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Judy Barber |
COMMENTARY When a family merges financial interests by investing together, its members may experience a deepening of personal relationships, as well as financial reward. But to achieve this balance takes work-a good hard look at oneself and an understanding of one's own emotional and financial needs. As I watch families discuss issues involved in investing together, a funny thing sometimes happens. People may tussle over setting objectives and discussing asset allocation, but underneath these struggles, family members may be making judgments about each other's lifestyles, spending, and saving habits. Sometimes the differences in values are unspoken, but often they surface in unsavory ways with derogatory comments such as "spendthrift" or "tightwad." It isn't easy for families who pool their financial resources to discuss their differing views about money. When families do sit down and talk together, often they will express value judgments about how individual members live. Below the surface, however, family members may fear exposure and criticism themselves. At times, they may also feel uneasy and defensive about certain financial choices they've made. No matter where people fall on the spending/saving continuum, they may be reaching for the same goals. When one sister prefers a home decorated with expensive antiques and objects d'art and the other sister dismisses her sibling's lifestyle as materialistic, ironically, both sisters may be sharing a basic need to have order in their lives. Rather than finding satisfaction in her extravagant surrounding, the thrifty sibling may feel a sense of satisfaction by reinvesting most of her income from dividends. She is overwhelmed rather than rewarded by possessions; for her, order comes from living with fewer things; for her sister, order comes from her immaculately decorated house. Realizing that one set of values is not better or worse than the other may be an important initial step in successful family investment ventures. For family members to plan and share in decisions regarding such sensitive areas as personal finance, a foundation of trust needs to be built: no one want to be judged for his or her preferences. When differences in values affecting investment decisions do occur, mutual understanding goes a long way toward resolution. But before this can happen, each member of a family must be willing to explore and understand his or her own emotional and financial needs, rather than perceive these values as being universally correct or feel defensive because those views are not held by other family members. Understanding the underpinnings of a sibling's, parent's, or relative's point of view is critical to finding common ground. A parent's conservative investment stance based on the experience of the Depression can sound like a cliché unless a daughter or son genuinely grasps the depth of fear and poverty his parents experienced. A child's apparent lack of interest in family investing may be a result of having parents who were so consumed with their business when their child was growing up, that in their absence, they left a hole in the child's life that could never be filled with money.
Non-judgmental conversations among family members in which all parties attempt to understand one another's basic needs isn't easy, but open communication could very well be the linchpin that brings a family closer to its financial goals and, in the end, to each other.
PERSONAL EXPERIENCE
Freedom and Cohesion: Dirk Jungé is in a unique position. As chairman, he heads the Pitcairn Trust Company that has, for seventy years, managed the wealth of the Pitcairn family, heirs to John Pitcairn co-founder of the Pittsburgh Plate Glass Company. In addition to serving members of the Pitcairn family, Pitcairn Trust Company also meets the complex needs of other families and institutions. As a family member and Chartered Financial Analyst who has been in the investment business for 25 years, Dirk offers Family Money years of sound judgment and expertise. This interview with Dirk is focused on how, after six generations, his family continues to invest together. It also highlights the changes this large multi-generational family has made to meet its diverse needs. FM: Dirk, will you begin with some history about the family and the business? DIRK: My great grandfather, John Pitcairn emigrated with his family in 1846, at the age of five. In 1883, he co-founded Pittsburgh Plate Glass Company, a Fortune 200 company now known as PPG Industries. In later life, John moved his family to Philadelphia. In the 1890's he bought land north of Philadelphia so he and his children could be more closely identified with a religious sect whose headquarters were in Philadelphia. After John's death in 1916, his three sons were faced with the management of their father's estate. Being Scotsmen, they cared a lot about doing it in a cost-effective way. Rather than individually hiring professionals, they pooled their assets under a personal holding company and in 1923 formed a family office to manage their collective wealth. At that time, more than 90% of the family's wealth was represented by PPG stock. Although there were a series of partial sales in the 1960's and 1970's, the family continued to be the controlling shareholder of PPG until 1985 when the final 15% of outstanding shares were sold back to PPG as part of the liquidation of the holding company. FM: How have the financial needs of family members changed since the first generation? DIRK: When my grandfather and his two brothers formed the holding company, the income stream from the dividends of PPG was sufficient to provide broad financial flexibility to them as shareholders. In most cases, even in my mother's generation, they like their parents were able to provide for their family's needs from the cash flow of PPG dividends. So for the first two generations that were doing business together in a pooled way there was plenty of income to take care of the needs of the family. But increasingly by the fourth generation looking to serve the fifth, liquidity became a more pressing need. We didn't have a liquidity mechanism in place. Although the company had produced a superior total return on the assets in the holding company, the family was growing geometrically while its assets were compounding arithmetically. Estate taxes for each generation further complicated this situation. The holding company was an effective vehicle in 1923, but the diversity and liquidity needs of the family were such that we needed a change. FM: As some members of the family needed more liquidity and flexibility, did this create tension in the family? DIRK: Absolutely. We were experiencing all of the classic issues of "family as family" and "family as business." FM: Can you say more about that? DIRK: Most particularly, we had a situation in our family where the principal trustees, representing 75% of the vote of the family business, felt like the family member who was president and chief executive officer of the company was instituting change too rapidly without bringing along the senior members. This precipitated a change in leadership. For some family members, the departure of this family member felt like a radical decision. It was the first time the family had ever dealt with one of its own in this way. It was a difficult time for the family. There was an issue of trust and confidence in the system that had apparently broken down. FM: That must have been hard, Dirk. My sense in knowing you is that communication, education and bringing people along to consensus is very important to you. DIRK: Yes. The senior family members who had in the past been senior trustees and directors had the expectation that they would be fully informed and engaged in all-important decisions, and they found themselves on the outside looking in. FM: How did you resolve this?
DIRK: This happened in 1983. We dealt with this troubling situation for three years. We were not able to satisfy members of the family who had become disenfranchised by the departure of this family member, and in 1986; we finally came to "free association" and liquidated the assets so we could part ways on a fair and equitable basis. This gave people the choice to stay with Pitcairn Trust Company or go elsewhere with their money. DIRK: It addressed the specific issue of an exit strategy for the disenfranchised family members, and it simultaneously addressed the broader liquidity needs of the entire family. By liquefying the family's assets, we were now able to provide greater flexibility in customizing individual investment portfolios to reflect a family member's changing and disparate needs. FM: How has this impacted the family relationships between those who continued to invest through Pitcairn Trust Company and those who took their money elsewhere? DIRK: Well, as you can imagine, in a small community - where you often see family members at church functions, in academic settings and at athletic events - it's better to talk to each other with the tension of the financial issue having been removed. FM: So how did you come to grips with it? DIRK: To start the process we engaged a consultant to come in and elicit from family members their primary concerns. I termed it the "good, the bad and the ugly" about doing business together. At this very important time, over 90 members shared in this family forum. The key issues coming out of that session were trustee control, succession of family members in the trustee capacity, the role of family directors, a description of the key duties of senior officers of the corporation and the maintenance of an on-going free association policy. There was also a need for broader family representation in the election process for the family board. To address these issues, we identified ten family members who would take on a family governance project. Although we knew that ultimately this would need to conform to legal and business conditions, the committee was charged with coming up with a plan without the interference of too many lawyers or tax practitioners saying, "You cannot do this because . . ." FM: So what did the governance committee come up with? DIRK: The bottom line was that instead of the power being concentrated in just four family members as trustees, we developed a Board of Family Directors composed of nine family members elected by the family, the president of the Pitcairn organization and three non- family, non-management individuals who bring special talent to the board. To facilitate a more democratic voting structure for the family, we developed a novel concept of "beneficial interest" that said that when voting for the family board of directors the trustees would be influenced by the view and preferences of the income beneficiaries. FM: So, let me see if I understand this? The trustees retain their legal responsibility, yet they maintain a two-way discussion with beneficiaries about the decisions to be made. DIRK: Exactly. It really is the whole concept of understanding the difference between a family need and a business need. The business need could be satisfied by continuing to have the trustees control the votes. But the family wanted to participate more, be more involved. They understood they could not technically take the vote away from the trustees, but still could develop communication and dialogue between family members and trustees. FM: Can you comment on how this solution has impacted family relationships? DIRK: It has been dramatic. Even though we have over seventy-five adult family members, we've put together a process that keeps them informed, engages them and asks them for their input on specific issues including representation on the governance board. We have institutionalized the issues surrounding the succession needs of a family enterprise. Although the four trustees had dominated most of the family voting, they were compassionate, competent and trustworthy individuals who understood the family system. They had the foresight, around 1980, to recognize the critical need for a training and educating program focused on the next generation. They supported the concept of an auxiliary board, a "junior varsity" board, which has no legal standing but functions as a leadership-training program. As a result, a large number of the fourth generation of family members participated in creating a governance structure and implementing an election process that works for an ever-expanding shareholder base. Effective communication is essential for a dynamic and complex family business structure. Our auxiliary board is a marvelous tool that promotes inclusiveness among family members. FM: What do you do when a family member wants to sell assets or invest in something outside the trust company? How do you handle this? DIRK: Each family member has total freedom. It is incumbent on us as financial service providers to respond to that individual's specific interest, be it inside or outside the investment offerings we provide. The company has the capacity to help perform due diligence and also help that family member make the decision whether to proceed with an outside investment. We also believe it's better to be involved from the outset in a trusting relationship with the family member rather than be asked to clean up a disaster because we were not included in that investment decision. FM: Sometimes in large families with pooled investments, investment advisors unknowingly share information. How do you deal with confidentiality in your family? DIRK: For the collective pool of assets, everyone is entitled to know how those corporate assets are doing, but we protect confidentiality like crazy around here. No one is entitled to know another's specific interest, the amount of income an individual has or, for example, how much someone spent on a vacation home. FM: In our discussion, I have been struck by the continued sense of cohesion in your family in spite of issues that have torn other families apart. Your great-grandfather named the church community he founded Bryn Athyn (the Welsh word for "Hill of Cohesion") where many family members still live. What is the glue that has kept this family together for nearly six generations? DIRK: Certainly it helps to have a successful company like PPG as a banner company for our family, and the family office demonstrates the benefits of doing collective investing coupled with expert estate planning. The vast majority of family members continue to be committed to one faith and share the need for charitable contributions to be focused on that faith. The family has a higher purpose than buying and selling securities together. Also as I watch my adult children, I realize that part of what allows things to be cohesive over a long period of time is the ability to let go. And so the family's decision to go to "free association" encourages the freedom of choice. As members of the family grow up, they can choose or not choose to come back to the collectivism of the family business. FM: Thank you, Dirk. Your family's story is quite inspiring, and we believe it can be a model for other families facing difficult issues like these. Dirk Jungé is chairman and CEO of Pitcairn Trust Company, one of the leading private investment concerns in America. He is a consultant and frequent speaker on the financial services industry, investment management and family governance issues. Dirk can be reached at www.pitcairn.com.
PROFESSIONAL VIEW by James T. Rea Managing multi-generational family money or funds for a closely held corporation with multi-generational partners can be, for an investment manager, an opportunity for creative and rewarding planning, or an experience that makes you wonder why you ever got into this business. Sometimes the investment manager can be helpful in determining what kind of experience the process will be for both the manager and the client. Let's take a look at a couple of scenarios. We start with the San Francisco family of Patrick and Shannon O'Leary. Patrick (Dad), age 65, and his wife Shannon (Mom), age 59, come from humble backgrounds and started the new, wildly successful chain of Mama Mia's Fast Foods of Milan restaurants. The restaurants are all company owned and run out of their San Francisco headquarters by Dad, Shannon, their son Michael, age 35, and their daughter Susan, age 29. Dad has managed to accumulate a portfolio of about $10 million dollars in Treasury Bills, and additionally, has given $1.2 million dollars to Michael and $1.85 million dollars to Susan. Although there is individual ownership of the separate parts of these funds, they are held and managed in one family partnership portfolio. Scenario #1 Dad decides that since he is getting close to retirement and needs to think about some succession issues, he should probably employ an investment manager to help in the management of the portfolio. He selects a good investment counseling firm and explains to the manager that he wants the portfolio to represent his conservative investment outlook and to have these funds for his enjoyment during his golden years. The manager does a good job listening to Dad and puts together a well thought out allocation for a man as conservative as he, and one that reflects his age and retirement plans. Specifically, the portfolio is allocated 10% to large capitalization stocks, 10% to large institutional quality foreign stocks, 60% to 90 day Treasury Bills and 20% to real estate. With today's quite low interest rates, this portfolio unfortunately will provide an expected rate of return of only about 7.5% per year, but the risk level as measured by standard deviation is also a very low 5.59. Dad is quite satisfied with this allocation and the plan is implemented. Unfortunately, this is just about the time when everything starts to disintegrate, although symptoms don't show up for a year or so. Michael, who is single, is aggressive and somewhat concerned about Mom and Dad's rather extravagant lifestyle. Despite his parents' conservative investment leanings, he is beginning to wonder if his money is ever going to grow fast enough to meet his long-term financial needs. Michael tries to talk to the investment manager and is told that Dad represents the partnership and Michael virtually has no say in the matter. Frustrated and angry, Michael one day announces his resignation from Mama Mia's and proceeds to start O'Leary's Fast Food Irish Pub chain. He feels that at least this way he will have his own independence and be a maker of his own destiny. To help get his new venture off the ground, Dad is willing to spin out of the partnership Michael's $1.2 million dollars, and Michael uses all of it to fund O'Leary's Fast Food. Unfortunately the public doesn't have the appetite for Irish fast food to the same degree that they did for pizza and pasta, and O'Leary's Fast Food meets a quick and very painful demise. Michael now changes oil at the local Two-Minute Drive-Through Oil Change franchise. You may recall that Michael has a sister, Susan. Susan is divorced with two pre-adolescent children. Her ex-husband, who was very taken by the soldier-of-fortune concept, is currently in Bosnia and much prefers that career to running a company business. Susan is not counting on him for any support for herself or the children. When Susan inquires about the investment partnership, Dad once again assures her that everything is fine and that she shouldn't worry about it. Meanwhile, Dad has bought a new Shelby Cobra and Mom is talking seriously about moving to Beverly Hills. Susan assumes that this means that Dad has become very aggressive in his investment portfolio, and fears she will never have funds necessary to educate her children. Sensing the worst, and being the intelligent person she is, she takes her money out of the partnership and puts it all in a secured money market fund, currently earning a modest 4.2% return. Although the return is low, she is comfortable that this will offset the aggressive posture that she assumes Dad has taken. A few months pass and Mom and Dad move to Beverly Hills. Dad has added a Ferrari to his auto collection and Susan is watching the painfully slow accumulation of funds in her money market account. She develops an extreme case of anxiety and seeks therapy for herself and her children. Now, I want to acknowledge that this is a rather extreme hypothetical example, although part of it may be familiar to you. Scenario #2 Let's now take a look at scenario number two to see if things could have turned out any better. In scenario number two, Dad walks into the office of an even better investment counselor and explains the family situation. This counselor, while fully understanding Dad's need for some control and a conservative investment posture in his account, suggests that Michael and Susan also come into the office for discussion of their investment objectives and complete a risk questionnaire to analyze their acceptable levels of risk for their own funds. Dad seems to think this approach might make some sense and brings them to the next meeting. At that meeting, the investment manager proposes virtually the same investment posture for Dad's account that the prior manager did, but a very different one for Michael and Susan. Michael, who can be aggressive, is given an investment allocation of 60% in small and medium capitalization US securities, and 40% in small and medium capitalization foreign equities. This is likely to produce an extremely volatile portfolio (standard deviation of about 28), but also has an expected annualized rate of return of over 16% a year. Michael understands the risks and can accept the volatility. Susan, who needs to be more aggressive than her money market fund investment but who also by nature and need is more conservative than her brother, has a portfolio allocated to 10% in large capitalization US stocks, 15% in large capitalization foreign stocks, 15% in small capitalization foreign stocks, 30% in real estate and 30% in five year government and corporate bonds. The expected annual return on this portfolio would be about 11% per year with a modest standard deviation (or a risk level) of about 10.5. The family together decides that this approach makes a lot of sense and segregates the family partnership assets into three separate portfolios. They have discussed amongst themselves the advantages and disadvantages of collective versus individual meetings with the investment counselor and have agreed to have quarterly meetings together. The manager now has the opportunity to explain the overall investment and economic outlook affecting each of their portfolios and give them a chance to hear each other's concerns and desires. Because each account is separated, however, private meetings are also available with the manager between the collective quarterly meetings, if the clients desire. Incidentally, the manager is also much happier with this arrangement than the manager in the prior arrangement. In this scenario, his goals are very clearly defined for each portfolio. He knows what the acceptable level of risk is for each of his clients and can adjust the portfolio and the risk level as the client's circumstances change. This approach also helps the client hold the manager's feet to the fire in terms of meeting performance expectations.
Mom and Dad still move to Beverly Hills and have also purchased a little country place in County Cork, Ireland. Susan, who feels completely secure in her financial outlook, now runs the
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