20:11So I think it's poppycock, this this flagellation over first generation makes it second generation lives off a third generation squanders. The problem is, if people aren't creating wealth at every generational level, your family's going to outrun you. So this is the lesson. I think there are two that are just unbelievably significant. The second one, which I'll just mention because everybody knows what that is, that's the three circles.

20:39The three circle diagram is the only innovation in family business education ever. And it's this incredibly subtle but profound, simple diagram of three intersecting circles. It's family, business, and ownership and how they interact. And if you parse the three family circles and identify the people that are in the FIFA and where they intersect and all that, you can identify basically all the disputes that could possibly come up.

21:11You know, the people that are in the family, but don't work at the company and don't own any stock. The people that own stock that are in the family, but don't work in the business. The people that are in the business that own a lot of stock and in the family are like the king. And then you've got the spouses, where do they fit in?

21:30You know, they usually are in the family. They don't own anything. And if you get divorced, they're completely up the creek without a paddle. That's not right either. And then you have employees that own stock and they're looking at the family and they're going, and a lot of companies are destroyed by this, of course. When you have great employees, if they see the family fighting and they know the money that's going to get drained out of the business, their business they created, that's not good.

21:53The three circles really is just a fabulous way to identify the fundamental issues and challenges and the complexity of a family-owned business. And that's why people shouldn't beat themselves about the head and ears for how hard it is to do this. And saying that, it's amazing how many great companies there are. I mean, a lot of companies haven't made it.

22:14I get it. But a lot of companies haven't made it, whether they're family owned or not. A lot of P companies don't make it. A lot of venture companies, 90% of the venture companies don't make it. Nobody's whining about them. So why are we beating up on the families for this? So what I think there are three absolutely fundamental undertoes that affect a family business.

22:37And I call it undertow because these are things that are against you that make it really hard to achieve what you want. And number one, and this is the number one diagram, and that's the family tree. And the reason the family tree is so important is it tends to grow faster than most businesses. when you show a family, like you're Gen 1.

22:58If we took, you have two kids. So imagine they get married and each have two kids and those two kids have two kids. Well, I mean, at least you started with just two families. And we have many families here in St. Louis. They have 10 kids. I mean, that's like unbelievable. And they've done it for five, six generations.

23:12I mean, there's all kinds of companies out there with three, four or 500 shareholders in the family. So the family tree is really important to look at. And the family tree also highlights this problem that comes in very quickly. And that is control of the company by necessity gets diluted one way or another unless you do something about it.

23:33And also, you have the addition not just to the family members proliferate, but they have spouses. And guess what? Believe it or not, spouses have families too. So it's almost a miracle that there are any multi-generational family business and there are thousands of them. And then the final thing when you talk to families about this, we do this for them.

23:55We projected out three generations because this solves a lot of problems. If you've got this company that you've been sitting on and not doing anything with for a generation, you got it from your dad or something. And it's where everybody goes to work. And it's got a nice name and it's prestigious, but it doesn't exactly kick off a lot of it.

24:16It's not growing. and you look at all those people, you go, how's this fit? And the answer is most of the time it doesn't. Well, recognize that early on is a wonderful thing, but that leads to choices. So then you get into the issue of, okay, I want it to be a family business, but I know the tree's too big.

24:37And there are other things. You can have it go the other way too where the tree's too small. Maybe you'll have this problem where you'll have only two kids and you'll have a massive growing machine and there's no way your family can manage this company. That's a nice problem to have. But then that's another reason family business can be too successful for the family too.

24:59But looking at that family tree, it just opens up this conversation and it highlights what I think is the gift of helping educate people is visually they can see the problem. And so one of the number one rules of family business, keys to success, and it's just a great expression that I learned from, I learned everything I know from families.

25:23But this one family had told me the key, Spencer, is set the policies for the future when there are no names attached to them. It is a brilliant comment. It's so obvious. You go, whoa. But it's really so great. But this idea of what can you say to somebody meaningful, the first generation, you can say everything meaningful to them because the fact is if they set up good policies when there are no names attached to them, when Johnny and Sally roll around, you'll say, hey, we've got a policy here.

25:54Now, you can always change it. I get it. But if you've got cousins, it's not so easy.

Mike25:59And what's a good example? What would be a good example?

Spencer26:02The number one example, and it's just so elementary, is who can work in the family business? It's a basic one. The other one that's elementary is who can own stock in the family business? Who can be on the board in the family business? What's your relationship to the family business? Are spouses in the family business? That's a big one. What happens when you have a divorced spouse that's been in the family business? How does that work? You have a whole bunch of annual compensation issues, SEW, socio-emotional wealth. What are the rules on people in the family that aren't in the business, but are in the family whose name is on the business, to what extent are they to share in the success of the business? Do they get to go to the 100th

26:49anniversary of the business? Do they get invited? Very fair. I mean, they might not own things, but are you going to be inclusive as it relates to them? Those are big deals.

Mike26:57Yeah. Yeah. And having those policies created beforehand reduces the conflict around those conversations.

Spencer27:02Oh, and it's, and it's, and really, you don't want to come up with these rules in a crisis when there's a young man or woman starting their career at the doorstep and you're saying, oh, we forgot to tell you that you got to get an MBA and go work for Vroom for, you know, for five years before you come here. And it's the way I see it going back to my thesis of the inadvertent multigenerational family business. If you show people what the successful ones have done and you say, here's what they've done. And by the way, they didn't do them with a forethought they just happened to somehow weather through it you go you

27:41read cargill's history so cargill's the largest privately owned family business in the united states and by revenue is one of the largest in the world i mean it's a massive trading company but it's not as big as the the ones in japan for example but the cargill's a very big company in united states agribusiness a hundred and i think 14 billion in revenues they've been in business since the early 1800s, their seventh generation. When you read their history, which is literally a 2,000-page multi-volume book on their history, they went through one crisis. I mean, they were the gold panic of 1873. Wars, civil wars, world wars, plagues, pandemics, governance issues, people trying to steal the company, relatives, double-crossing people, wanting to go public,

28:32stay private, all these things. But they learned a lot. And all you have to do is read it, and you can pick up a lot of amazing things. That's why I do a lot of book reviews. I see a good book and I go, wow, that is really interesting. What can we learn from this?

Mike28:47Where I want to go next is this concept of the type of family business that you have. You have this model that I've seen, which is a continuum of behaviors. And on one side, you have a business family. And on the other side, you have a family business. And I think that's relevant to study, because as you said, you're doing these book reviews, you're studying the families that have been successful. And it seems they go on a journey.

Spencer29:08Absolutely. It's a journey. This is a completely contrived continuum, incredibly valuable. And there are actually two things that I do that I think I've contributed modestly to innovation and family business education. This is one of them. And it's this continuum of the characteristics of what we just call a family business versus a business family or alternatively a family in business or alternatively a family enterprise. So everybody's got monikers for this.

29:47What I think is interesting about the continuum is when you identify all of the characteristics, this is way overgeneralized, I totally get it, of the two types of organizations you could be in. And then I love doing this. After a meeting with the family, learning about it, and we're trying to figure out what's going on here, what can we do?

30:10I say, okay, I'd like you with this marker. I hand him a marker and I say, I've got this thing where there are two columns and it says continuum at the top with these arrows. I want you to put a mark somewhere between those two columns as to where you think you are in terms of progression from the right side over to the left.

30:34Now, the first thing to mention is it's not evil to be just a family business. That's not an evil thing. The key is to know that's what you've got. Because if you have that, here's what I'll tell you. Your chances of being multi-generational for long are not good, one. And second, it's highly likely that you're not doing a very good job running your business.

30:58Highly likely. Not impossible, but highly likely. So the idea is that the more you move across the continuum, and what's so fascinating about this, when you do this in foreign countries, I did this in India because it's only a lot all part of family structure, of where the family business is actually the family. And it's not just, it's not a nuclear family like you might think of.

31:20It's everybody. It's cousins, uncles, all those people. They're all in that. And that's how they do it. But they're in this titanic struggle to get beyond that, which is really hard to shift. But in developed countries, it's much easier. And a lot of it has to do with family structure and culture and education, business schools and all that.

31:39And some of the things, the movement over there is obvious. I mean, just to pick one, how about this? Entitlement by birth. And if you're in the family, you can never be fired. And you probably are unjustly compensated at too high a level. Normal, right? I mean, you probably shouldn't be in the business in the first place, but you're there.

31:57And you might not be great, but you're part of the family. Therefore, you're tolerated. Versus a meritocracy. Now, nobody's saying that your family business has to be 100% meritocracy. That's not the point. It's just a question of where you are on the continuum. Governance the same way. You go from decision-making that is totally consensual, informal, relaxed, over the kitchen table, maybe not even, nothing comes to a fault.

32:22I've been with so many businesses, first-generation businesses, almost all like this, where you make decisions by ignoring a problem and just doing what you're doing, but you don't have a board meeting. I mean, that's ridiculous. And so it's just moving the process. You can call it more professional. That sounds like you're being negative about. I'm not negative about family businesses versus business families.

32:44I just think it's a question of where you are. The related concept.

Mike32:47Would you say it's almost a shift in the level of sophistication from a family business to a business family? And at some scale, you're adding a little bit more formality, a little bit more governance, a little bit more structure to the ownership and management rather than just being scrappy and freeform.

Spencer33:06Yeah, I would hesitate to use sophistication as a term because here's the classic example. Do you have non-family senior management, executive and non-family executive? Now, here, the mistake you make, I've made this mistake and I've been chastised for it. When you say to a family, well, where are you in bringing professional management in your business? They go, well, what the heck do you think I am?

33:31Jump change? You hear all these terms that you get caught up in. But so a family that is willing to not just entertain, but move forward with hiring best to breed non-family members to do things. The way it always starts, it starts with we need a finance guy. We need somebody to do the accounting. Well, nobody in the family knows anything about accounting.

33:54And now today it's about technology. We don't have anybody in the family who knows about technology. And then it's about we don't know anything about international. We got to get something. Well, you know, you can step back and say, OK, we've got this business. what kind of talent do we need? Let's hire a headhunter. Let's put some people through some psychological testing. Let's see if they fit. Let's have a competition of the best in the world.

34:14That's not easy to do. There's so much behavioral science in family business, but a great example of that is this problem of framing. You ask a family business leader where their next leadership group is coming from, it's like they never heard that there's a business school down the street or that they're headhunters out there. It's like, huh, well, I'm going to look at my family. Well, and I agree that's a good thing to do. But if you were really trying to optimize the asset for the family, which would be also a good thing to do, you'd look broader. It's a mindset, right? It's how you look at things. And it doesn't happen all at once.

34:50In India, it's interesting. That is the biggest issue of bringing non-family management into some enormous family businesses in India, bringing them in and letting them have the reins to run it. And the ones that do, I think, are so thankful that they got Cousin Johnny out of there. The other one that's important is the trade-off, and this is where the rubber meets the road.

35:19Maybe this is the key concept here. The trade-off between running a great business and maintaining family harmony. And one of the questions I ask everybody who speaks in my class is, what comes first? Family or the business? And everybody lies. They're liars. They all say, well, the family comes first. Of course the family comes first. I've had people in seventh generation, they've hacked off half the family in the business.

35:50You know, they're not there anymore. They prune the tree as they've narrowed it down because they can't survive if they have the whole family in there. So they prune it down. But it's their inevitable conflicts between having family harmony on the one hand, which by the way, the matriarch of the family is usually the keeper of family harmony.

36:10The patriarch of the family is usually the keeper of running the great business. And believe me, the patriarch, more often than not, does not have the power in that family, more often than not. And that's also the reason why people need to take my course, because if they're going into investment banking, wealth management, M&A, they better darn well understand who the owners are and who has the power.

36:37I mean, I think that's the real secret sauce in understanding family businesses is the priority for family harmony is unbelievably strong. And it should be. And they can mutually coexist. I mean, it's not family first or business first. It's how you balance. They don't have to be competing either. They often are, but how you balance the two and how you give each of those sort of important interests, the space and the nutrition they need and the fertilization to not only survive, but thrive.

37:15So that gets you. So this concept of, so the business family versus family business continuum is really all about preparing you for the journey of being a multi-generational family. If you get the hygiene right and you start making the transition over to running a real business, then the important things like culture, purpose, values, they can take over.

37:43And those things, by the way, are completely consistent with Family Harmony. What's really inconsistent with Family Harmony is running a business without any purpose or out any values. That's terrible for everybody.

Mike37:56So family harmony, how is it maintained as businesses or families progress through multiple generations? We get through to the sibling partnership, cousin consortium, looking at the fourth gen. And as you highlighted earlier, the growth challenge of the family tree growing faster than the business in a lot of circumstances. How do you maintain that family harmony with the business performance in mind as well?

Spencer38:22Well, so the simple answer is with a lot of work and it's a lot of intentional work. So the constructs that exist today, I don't know what happened 50 years ago, but today it's pretty straightforward what you do on a piece of paper. Now, families all do it differently, but the three interest groups that are represented usually in a family are the people in the business on the one hand, the people that own the business on the other. And the third would be the people that are just in the family that are neither owners and neither in the business. And so what we show people is, and by the way, a family office is critical to this in that if you've got a big family and they're all

39:07sort of around a business, the question is, they ask it one way or another, at least they think it. And if they don't think it, their spouse is thinking it. Is this really a fair and equitable deal for everybody involved. And really, many disputes, certainly disputes over money, are very often just ignorant disputes, where it's very clear why things are the way they are, but nobody's bothered to explain it to them. So the construct is to have the owners talk about what ownership means. And what ownership means in the context of any business is who is on the board and who does the board pick to manage the company.

39:46So we know what that's all about. And that should be about running a great business. The owners also are part of a family and the family includes many people that are not owners and they have a role to play in terms of how do we have a great family with family harmony. And the fact that two can coexist and they do all the time and it's because they have inclusive family gatherings.

40:09They share the successes broadly. There is an emphasis on family history and legacy. And by the way, the family tree goes in two directions. You can project it to the future, as I told you earlier, three generations. It's really important to look who came before and where did this family culture come from? It's oftentimes not the founder of the family.

40:33It might be his or her grandparents or the great grandparents above. What's in this family's DNA? There's just much more like medicine and the importance of family history. In families, the family tree is really significant. And what's the lore in the family? Why does my father, why does he bristle when this subject comes up? What's that all about?

40:57Why does my mother give him a dirty look when that, you know, all this stuff. So I think the emphasis on it, and there's this new concept. It's not new in terms of did it happen before, but it's new in terms of study. And you'll enjoy this. It's called a family champion. And I've written about this a bit because it's so interesting.

41:14So this is a person in the broad family that takes family really seriously, so seriously that they act as a convening agent or producer of family events. And healthy families usually, I mean, not always, usually have somebody like this that, you know, for the good of the family, we're going to have a picnic at my house. We have a family champion in our family.

41:39I wrote, I have a piece called Successful Family Reunions. And it's all about celebrating what everybody is doing. Nobody's more important than anybody else. I don't care if you're the chairman of the company or you're the inventor for the company. When you come to the family meeting, you're just part of the family. You got your one vote.

42:00You're not voting your stock. And if you're a jerk, you're a jerk. I think the families that are successful start that usually first and second in there, in that neighborhood. They might not have a big enough group. I mean, I get that. But it doesn't take long. I mean, I grew up in a family of four. We had 37 people at our last reunion.

42:24And now we're down. And our parents are gone. We're the senior generation. And then we have our kids. And of course, they have kids. And the kids now have jobs and stuff. But that's what it takes. So I think it's the mirror image of the inadvertence of why people become family business or inadvertently by accident, by necessity.

42:43But to make them go on, it has to be more intentional. I think the nurturing of the family component and the family harmony component is a key role that somebody has to lead. And that's this family champion. And it's really interesting to see that in operation with a healthy family.

Mike43:01I really like that point about intentionality. intentionality that comes up in a lot of the conversations that we have on this podcast. The successful families are doing a lot of things very intentionally. And I also like your comment about looking forwards, but also looking back because we talk a lot about documenting family history and storytelling. My great-grandfather had nothing to do with this business we have today, but he had everything to do with the culture of our family and why we behave the way we behave.

43:25This is what we learned from that generation.

Spencer43:25And that is so powerful. Again, socioemotional wealth, that's part of that goal that really is the glue that keeps people working together. There's going to be strains, tensions, disputes, dysfunction. I mean, that's inevitable. And again, in the academic world, we've got a thousand professors focused on the psychology of family members. I'm just not one of them. And I mean, that's a very important thing to do and have counseling and all that. But as it relates to this, it does take an effort.

44:04Just one plug on the family officing. That's not needed at first, but what inevitably happens is the issue of wealth starts just getting much more complicated as the generations go on. And it's now a U.S. thing, but our tax laws are so convoluted. I mean, they're complex, but they're arcane. They are arcane. And they're so confusing that the normal layperson has no idea of what's going on. All they know is they're going to avoid a tax. But what they get in return for avoiding a tax is a stack of documents with the name trust on every one of them. And it's very complicated and there are all kinds of relationships. So one of the big components of our job is

44:50managing, we call it managing the entities. So I show this in my class, a third generation family. I don't think they're outrageous at all in terms of, I mean, they're very successful and they're not that big. They have 24 entities. Those are 24. Now we have clients with hundreds of entities. We have businesses that were formed in the early 1800s where there are 100 trusts.

45:16I kid you not. And they're all related. They have overlapping this and that. There's all kinds of things behind the scenes that to be successful, again, going back to undertow, that a first generation family member in the United States has to plan now. Hester, you have to get your company out of your name now. If you want your kids in 30 years to have that company, get it out now.

Mike45:40You're speaking about complexity as families grow. So very quickly, you're getting beyond just one core family business and into the wealth management and operation of a much wider family enterprise, aren't you? I mean, it may involve a family office. It may involve other assets of the family. It may involve a family council or meetings, constitutions.

Spencer46:02All those things. At the end of the day, your goal of all of it is to be the sine qua non and the goal of everything is to be a strategic owner. I mean, not for want of something else to call it, but a strategic owner, an enlightened owner that's got all the family harmony in the world and the greatest business in the world.

46:21And it goes on for hundreds of years. Now, we know that's fantasy. But the question is, why is it fantasy if you've got all these advisors going? Well, the reason, it's called human behavior. the problem. The fact is you need all these people and you need these different groupings, the family council, the family assembly, the board of directors, the family champion.

46:43You need consultants, any tax advisors. You need all these things to make it work. Again, it's amazing that there are any companies around. I mean, with all the burden that they have, it's amazing. And there are. I discover in my hometown, and I've been here, a professional in in this region for 50 years. Literally, not a week goes by that I don't discover a company I'd never heard of that's just unbelievable. It doesn't mean it's the biggest thing in the world. But going back to the value of owning your own company, this would be a company that compounds capital at a very high rate, at a low taxes, and can stay in business almost forever if they don't screw it up.

Mike47:22Which was going to be my next question, the competitive advantage of family or employee owned firms that are enduring.

Spencer47:27Well, this is so neat. This came in year three and a half of my teaching this course. And when I realized that the end zone, to use a US sports, it might not be multi-generational family business, might be something else. And what could that be? It could be a family controlled public company, which gives the family total liquidity and they maintain control, but they at least get the liquidity issue out of the way. And that's very prevalent here.

47:58Or it could be a partially employee-owned company or a 100% employee-owned company. This was an incredible insight. How many of those are in the United States? And you talk about under the radar screen. These are some great companies where the family's succession is just run out of time or gas or capable people. And the family goes, you know, we've, I mean, there's sort of an enlightened view here that we've made a lot of money and the people that made it are working over in that building over there and they ought to control their own destiny. So they cut a deal that's very favorable and they're not giving it to them, but they're selling it at a mighty

48:36discount. By the way, in a family business, the stock is given to the next generation for the most part. Nobody's paying anything. An employee-owned company has all of the great attributes of a family business, but without any of the family dysfunction. They tend to have better governance. They tend to be more strategic. They tend to be more collaborative. They certainly have purpose. They have vision and culture. It's amazing. Then this was a big discovery for me.

49:06Shame on me, but I didn't realize what was going on in Europe and in Asia with these foundation-owned companies. So now we have this idea that, okay, I'm a family-owned business and I could sell it to my employees. That's one thing I could do. Or I could transfer it to a perpetual foundation that will last for hundreds of years. Northern Europe is absolutely filled with these companies. They're the greatest public companies in Europe or foundation control companies.

49:38One of the great, I didn't share this with you, but on the subject of control companies, this goes back to Facebook and why that's relevant. But when you get these foundation structures, it is incredible how complicated they are. Usually it's multiple foundations and the family. IKEA, for example, looks like a Rube Goldberg contraption of ownership entities in multiple countries because the founder of IKEA had this brilliant concept.

50:06He said, I may not be able to control this company forever, but nobody's going to accuse me of not trying. So he has the ownership in three different countries because he's afraid that with the success of that business, they're going to take it from him. So he's got this thing set up. I mean, it's literally, there are probably 40 ownership entities in the IKEA structure.

50:32And so I discovered that and that just opened my eyes to, oh my gosh, that's so interesting that if our tax laws here permitted it, which they don't, man, this country would be very different.

Mike50:44For better or worse too, right? There's pros and cons each way. And I'm sure plenty of people have an argument against what IKEA have done. But I have seen an image of the diagram. It's like a spider web of entities. It's incredible.

Spencer50:55Yeah, well, this guy, the person that you really ought to get on your show is Steen Thomsen at the University of Copenhagen, who's the leading global authority on these things. By the way, they're in India. Tata Group is a foundational company. But he's written on what caused them to come and being. And then they've done all kinds of studies on performance.

51:14And the performance has been exceptional versus industry peers that are non-foundation owned. So it's a very interesting area. But the point is, there's life after family business. And it's not bad. As a matter of fact, I think the alignment of interests, well done in a family business, an employee-owned business, an incredibly powerful machine where you have everybody trying to achieve the same thing.

51:41and you have this common culture, employee-owned or family-owned, where I love this idea that when you go to a company and you can ask anybody that you run into from the front door to the back door to the top floor to the bottom floor, what is this company all about? And you'll get more or less the same answer. Now, that's a great company. And I'll tell you, you can't go into an employee-owned business and not have that. And it's, they're not for everybody. Employee owned businesses don't, and they don't have stock options, for example. They have a harder time going public, although we have UPS, the United States employee controlled business. It's a, I mean, the UPS people in their

52:23brown delivery suits and their brown trucks running around the United States. That's a very successful company, competes head on with Federal Express and Amazon, and they're fabulous. And they have a great esprit de corps there. But it's harder to do publicly, but it's sort of like the old partnership model. Most of these have better governance, more aligned incentives, much less spread top to bottom in terms of compensation. I mean, they're very well-run cultural organizations and they take care of their own. They usually have wildly generous benefit programs and the like and run a great business. They have to because they're competing with everybody else. It's pretty cool. And that's another area that's not studied.

53:06You mentioned a business school, employee of business, I don't even know what you're talking about. It's very cool.

Mike53:08And it sounds like something that we might have to explore in a follow-up conversation because it's a whole other topic, which I think is fascinating.

Spencer53:16But it's a natural evolution from family business because most of them come from families that just have decided that that's the right thing to do. It's an enormous act of generosity. It's just incredible.

Mike53:25Great way of maintaining culture beyond the family ownership. Now, Spencer, unfortunately, we've only got time for one more question. Imagine you're writing a letter to your children. What's one lesson or idea that you don't think many parents would mention, but you think is important to understand?

Spencer53:46Hard to imagine that I could come up with something that nobody's mentioned before. But I think the key to happiness to me, and this is what every parent wants their kids, is don't let other people be the measure of your success. Define your own success and don't be looking at others. And if you're not happy doing what you're doing, go do something else. Don't suffer. I think so many people get trapped. I see it with my own kids. I see it with myself and my own career. I had, I think, seven different kind of jobs, all things I wanted to do. And some worked out better than others. But the fact is, I wanted to do them all. And I thought it was a good idea at the time.

54:27and when it no longer was a good idea, you go and do something else. I think in today's world, a lot of it's going to happen to you because of the way technology goes. I don't know if you can outrun it or not. But I think don't let other people judge you. You judge yourself and you judge yourself on basis of what makes you happy and what helps you become the best you can be, whatever that is.

54:50I mean, nobody else has a measuring stick. That's your measuring stick. And be satisfied with that.

Mike54:56Terrific lesson, Spencer. So thank you. You're a wealth of knowledge. This has been a lot of fun and I hope we get an opportunity to do it again really soon.

Spencer55:03Well, it's been a pleasure talking to you and I look forward to seeing how you use all your library to help people be better owners of family businesses. So thank you.

Mike55:16Thanks for listening to The Business of Family. You'll find the transcript and key ideas from this conversation at businessoffamily.net, along with the Business Family Diagnostic. It's free, and it shows you where your own family stands. And if someone in your family should hear this episode, please send it to them too. I'm Mike Boyd. Until next time, take care.