Spotlight on Family Governance – Entrepreneurship Across Generations

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Maya: Hi, I'm Maya, and welcome to JP Morgan's Spotlight on Family Governance series.

In this episode, we welcome Rodolfo Paiz, a third generation member of a successful business family from Guatemala, who is himself, an advisor to business families in the Americas.

His family was an early pioneer in Latin America of intentionally developing their family governance protocols.

He's also founder of a family office designed and intended to last 100 years. He lives in North America.

I'm truly thrilled to explore with Rodolfo what family governance means to him and how his families, both his family of birth and his client families, have cultivated their relationships as a family, and what is their secret source to nurturing entrepreneurship in multiple generations?

Welcome, Rodolfo.

Rodolfo Paiz: Thank you, Maya.

Maya: Let's start by giving our listeners a bit more background about you and your family, and your work.

 Rodolfo Paiz: I come from a really great family. It's nice to be able to say that. Most of us have a fairly complex history to tell, but my family did a lot that I could learn from. I was too young to really participate in much of what was going on, but old enough to see it and learn from it firsthand.

My family started really with my grandfather who was orphaned and he failed at several businesses, but every time, he picked himself up and paid back anyone he still owed from his prior ventures, and so he built up a reputation.

And when he was 25, he was able to set up a little shop with the inventory on consignment because people trusted him. And that time he didn't fail.

And so the family always grew on core values of ethical conduct always, hard work, education and learning, and really service to our employees, to our community.

My grandfather echoed a lot of the teachings of Disney, and Ford, and others, about stakeholder capitalism and looking after the people around you, not just your own pocket. And my family defined success as being respected, trusted, and at peace with yourself, not about how much money you have.

So the family ended up with a great many firsts in business, either in Guatemala or across central America.

I believe we were the first company to incorporate and allow employees to own shares. We were the first to set up a pension plan. We were the first to set up profit sharing. We were the first to do health insurance for employees. We were the first to do self-service supermarket in central America. And there's a fairly long list of that.

We were also one of the first families to work on family systems governance.

And I found governance fascinating. My family hired one of the leading consultants in the field when I was nine, and so I literally grew up with my family in one ear, a consultant in the other. And over time, I realized really more than a business person, my soul is of a teacher and a guide, and I realized that there's a science to family systems, that families in business are more successful than non-family businesses. That most of the negative images of family businesses and families is a myth, but that you really do have to follow the rules to get results. So in the end, I've made it my career to teach and guide other families.

When you hear me talk about my families or our families, we are lumping in both my family of origin and many of our client families, because that's all we do for nearly 20 years now. We just provide good advice and guidance to families in business, and that's where we are today.

Maya: Rudolfo, I just really love what you said about the thing that what success means to you as a family is to be respected, trusted, and for people to be at peace, the family to be at peace. Absolutely wonderful.

And many people hear the term family governance, let's start there, and you've mentioned it now as well, and are often confused by what this means. It seems, to some people, to signify bureaucracy.

I wonder if you could share some thoughts as to what family governance means to you.

Rodolfo Paiz: It seems like these days, governance is one of those secrets that is the key to eternal youth, but it really shouldn't be seen as either a secret or anything complex.

First off, governance is not any particular document, any family constitution. It's not a council, a structure. It's not a trust. It's not any of the mechanisms that are often seen.

And governance is not a corporate thing. Governance is a universal concept and it applies to everything. It's everywhere. It's a bit like the Force in Star Wars. You can have a light side and a dark side, but it's everywhere in the universe.

And really governance is how and why we do whatever it is we do. To what limit? To what extent? By what rules?

So as a person, you have individual governance. You choose what kind of food you eat and when. You choose how much exercise you get, how much you care for your sleep. You choose how you treat your friends. You decide how you want to live your life. And that is governance.

Those decisions about who am I and how do I want to live this, that's governance.

If you get together with your Tuesday night poker group, there's governance there. Who brings what? What are the rules on betting? What's fair? What's not accepted? Everything has governance, individuals, families, businesses, countries, everything. And the more you understand that this is the most normal thing on earth, the most universal thing on earth, and you just deal with it as part of your daily life instead of thinking it's complicated and overthinking it, the easier it gets.

Does that make sense?

Maya: Absolutely. And you shared with a wonderful example of governance in practice in your family, which is very simple, and I think absolutely beautiful. I'd love you to tell that.

Rodolfo Paiz: Well, yes. I think that the key words for governance are appropriate and functional. You have to have the kind of governance that works for you and you have to make decisions that are appropriate for where you are. There is no one size fits all argument.

In fact, sometimes the best decision you can make is to take apart and dismantle some of the family businesses or even all of the family businesses, because that'll be better for renewal, for rebirth, or because the world has changed.

The case you mentioned is one where my family of origin, my birth family, grew to a point where we had 100 plus supermarkets and I believe 20,000 plus employees, but family governance and corporate governance was one single Tuesday morning meeting, every Tuesday, all morning, and you're there unless you're dead or in the hospital.

And it was my father and his siblings, and a couple of key non-family executives who kept them honest, served as a memory aid, and were part of the team. And any possible issue that could be brought up, whether family, business, ownership related, everything came to the Tuesday morning PC meeting.

PC was even a reference to an earlier venture that they had attempted to install called the Paiz Consultants, which had failed.

They had tried to set something up. It didn't work and they kept the PC name as a reminder that on Tuesday morning they were consultants to themselves and they needed to do a good job.

And what I like about that is it's simple. It worked. People assume that a large business needs complex governance, and it's just not true.

If it's a business with five siblings who control everything, then as long as you can get those five siblings, they're on a table, you've got what you need.

Maya: Absolutely. I hosted a family just last week and what they had decided on was a family meeting on a Saturday morning where they would discuss their investments, their philanthropy, and then have a lovely lunch together.

And everyone knows that it's on the last Saturday of every month. It's repeatable, it's regular, and that's what you are describing as well. Something that's repeatable, regular, everyone knows they have to be there. They clear their diaries for it, and it's as simple as that.

 Rodolfo Paiz: And it's the right decision for that family at that time. It works for them because that's the key.

In fact, I'd like to segue onto that to one important point, perhaps the most important point of all, that family is doing one thing very, very right because they have realized that the family itself is more important than the business.

The family enterprise world has changed over the last 30, 40 years, and around 2010, some new research came out that really changed the course of the industry.

Before, we used to think that the family business was the most important part and the family should work around the business, and the business should be given priority.

Now we understand that the family is the most important part of the system. The family over years, and decades, and generations will build experience and build a diversified portfolio of businesses. But it's not the business that's important. It's the family. That's what really leads to success. Even if you define success purely as commercial material success, the most important thing to work on is the family.

Maya: Yes. And you said right at the start that I come from a wonderful family, so it really shows.

And it's very interesting that you say that as most people may assume that it's the business or managing financial assets that should come first.

I wonder if you could say a bit more about how you have really nurtured that sense of family and that sense of connection within your family. Maybe just a couple of points or practical things that people can do.

 Rodolfo Paiz: Yeah. First, I think that it has to be hammered in that every family needs to find their own answers, but there are some common threads.

One major common thread is knowing where you are and who you are.

In the 1990s book, Succeeding Generations by Ivan Lansberg and Kelin Gersick, there's a wonderful illustration where it says the first generation or one where the business is controlled by a single founder or a single owner is like a tennis game. Usually, you have the owner and spouse, whether that's male or female in each case, and it's a tennis game. There are no real rules to how we play our positions. We just want to hit the ball. If I fall, you cover the court. If you fall, I cover the entire court. Very simple.

When you have a second generation group of siblings managing a business, then you have a basketball game. You have positions, but many of the plays still need to be improvised. It's very fluid. There's the captain, but that captain is a leader not a boss.

[Foreign language 00:12:50] is in Latin, first among equals.

And once you really get into a family system where you have several family branches and cousins, and multiple businesses, now you're running a league. Whether that's a soccer league or the United Nations, but you now have a full league. Everything needs to be documented. There need to be contracts. Everything need to be market price.

Because we didn't all grow up in the same house, we don't have exactly the same experiences, common stories, and values, and so the family needs to see where they are.

One of the biggest problems I see in multiple families is the second generation showing up to a basketball game with a rocket. And it just doesn't work.

Because your parents did it for 30 years with great results does not mean it'll work for you.

Now, what does work for everyone is knowing yourself and finding the things that really enrich your experience. Almost universally, family time needs to be sacred. There should be a family vacation, a family trip, lots of dinners. We need to really treat the holidays that are important to us, religious, secular, whatever, as sacred to us. If it's Saturday morning meeting, if it's Sunday dinner, those need to be important.

And we also need to know how to balance in this family and at this time, the pull toward being more together and more collective, but also giving space for individuality, and freedom, and expression.

Sometimes the greatest benefit to our family will come from somebody leaving because they're toxic or somebody leaving because they want to go explore the world, and they'll come back to us later with more to contribute.

So it's not more is always better. It's not closer is always better. It's what is going to work best for us, and the keyword there is always balance and family.

Maya: Absolutely. That's wonderful. And in fact, in the freedom comes greater, draw towards connection, rather ironically.

One of the things that your family and the families you work with have been wonderful at is really thinking about being entrepreneurial. And this is a question that we are asked a lot, which is how can you really encourage an entrepreneurial spirit in each generation? And I just wondered if you could share some thought on fostering entrepreneurism.

 Rodolfo Paiz: Oh, yes. Yes. Lots. Let's try to keep this a bit brief because I can spend a couple hours on this topic. But it's really important to share failure as well as success.

The family leaders, the senior generations that try to hide failure from their kids or protect their kids from failures are setting themselves and their children up for failure by doing so.

We work with a wonderful family in Costa Rica where dad is simply an amazing business leader. The man is really outstanding, even among the people we know. But his greatest strength is that he is constantly humble and constantly listening, and he takes feedback, and he listens to everybody, his kids, us as his advisors, everyone, and he learns and he applies, and he makes it a point to explain to his kids where he went wrong, what he did wrong, how he failed, because everybody needs to understand the individual and the family that failure is inevitable. What is not inevitable is learning from it and using it to grow.

Failure can be crippling, but that's your choice.

But trying to avoid failure, like trying to avoid pain, only leads to families, and people, and businesses who are not resilient, who can't pick themselves up and move on and grow stronger.

You need to treat failure like a broken bone that grows back stronger, and not treat your children like fine china that if it falls once, will shatter forever.

You also want to reduce the cost of failure. You want to make it easier and more fun to try and experiment to try something new because if it doesn't work, that's okay.

There are things you should never do. You should never lie, steal, or cheat, but go on and try your own business. Try and adventure. Go on, fail. That's how you learn.

Maya: And that's key to every entrepreneur. They all talk about their stories, if they really reflect on it, and say, "Here were the really down moments, and it was my resilience, and grit, and just pushing through and not being afraid of failure that helped me to succeed." And clearly, being able to share some of that with the next generation is hugely helpful.

 Rodolfo Paiz: And if you can take from a moment, a dive into academia and philosophy. If you look at Maslow's hierarchy of needs, the worst suffering you've experienced feels like hell. And to people who've actually been hungry, who haven't had enough to eat, who've suffered serious hardship, they shrug off many of the little things in daily life that can go wrong.

But if you've coddled your kids and you've spoiled them, and they haven't had to deal with a problem in their life, and you've solved all of their problems or prevented them from facing problems, those kids are going to grow up believing that a hangnail is the end of the world, or they didn't get the color rug they wanted for their private jet is the end of the world.

You want them to be a little cold and a little hungry sometimes. It sounds a little cruel, but you want them to suffer a little bit because that is the only way the human race learns.

Maya: Rudolfo, thank you so much for sharing your ideas, and your insights, and your wisdom with our listeners. Perhaps in conclusion, if there is one piece of advice you might give families just getting started and thinking about their own journey of family governance for the first time, what advice might you offer them?

Rodolfo Paiz: So first piece of advice will follow logically from what we've already said. Don't make it too complicated. Don't overthink it. Don't get sucked into making it harder than it is. Be aware that for a family, dealing with intangible issues, like how do we set up rules for ourselves and what agreements, because agreements is a better word than rules, will help us get along better and be more productive together, there's a tendency to want to avoid simply paying for advice.

People tend to focus on tangible products. If I'm going to pay somebody, I want something delivered to me, and so it creates an unhealthy dynamic where you may find many consultants selling a product, a report, a deliverable, a family protocol, or a family constitution that you don't need, but you're more likely to buy that because it's tangible.

Now, the family constitution and the family protocol are a subject for another day, but they are essential tools for families whose systems, whether the family, or the system, or the business has become highly complex.

But for a family of a few people who have one or two businesses, even if those businesses are quite successful, if there's not a very high complexity, there's no real need for the family protocol constitution yet.

I know families with three siblings who are on their fourth family protocol and it means nothing. It's just a piece of paper. They don't need it yet. So don't overthink it.

Also, over time, we built a tool at Fidelis we call the Iceberg Methodology because it uses the iceberg cliche to explain the importance of different levels.

The lowest level of the iceberg, the one that's deepest underwater is the family because the water's colder down there. The currents are stronger. There's less light. And it's hard to work on those issues, is you have to be respectful, and compassionate, and kind.What they call soft skills are actually much harder, but those are the important parts.

After you work on family, you need to work on education, on learning what you need to know. And with that, you need to work on governance.

Family, education and governance are the three bottom layers and the three most crucial layers of the iceberg because those will determine the success of everything else you do.

If we're talking wealth advisory, and I've always been a fan of the work you do with the team at JP Morgan, really the wealth, and in wealth, I include reputational wealth, financial, social, intellectual, how healthy and happily your family is, to keep your wealth above water, you need to worry about all the ice that's underneath it, because if you don't deal with the family, the education, the governance, your wealth sinks.

Maya: I love that, Rodolfo. Such a simple and effective, and strong message for us all.

Family, education, and governance. That is really the baseline for everything.

Thank you so much for this lovely conversation.

Rodolfo Paiz: Thank you, Maya. I think I'll echo something you said to me ages ago, and it was that most people are too afraid to talk about their failures and their problems to outsiders. And the key lesson families can take away is to actually seek advice.

Maya: Absolutely. Thank you so much.

Rodolfo Paiz: Oh, not at all. I'm delighted to be here and thank you for the invitation.