Wealth Matters: The Three Different Flavors of Family Businesses

Each family that runs its own business also has its own culture, say two psychologists who work with wealthy families. And understanding those cultures — which these psychologists break down into three groups — can make it easier to resolve intergenerational or cross-cultural conflicts that arise as the business matures and expands.

The psychologists, James Grubman and Dennis T. Jaffe, last year published a book that offers a framework for understanding the three cultural approaches that they say prevail in family businesses. The “individualists,” who tend to be clustered in North America and Western Europe, foster creativity at the employee level. The “collective harmony” view, which prevails in parts of Asia, views family and business as an integrated whole. And the “honor” culture, which dominates in Latin America and elsewhere, places a primacy on family loyalties.

As these psychologists explain in their book, “Cross Cultures: How Global Families Negotiate Change Across Generations,” an appreciation of these three paradigms can help ease the dynamics between older and younger generations, who may have grown up in different cultural milieus, and between business partners from different parts of the world.

“In each culture, families have two journeys,” said Dr. Grubman, a family wealth consultant and a partner at Cambridge Family Enterprise Group in Boston. “There’s the journey up, which is economic, and, for families that are global, the journey across, which is cross-cultural.”

And while no one culture is said to be superior to the others, they are clearly defined in their rules and ways of operating. Not understanding those rules can mean friction when members of different groups interact.

The individualist culture is about being creative and striving for success on your own. Accountability is key, and performance is measured. Just because someone is part of a family business does not mean he or she will one day run the company or even be in a senior position.

Dr. Grubman and Dr. Jaffe, an associate with Wise Counsel Research, which serves family offices and other wealthy clients, describe this type of culture as individualistic, rational and focused on human dignity. The family is supportive, but wants each member to reach his or her full potential.

This culture is said to be prevalent in the United States, Canada, Australia and Northern Europe.

The entrepreneurs behind Zappos, the shoe company, are a good example. They let their employees test out ideas and see what happens. This can lead to great innovations — and financial rewards — that wouldn’t be achieved otherwise.

But there are risks to an individualistic culture. One is that people may go off in different directions and achieve nothing. Another: that family members do their own thing and that a successful family enterprise is taken over by outsiders.

Dr. Jaffe said he was working with two brothers who have separate but related businesses. When he asked them how they planned to pass the businesses to the next generation, they said they wanted their children to create their own companies.

“The fear was, if they work together, the thing will decay,” Dr. Jaffe said. “If everyone goes off on their own, it will be vital and energized.”

The collective harmony culture is prevalent in East Asia. Family businesses from this culture are based on principles that put a premium on duty and respect for family, but also for the community at large. Children who are called into the business have great respect for tradition, but are also given autonomy to run their own areas within the larger family enterprise.

“They have trust and a greater connection to society,” Dr. Jaffe said. “There’s a real web of connection and obligation. The justification for them being a wealthy family is they’ve been great citizens of the wider community.”

The downside is that these businesses can be slow to innovate, because of the emphasis placed on harmony and respect for what has gone before.

Both individualist and collective harmony cultures evolved out of the honor culture, which is essentially tribal. In the hunter-gatherer phase of human history, the tribe was the only group you could trust. Members deferred to a chief, who had total power but who cared for those in the tribe.

In the context of family businesses, the honor culture persists in Latin America, Africa and the former Soviet Union. It is also present in places like South Korea, with its chaebol — the family-controlled conglomerates, like Samsung, that have immense economic power.

“You have to have a unified approach,” Dr. Jaffe said. “Your word has to be trusted, so you evolve into having one person who is the leader. Everyone is loyal to him. The others can’t be trusted, because it’s not safe.”

The leader’s children do not find their own way in the world. They work in the family business but without the autonomy of children in a harmony culture. All major decisions need to be approved by the leader.

“The easiest mechanism to keep things organized is a very small group,” Dr. Jaffe said. “People can’t run off in all directions. It’s a single-minded organization run by a small group of people.”

These companies are very hard to change, and they struggle to adapt when the outside world challenges their dominance.

Dr. Jaffe compared the central tenants of the three groups: “The individual culture says, ‘Go off on your own.’ The harmony culture says, ‘You have an obligation, if you’re called by the family.’ The honor culture would say, ‘You’d better join the business, because you can’t trust other people.’”

Dr. Jaffe said the research that he and Dr. Grubman had done suggested that President Trump was deeply rooted in an honor-based culture. This, he said, may help explain why his approach is so different from that of recent presidents, who have been more individualistic.

“He’s so honorbound,” Dr. Jaffe said.

While this may help explain Mr. Trump’s need for loyalty among advisers, it does not mean that he — or anyone from an honor culture — cannot be successful in an individualistic culture.

All three cultures, as Dr. Jaffe and Dr. Grubman see them, are valid ways to run family businesses. Where it becomes difficult is when they clash.

“How would you create an alliance between Zappos, where everyone does what they want, and an honor culture where everyone follows the leader and they don’t open their mouth?” Dr. Jaffe asked. “It would be hard to harmonize.”

Clashes among these three cultures are common and, outside the political realm, avoidable only when the family understands what culture it comes from.

“The relevance of this is when you have family enterprises around the world, and they grow out of places like Greece or Brazil or Dubai,” Dr. Grubman said. “They’re steeped in that honor culture, but the parents send their children off to get educated in the West, and then the kids come back and they have different ideas. They rock the boat.”

There is nothing wrong with rocking the boat, but when those different groups come together, they need to work harder to speak to each other with respect, at least if they want to avoid tipping the vessel over and drowning.