Business Family Justice in Ownership and Wealth Transfers
4th February 2022
The Family Business Challenges series
The Family Business Challenges series offers practical guidance for those involved in family businesses to help them manage the challenges that they encounter.
Family businesses face unique opportunities and threats in developing a successful enterprise that works for the benefit of key stakeholders.
Each guide identifies commonly faced issues and discusses the strategies for managing the tensions and competing demands that arise in family businesses.
Each Family Business Challenges guide is illustrated by a case study and divided into three sections:
1. Defining the Challenge – clarifying issues and summarising thinking in the subject area
2. Actions to Consider – strategies to help those involved in family businesses to meet the challenge
3. Resources – suggested further reading and resources
About the Author
This guidance was written by Dr Susan Lanz with input from Dr Martin Kemp, Head of Research at the IFB Research Foundation. Dr Lanz is an Economic and Social Research Council (ESRC) Fellow at Aston Business School, Aston University. Her work focuses on understanding business-owning families, especially in relation to justice issues that arise in transition periods. She recently completed her PhD (2020) at Aston University. Her thesis focused on understanding the process of ownership transfer in businessowning families, and how justice is understood and communicated between different family members.
Acknowledgements
We wish to acknowledge and thank Damini Sharma at The OM Group who contributed the case study for this guidance, as well as members of CREME at Aston University, the Trustees of the IFB Research Foundation, and IFB colleagues who supported the project. We also wish to thank the benefactors of the Research Foundation, and the support of the Economic and Social Research Council (ESRC) who funded Susan Lanz as an Early Career Postdoctoral Fellow to build impact from her doctoral research.
1. Introduction
This Family Business Challenges guide provides evidence based guidance for family-business owners and their advisors on inter-generational business ownership and wealth transfer. It focuses on the justice (fairness) dilemmas that can arise in intergenerational ownership and wealth transfer decisions.
The guide is split into three sections.
Section One – Defining the Challenge
This provides an overview of what has been commonly described as the Great Wealth Transfer1, its importance to business-owning families and the role that perceptions of fairness and distributive justice play in ownership and wealth transfers.
Section Two – Actions to Consider
This presents a case study to illustrate how different generational perspectives on justice during the ownership transfer process can affect members of the business family.
Section Three – Checklist and Resources
The checklist suggests ways of responding to some of the most challenges and dilemmas that can arise in this process. The final part of this guide suggests additional resources for business families and their advisors to help them navigate the underlying justice issues that can arise when business families experience ownership and wealth transfers.
2. Defining the Challenge
This section provides the reader with an understanding of the ownership and wealth challenges that arise and discusses how wealth transfer affects business-owning families, especially how fairness is understood between family members and generations.
2.1 The Great Wealth Transfer
The UK population is aging rapidly with people aged over 50 the fastest growing segment of the UK population. It is projected that by 2041 over one in four (26.2 per cent) of the UK population will be aged 65 and over. It is estimated that £5.5 trillion in wealth will be transferred across generations within the UK over the next 30 years, with 90 percent to be transferred via inheritance bequests. This phenomenon has been described as the Great Wealth Transfer and will be the biggest wealth transfer in the UK, and Western countries, in modern history. Recent reports also highlight the increasing importance of inheritance on the life outcomes of younger population groups.
As key custodians and transferors of a significant part of the UK’s wealth through their business ownership, family business owners and the next generation of family owners are key actors in this transfer of wealth. In many business-owning families, most of their economic wealth is embedded in their businesses, with family owners preferring to pass their business shares and wealth to close family members.
2.2 Difficulty of Ownership and Wealth Transfers in Business Families
However, business ownership and wealth transfer can be a challenging part of the intergenerational succession process. According to PWC’s 2016 family business survey, around 30 per cent of family businesses close during inter-generational family ownership transfers. Reasons identified for family business closures include a lack of family communication and destructive family conflict. Family transfer conflicts can arise due to family owners being torn between family (membership-based) and business (merit-based) distributive justice considerations. Open family discussions of ownership and wealth transfer intentions can potentially evoke strong emotional responses in family members i.e., sadness, anger, anxiety, and fear, leading to poor family communication. In addition, when transfer choices are disclosed, they can potentially trigger destructive family conflicts and behaviour due to the emergence of different family members’ perceptions of (un)fairness and (in)justice of transfer decisions.
£5.5 trillion
in wealth will be transferred across generations within the UK over the next 30 years
30%
of family businesses close during inter-generational family ownership transfers
2.3 Sources of Family Member Fairness Perceptions
To help business families work through these fairness and distributive justice issues in their own ownership and wealth transfers, we can draw on research looking at family dynamics, especially research and theory relating to family solidarity-conflict dynamics. This can help business-owning families understand what fairness issues they have in common with other families in wealth transfers and help them to work out what specific distributive justice issues they will face and will need to work through in their inter-generational ownership and wealth transfers.
Exhibit 1 outlines the concept of family member justice ledgers and how these inform family members’ perceptions of fairness within a family group. Contextual family therapy (CFT)12 is a relational ethics approach that argues family members have a right to expect care from a family member or members (entitlement), and this in turn creates a reciprocal obligation to care for a family member or members in return (indebtedness). Within this framework, fairness is perceived as a balance of care between any two family members (dyadic relationship), referred to as a justice ledger.
Exhibit 1: Reciprocity Based Justice in Families
“The ledger is a calculus concerned with the balance between the accumulating merits and debts of the two sides of any relationship. Just how much entitlement or indebtedness each party has at any given time depends on the fairness of give-and-take that exists between them”.
Hanson et al draw on CFT and relational ethics to explain, in part, how family business resilience across family generations is maintained or destroyed. Ownership and wealth transfers can put additional pressure on business-owning families. Exhibit 2 outlines the key underlying family resilience considerations that can create or undermine business family success during transition periods.
Exhibit 2 shows how sustaining family businesses across family generations requires trust in family member reciprocation; understanding of what is expected/earned in family relationships (entitlement/merit); balance or imbalance in the giving and taking (perceptions of fairness and justice); and, finally, the importance of understanding to whom family members are loyal to in the past and present.
To understand business families we must know who they feel loyalty towards and the basis of that loyalty. Loyalty ties in families are complex but comprise some level of ethical obligations e.g. parent-child relationships, spousal relationships, and wider family relationships.
2.4 Family Fairness Perceptions within Ownership and Wealth Transfers
Recent qualitative research by the author of this guide reveals the role unspoken concerns, long-running concerns, and areas of unresolved conflict have in creating perceptions of justice ledger fairness between family members. Three key fairness challenges for business families emerge in inter-generational ownership and wealth transfers and these are outlined below:
a. Intra-Family Trust – Generational Impact of Past Ownership Transfer Injustice
The level of trust that exists between family generations can vary both across and within business families. Past generational breaches of perceived agreements and expectations of reciprocity can affect future ownership and wealth transfer timing and choices. For example, family members can do paid or unpaid work in the family businesses with an expectation of inheriting shares in time. If there is a perceived breach of trust in inheritance decisions, this can have a long-term impact on perceptions of trust and relational ethics in a business family. The quote from a family business leader shown in Exhibit 3 highlights the enduring impact of a past breach in family member inheritance expectations.
Contextual family therapy (CFT) is a relational ethics approach that argues family members have a right to expect care from a family member or members (entitlement), and this in turn creates a reciprocal obligation to care for a family member or members in return (indebtedness).