Learning to protect the family fortune

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The world's most powerful family businesses often operate in a vacuum, where the need for privacy leaves few avenues opento discuss their experiences with others. Some families, through friends and personal connections, find peers with similar challenges - founders struggling to hand over to the next generation, or managers tryingto accommodate relatives.

Now, the Wharton School at the University of Pennsylvania has tapped into the networks of the wealthy to launch what it calls The Wharton Global Family Alliance, a research initiative to explore how best to manage the businesses, fortunes and philanthropic giving of the world's wealthiest families.

"There's a huge amount of value in generating ideas based on observations that are not rigorously tested, and turning them over to Wharton who can take our rules of thumb and distill them into themes that can be researched," says Laird Pendleton, heir to the Pittsburgh Plate and Glass fortune and chair of the Wharton alliance's advisory board.

Founded in January last year, the Wharton alliance only includes families worth at least $100m. The school is making a multimillion-dollar commitment to the project, which will develop a curriculum for graduate and undergraduate teaching. The hope is this will place it ahead of schools that offer a single course in family business.

"This is a profoundly important area of business research, since families own between 33 and 73 per cent of public [companies] - depending on the country in question - and in regions like Latin America only a small fraction of companies are publicly traded," says Raffi Amit, professor of entrepreneurship and management and the alliance's academic director.

He hopes to collect data from around the world to create an authoritative source on the operations and wealth-management issues of family businesses.

Thanks to a seven-figure gift from the Dubai-based investment holding company Istithmar, the alliance will hold its first global summit in the spring in Dubai. The summit will draw family business leaders from around the world, together with Wharton faculty, students and alumni to discuss early results and shape future research. It will also highlight the role of family businesses in the regional economy of the Middle East.

"Family issues seem to trump all others - of religion, politics - and the rabble-rousing in-law crosses all cultural barriers," Mr Pendleton says.

He helped provide a core of families through the Boston-based CCC Alliance - a financial services organisation made up of family offices - which he co-founded in 1995, with Barney Corning.

The programme's initial research, c onducted by Prof Amit and Belén Villalonga of Harvard Business School, offered a benchmark against which a family could compare its company.

The first wave of research focused on two of the principal concerns of family businesses - succession and outside management.

Using proxy data on Fortune 500 companies from 1994 to 2000, the research showed that founders created value for the company while they remained CEO or board chair overseeing a hired CEO. The second generation tended to erode value as did instruments designed to maintain family control over a public company such as dual share classes, pyramids and voting agreements.

Todd Millay, the Rhodes scholar who serves as the alliance's executive director, says the research provides the "first comprehensive hard data" on succession, the pivotal issue in terms of the long-term health of family businesses. "It provides the basis to discuss rationally and plan for the event based on facts," he says. "And. . . in the case of a few families, it helped generations to speak to each other in terms of hard data instead of in the more usual emotional terms."

The Wharton alliance also wants to publicise the innovative practices of private family businesses. The organisers hope this will fill a gap in the market, given that private companies are shielded from the sways of capital markets and do not need to report profits quarter to quarter.

"In a family office, there's a different mindset when it's the principal making the decision, than when it's a paid adviser, whether they are inside or outside the business," says Don Heberle, national director of Mellon Financial's Family Office group, which will offer its client base the chance to participate in the research.

"If the principal is a wealth creator, they've already taken risks to create it, and they can take between 1 per cent and 2 per cent of their portfolio and risk it and be more conservative with the rest to ensure lifestyle maintenance for several generations."

Mellon hopes to collaborate in the research. One potential project is establishing a benchmark for family wealth investment, based on performance, asset allocation or a forward-looking sentiment indicator. Such an index could capture investment trends that families have pioneered.

One-third of the alliances's research is dedicated to philanthropy.

Ian MacMillan, the academic co-director at the Wharton Alliance, is developing a social entrepreneurship model for the families, whereby students develop business plans.

"Whether it's running your businesses in a socially responsible manner, or doing charity work, we see this as a place where there's a key intersection between a social problem, a business opportunity and a chance for families to make a difference with seed funding," he says.

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