Succession Planning

Abstract

The long-term survival of a family office requires family unity. Succession planning is a difficult but crucial part of achieving this. Several different aspects are reviewed. First, both the rising and retiring generation should negotiate a forward-looking succession plan. This includes a written agreement on how leadership responsibilities will be handed over. Finally, a mediator, internal or external, should be engaged if the parties find themselves unable to work effectively with one another. Major potential points of conflict and the basic considerations of estate planning, including accelerated succession, are also discussed. Interview with Christian-Titus Klaiber, a member of the Leitz industrial family and an executive in the associated family office.

Christian-Titus Klaiber is the deputy chairman of the Leitz Family Office shareholders’ committee. He and his relatives in the shareholders’ committee work to promote long-term cohesiveness in the family and control that its assets continue to grow over time.

From Germany: “We’ve stayed together as a family for generations.”

6.1.1 Interview with Christian-Titus Klaiber

This interview explores the choices that face high net worth families after a cash event, the challenges of family governance and getting buy-in from later generations for the family office and the emotional value of charitable foundations.

The interview was conducted by Alexander Koeberle-Schmid.

Mr. Klaiber, you are a member of a well-known industrial family here in Germany, the Leitz family. Over 15 years ago, the fourth generation made the decision to sell Leitz, the family’s legacy company. What’s there in its place today?

Christian-Titus Klaiber: Well, we don’t have factories any more. We sold all our shares in the company to the Esselte Group. So nowadays there’s a family office on the one side and the Louis Leitz Stiftung on the other.

What changed for you all after the sale?

CTK: The business was well over a hundred years old by the time we sold it. My great-great-grandfather Louis Leitz first founded his workshop to produce metal parts for organizational tools back on 1 July 1871. In 1896 he invented the Leitz folder, which you’ll still find today. In this case, ‘running the operating business’ means: We always produced office supplies and sold them worldwide. 15 years ago, in the aftermath of the sale, all we were left with was cash. Which posed the question: Were we going to remain together and undertake something jointly, or was everyone just going to take their own share of the capital and go? We decided to remain together as a family. In fact, we were unanimous on the point. The family gets along very well with each other and recognized that in the aftermath of the sale it made much more sense financially for us to stay a cohesive unit. For starters, we have an entirely different magnitude of influence when we invest our money as a group. And it also protects shareholders working in other fields, the ones who weren’t economists, auditors or bankers. If you’d simply transferred the money to their accounts, they would’ve been left to ask themselves: So now what am I going to do with all this?

Did all of the family members sign on after the sale of the company, i.e. did all the proceeds from the sale go into the family office?

CTK: I think there were six shareholders who left the family association. For a variety of personal reasons they wished to invest their money on their own. They didn’t want to be bound by communal decisions. And they were furthermore of the opinion that they had sufficient knowledge to invest their money on their own. There’s no doubt that upon sale there will be an initial wave of withdrawals. But I’d say that the rest of the family applied over 90% percent of the sales price to the family office.

How many shareholders in the family office are there today?

CTK: We currently have 45 shareholders. Each family member receives a small share when he or she reaches 18 years of age, and so automatically becomes a shareholder. The idea is that you grow into the family and into the responsibility that goes along with this kind of wealth, and have time to better understand the issues.

What is your family office responsible for managing?

CTK: Our family office serves as the final instance of approval for asset investment. The asset portfolio as such is outsourced to professional wealth managers. We formulate the strategy, so to say, but not the operative elements. We don’t undertake tactical asset investment. The family office is thus a final approving body for any asset investment and makes strategic decisions on such investments. It also coordinates our asset controlling and asset reporting. An external service provider has actually been contracted to handle this work, but the family office collates it all for us. The family office handles tax planning and tax returns for all stakeholders. In the past, all insurance policies were also handled centrally within our family office. That’s no longer quite as prevalent any more. The family office plans the general shareholder meetings, which are held twice a year. It also coordinates all of the activities and events that we conduct to reinforce our family identity, such as the “Day of the Fifth Generation,” joint skiing excursions among the fifth generation and continuing education events. So, we’re talking about really concrete family governance measures. This is where the families, and the members of the family, gather and meet, and where the fifth generation also comes together. What we don’t have is a central organization for all of the security questions on the part of the shareholders.

Who pays for the services of the family office?

CTK: It’s all paid centrally from one big pot. There’s no cost center-style breakdown. Everyone has agreed to this. In our family, there’s a principle of mutual give and take. As long as it works for everyone, the whole system is stable. There are years where one person utilizes the family office more strongly and other years when someone else does.

What is the leadership structure for your family office?

CTK: The stakeholders choose a shareholders’ council from their own ranks, which in turn selects a chairperson and a deputy chairperson. My uncle is the chairman and I’m his deputy. We have a family office advisor. That gentleman is an auditor and tax accountant.

So you’re a member of the shareholders’ council for your family office. What are its responsibilities?

CTK: The shareholders’ council represents the interests of the shareholders. It’s akin to an advisory council or supervisory board in a company. For example, it sets the investment strategy, meaning it defines the bandwidths within which investments should be made in the various investment classes. The shareholders’ council makes the strategic decisions that are then conveyed to the asset managers.

What are the responsibilities of the shareholders’ council in terms of family governance measures?

CTK: For example, we’ll be holding our “Day of the Fifth Generation” next year in Bad Homburg. Members of my generation who haven’t been as deeply involved in the details of the family office are invited to join us for a day in Bad Homburg and gain some insight into what exactly we do here in the family office, what the various asset classes are, who the people are behind all that work, and so on.

What were the origins of this “Day of the Fifth Generation?”

CTK: It was actually my idea, and we took it up in the shareholders’ council. First, I talked with the central contact person for the fifth generation and the person who organizes continuing education events within the shareholders’ council and we decided: “It’s a good idea, let’s do it.” The family office is handling the operative implementation.

What does a session of the shareholders’ committee look like?

CTK: In concrete terms, we discuss all topics openly. Following classic parliamentary rules, everyone is welcome to offer his or her opinion and the discussion remains open until a solution is found. We’ve got quite a wide range of characters in the committee, with different professional backgrounds. At the end of the day, we’ve always managed to come to a mutually agreeable solution—even if discussions have dragged on quite late at times.

Where do you meet for the sessions—since you no longer have the corporate headquarters.

CTK: We have an office in Stuttgart, where our family office is based. That’s the central meeting point for our family. After the sale, the Louis Leitz headquarters in Stuttgart-Feuerbach was no longer available for meeting. We initially met at fancy hotels, but it didn’t really work for us. Even since we’ve had our family office, we have always met there. The round table in our conference room is a tangible symbol of its role as a place for all sides to come together. Everyone gathers around this table, makes communal decisions and works to find solutions.

The topic of succession is a relevant one for you as well—in the establishment of shareholders and in the control of the family office. How are you nurturing your successors?

CTK: A generational passing of the torch is coming for us soon. The fourth generation is now between 50 and 75 years old, while the fifth generation is between 30 and 45. For right now, the fourth generation retains the ultimate decision-making authority. That responsibility is increasingly being passed to the fifth generation, however. I’m the deputy chairman of the shareholders’ committee right now and am assuming a growing share of the responsibility—including from my uncle.

In summary: What do you see from your perspective as the success factors for family offices?

CTK: You need loyal and discreet employees. After all, they’re dealing directly with the members of the family. For example, the central contact person for all shareholders has been working for us for over 40 years (initially at Leitz, now for us in the family office). My grandfather first hired her. Beyond this, you need external expertise in wealth management, law and taxation. Because simply being a nice guy isn’t enough. Clear decision-making paths are also essential. And all sides must be clear on which topics are handled on our own within the family office and which tasks we will pass on to external consultants. For that to work, skill profiles need to be defined for people working in the family office. That applies to family members in the committees as well.

Putting the family office aside for a moment, you are also engaged in the Louis Leitz Foundation. What moved you to create your own foundation?

CTK: We were always entrepreneurial in nature. As Swabians and as owners of a family-run company, the well-being of our employees and their families has always been very important to us. In some cases we’ve had generations of different families—grandparents, children and grandchildren—all come to work for us. We were a very important employer at the local level. When we sold our company, the fifth generation in particular felt that there were issues that needed addressing: are we going to be satisfied with this monetary wealth, or is there also value in taking a portion of that inheritance, this economic success, and giving back to society? We also wanted to establish a framework that would promote ideal togetherness. And so the foundation was created. It is focused on education, training and employment. That reflects our tradition.

How is the family involved in the foundation’s work?

CTK: Over 90% of all shareholders are also benefactors. All on a voluntary basis. We have a foundation board, with a chairperson and deputy. Both are members of the family. The members of the foundation board, also members of the family, oversee various projects as sponsors. These projects are then presented twice a year after our shareholders’ meeting. The responsible parties report on how the money was used. And that motivates the shareholders as well.

What projects are you supporting?

CTK: The “Seehaus” in Leonberg, as an example. It works to re-integrate youths with a criminal past into society. My mother is involved with the SELF project in Kassel. It’s a program for children without parents, or whose parents have abandoned them. We help them get started in a career. In concrete terms, my mother sponsors three youths and provides them with assistance. What stands out about our foundation work is that the members of the foundation are personally involved with the projects they sponsor. We want to be present in the projects as a family, something we see as a success factor.

Which other success factors do you see for good foundation work?

CTK: The shareholders and members of the foundation need transparency on where the money is going. There need to be lean structures to keep administrative costs down. A foundation always needs to be aware that it’s not just managing itself, it’s also responsible for ensuring that the money is reaching the people who need it. Beyond that, a mix of generations is important. If the foundation is solely run by the ‘golden generation’ and is unable to pull in the younger generation, then at some point the board turns 90 and finds it hard to continue its work. So we must question our own methods and processes. Things that were modern 20 years ago can be perceived by young trustees, themselves little more than 20 years old, as being no longer modern at all.

Looking back over the past 15 years, what would you change going forward?

CTK: 15 years after selling our company, we’re still together as a family. In many places large segments have already been transferred from the fourth to the fifth generation, or the process is underway. We all get along very well within the family. To that extent I’d say: The family office has been a success and is likely to continue being so. With that said, we need to be diligent in ensuring that the family office stays lean. And we need to work on a smooth, shared transition between the generations in the years to come. The groundwork has been laid for that. We have well-educated and interested fifth-generation family members. That means continuing the shared spirit and remaining thankful about being a member of the Leitz family. And we always need to continue working on that.

So you feel that your efforts have been a success?

CTK: In terms of the economic success: staying together and investing jointly through a family office has definitely paid off. In terms of the societal impact of our foundational work: the projects have genuinely had a positive impact on our society, because the project sponsors from the family are personally involved. And perhaps most importantly: The family has stayed together across generations.