Wealth at risk in fractured families
David Smorgon calls it “The Fractured Family List”. And he laments how many members of The Australian’s inaugural List of Australia’s richest 250 people are on it.
“There are too many families who should be just on The Australian’s Rich List and not on a Fractured Family list — where there are tensions and conflicts between the families, where they haven’t got their act together, where their family business is at risk of imploding, not because of business reasons, but because of family reasons,’’ he said this week on the sidelines of an address to clients of Hamilton Wealth Management at the Kooyong tennis club.
Smorgon, who last year retired from his position as executive chairman Family Advisory at accounting giant PwC and was the inaugural chairman of Family Business Australia, reveals he is working with at least 12 wealthy clients “where there are tensions”.
He claims, by his estimates, that “one in three” families on The List have issues they need to work through.
“There is a difference of opinion. It might be on succession — in other words the younger generation trying to get the older to step aside and give them more responsibility.
“It might be intergenerational tensions between the generations on different value sets and what is important. It could be sibling rivalries, jealousies, fears, concerns over a whole range of potential issues,’’ he says.
“There are also tensions around structural and governance issues in families that don’t believe they need a business board, a family council, they say ‘We do things on the run, we sit around the dinner table, we meet in the office’, and they are not dotting the i’s and crossing the t’s.”
Some of those disputes have become public in recent years, most notably involving the Rinehart and Fox family fortunes. A nasty battle involving Melbourne’s Mandie family over the fortune its late patriarch David Mandie made from duty free shops at airports made its way all the way to the courts, as have battles over the fortunes of Perth building magnate Len Buckeridge and TV game-show pioneer Reg Grundy.
Smorgon himself knows all about the pain and consequences of family conflict.
While he is best known for his role at the helm of the Western Bulldogs AFL club, where he was president from 1996 until he stepped down in 2012, Smorgon is also a member of one of the nation’s most famous and wealthiest families.
In 1995 Australia’s then-largest private company, Smorgon Consolidated Industries (SCI) — a $1.5 billion juggernaut that spanned meat, paper, chemicals, plastics, electronics and steel and had involved four generations of Smorgon family members — was broken up.
The second, third and fourth generations of the Smorgons had come to a stalemate on is future.
David Smorgon was shattered. Following the dismantling of SCI, he established his own family office called Generation Investments, owned by Smorgon and his sons Dean, Ricky and Dale.
Generation’s key operational business is Ride On! Entertainment, which runs children’s amusement rides in hundreds of locations in Australia and overseas.
One of the most important aspects of David Smorgon’s family office is that it is chaired by an independent non-family member, Wingate managing director Farrel Meltzer.
“You need an independent facilitator to chair the family meeting. To go where I don’t want to go as a father,’’ Smorgon says.
In a rare interview earlier this year, Roger Gillespie, the straight-talking, deeply private patriarch of the $700m Baker’s Delight bakery franchise business, revealed to The Australian the importance of having former KPMG global chairman, the late Michael Andrew, as the independent chairman of his family business.
Andrew never talked about it publicly but for years he had chaired the Gillespie family’s family council, acting as the bridge between the old and younger generations of the well-known bakery business, which is now run by Gillespie’s daughter Elsie and her husband, Dave Christie.
Her brother, Aaron, runs Baker’s Delight’s North American and Canadian businesses.
“He had been so good for us. He broke a lot of circuits without knowing he was doing it himself. He knew the times he had to step in, say when the children raised an issue about something,’’ Gillespie said.
In recent years former Packer executive Peter Yates has also been the deputy chairman of the deeply private and prestigious Myer Family Investments Group.
“I rarely come across a family that has put in place the mechanisms, the processes, the structures to be able to deal with tensions and conflict within the family. It is easy to get advice on the quantitative side of things. Where we have to focus in families is on the qualitative side — all the soft, intangible issues. What are you feeling, what are your concerns, your thoughts, what is the purpose of our wealth,’’ says Smorgon, who maintains his own consultancy group, Pointmade, where he helps wealthy families negotiate generational transitions. “You need to peel back a number of layers to understand what are the bigger issues with these families.”
Smorgon says the growing issues among the nation’s richest families will have serious consequences for the nation, given Australia is about to go through arguably the greatest wealth transition in its history.
According to Smorgon’s former employer, PwC, $4 trillion is projected to be transitioned between generations over the next 20 years.
“And we cannot afford to stuff that up. Are we coaching, mentoring, training the younger generation to take over the business? Or are we doing enough to get them to become good investors? What are they going to do if there is an IPO, sale or selldown in their business? What are they going to do with the cash? You can’t just rely on them because they have a good surname,’’ he says. “There is a difference between being a successful business and a successful investment organisation.”
One of the biggest issues, Smorgon says, is the business founders and owners — mostly men — refuse to give up the reins.
He estimates half of the men and women in their 70s or early 80s who have run their businesses for 40 years or more are having trouble letting go.
“And I am not just talking about saying they are letting go. I am talking about stepping down, giving responsibility to their kids or a family member,’’ he says.
The average age of members of The List — Australia’s Richest 250 is 65 years.
But Smorgon’s greatest concern is the tensions among families on the Rich List are not getting better. They are getting worse.
“The biggest challenge for us is to convince these patriarchs and matriarchs that it is not the size of the balance sheet that matters. Their biggest assets are their children,’’ Smorgon says.
“They simply must encourage the younger generation to get familiar with their businesses, get familiar with wealth and familiar with investment. That remains a huge challenge.”
Image: David Smorgon at Kooyong tennis club. Picture: David Geraghty.