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August 2023 Session - Scenarios Documentation

Scenario 1:

The year is 2050. Matt’s child approaches to this board with a request for $200M to start a business. They haven’t started any other businesses, the business case is very loose, but there’s a lot of passion and the idea sparks the board’s interest. You’re seeing passion out of Matt’s heir, but you have a feeling that they still, as an individual, have some maturing to do. How do you approach the situation?

  • Depends on what the percentage of the portfolio it is. If it’s a drop in the bucket, that would affect how we would think about it.

  • It would potentially be unfair to other members of the family or potential future generations. One person didn’t take that much risk on it, so there is the question about envy and entitlement. Are we putting too many of the eggs in one family member’s basket?
    • How many children are in the family?

  • Tell them to get some outside investors and the board will make a down payment. The idea should be validated by professional investors and the heir shouldn’t count on the family to just fund.
    • Ask questions: What other sources of funding could also help to do this? Where did the idea come from? How did you get that? What kind of market research did you do? Questions then result in further action or work that the heir must do to tighten up the plan personally. The board takes them through the learning journey.

  • The FAB has to protect against key risks. Giving money out is a risk to the family, but also a reputational risk, if it fails. Usually, you can talk people out of bad ideas just by asking questions.

  • The FAB also has to hold the notion of avoiding waste and seeking value, as well as the importance of being fair.

  • Joe: Right now, it’s our average investment in outside deals, $1 million. Down the road, maybe our minimum investment will be 10 million. So, if they’re seeing that we’re putting $10 million into all these deals, of course they’ll come to and say, “Hey, I’ve got a deal, do you want to put 10 million into it? You do it with all these other people.” They don’t understand this, they just think that that’s normal.
    • If you decide to do a deal, we advance certain amounts based on milestones. We’re in the preferred position, so you don’t own it, we own it. But if you hit these milestones, you can buy it back for a low price or something.

  • In past experience with family offices, there are named advisors who are meant to be a protectors but often feel like somebody who holds things back. This creates a negative psychology.
    • Uncle Rick was there for 35 years doing prenups, and there’s all these negative feelings that came with it. He did what Generation Two wanted, but it’s just different now.
    • We think about incoming spouses: one of their key worries is we come into this lifestyle, meaning not just dollars, but now I have to do philanthropy and I’m embedded in this and I have to do this, and not everyone’s an investor. We are advisors to all family members in here, and there is financial stewardship, but then there is psychological safety. And the psychological safety is, I think, a greater value, because you can always find a service provider for the other things.

 

Additional discussion:

  • Evolution of this work that has to get done of single-family office and multi-generational, and some people always handle the work.
  • Psychological safety around the family office, ability to rely on family office for fiscal support (prenuptial agreements, estate planning, etc) and for important personal needs (finding and scheduling medical care, etc)
    • The role of “knowledgeable confidant”
  • How do you help people have higher self-esteem and feel good? The net benefit and the net positive.

Scenario 2:

The Elevate Prize operates as it does today. It’s supporting a diverse portfolio of things, as it moves towards building an ecosystem. The executive director approaches you with a big, pressing social issue. It’s going to require focus and sustained effort to do it. And they want to adjust sort of the mandate of the foundation for this really important thing. You agree that this requires energy and effort, and may require a change in the scope of the organization’s mission. How do you deal with that?

  • At Elevate, there are two boards above the executive director, who would have had to vet this and have expertise within the prize itself.
    • There is an underlying structure, set up by Joe and Matt, that is not so restrictive, and we need to be careful about changing it.

  • We would have to weigh the opportunity cost vs. risk and decide if it is worth it for Elevate to go all in on one thing.

  • Joe: We need to better understand the original intent of Elevate. There are other organizations doing similar things, and they serve as fun and personal inspiration. We have tried different things, and it evolved over time. It’s a ball game, and the resources are the ball, and you find amazing people and hand them the ball. And as I went, I realized there is a big cultural void where there is no platform to learn about and celebrate social heroes, and we added that. There’s no shortage of issues to help. We need to understand more about it, can we collaborate, use milestones, donors. It’s not a yes or no decision but understanding more to lower the risk and improve the probability of success.

  • Elevate is a perpetual foundation, meant to fund social agents, socially elevate them, and amplify their efforts. In that context, a big bet on one thing goes against the mission, no matter how good it is.
    • Example of “non perpetual foundation: Michael J. Fox foundation is predicated on one issue (Parkinson’s), lives by the concept of “…we’re here. Until Parkinson’s isn’t” and gives its money away completely every year (no endowment).

  • It’s not a binary yes-no, we should lean into the problem, investigate, and consider if we you should use the organization’s resources to start something else or to partner. Work through it vs the job is to say yes or no.
    • Joe: It’s just like any other business: looking at the market, competition, etc. The same applies to a nonprofit.

  • Joe: If the intent gives birth to the mission, and the environment has changed so that the mission hampers the intent, I do not want to be bound by the mission.

  • Matt: I come back to what is the intent, what is the role of the FAB and how do we address that.
    • Sometimes we might have to deviate in order to get back to our purpose.
    • Joe: At some point, things become a bureaucracy and people care about their job, their career, etc.

Additional discussion:

  • First Elevate prize recipient, Kaushik Kappagantulu, started Kheyti “greenhouse-ib-a-box” for farmers in India. He credits the intense media training from the Elevate program as a major driver in his Earthshot Prize win.
  • Have you thought about the multiplier effect? Asking awardees to pay it forward. Joe: No, these people are visionaries (missionaries), this is their life. The rare one has no interest outside of it.

Scenario 2.1 (Matt Deitch’s Scenario):

The Elevate Prize has two goals:

  1. to find great charities 
  2. to make people social heroes

Joe and Matt have passed away, and 10 years after its founding, Elevate has made a lot of progress and is increasingly successful. In that time someone else has come along that is now the TED of social good. It’s five times larger than the Elevate Prize and is putting people on a global stage. They have connections globally and are delivering on the mission of Elevate better than Elevate is. Is the goal of the Elevate Prize at that point to perpetuate the Elevate Prize and try to do even better or to shift those resources and fund the other organization?

 
  • What immediately comes to mind is Warren Buffet deciding that, instead of starting his own organization, to give his money to the Gates Foundation.

  • Joe: I Have said to my Elevate team that “if we can’t become more efficient and this isn’t fun,” I’ll give the money to Draper Richard Kaplan (venture philanthropists).

  • Joe: In pyramidal hierarchies, what is said at the top echoes as fact throughout the whole organization. For instance, when I mention “you might do that” it is taken as “you have to.” We have to be careful with language. Instead of “what did Joe and Matt say about this?” it needs to also be WWDD “what would the Deitch’s do?”

  • People will resist if something affects them adversely (employees, CEO would be out of a job). Mitigators are communication and trust.
    • You have the opportunity now, from the afterlife, to observe the discussions and dilemmas the board might face in your absence. Even well-wishers will face a lot of institutional resistance and thus there will be a lot more risk aversion in the decision making than if you are around. So, this is the moment to write it down.

Additional Discussion

  • Joe: I think Tiffany would be a good addition to this board because, if anything happens to us, I respect her opinions. She knows us. Does that mean that in terms of this becoming bureaucratic, should there always be a family member on the board? Members who aren’t just “outsiders”?
    • The board should be comprised of people who know you well, and family members who know you best.
    • Warren Buffett and his son, soon-to-be chairman of Berkshire Hathaway, are a good example. They have professional CEO, Greg Abel, but Buffet’s son, as chairman, will maintain the Berkshire values.
    • Brings up interesting new issues. In Heath’s family office, where only family and spouses can be board members. An in-law was on it, was terrific, but, after he divorced the family member, could not be on it any longer because it violated the bylaws. It took a while to figure out, but it would go against core values to fire him – as he was (and still is) good at his job. He remained on as a manager (as he cannot be an officer). This brought up contradictions within board principles – the board has to do what’s best for the family. He is good at what he does (so the board should keep him) but it does not benefit his ex-wife.

  • Agreed next step is to create list of scenarios.

  • We could create an AI model, feed it with 500+ scenarios with corresponding information for how Joe and Matt would respond, and use it to create responses to issues.

  • Interesting problem of how Joe and Matt, while still here, create and transfer trust to the FAB. The authority that protects them and avoids the issues of risk aversion, conflicts, lawsuits.
    • Another next step: create list of family members who represent the Deitch values.

Scenario 3:

In the future, one of the most important operating companies in the portfolio us underperforming. The board has been made aware by members of the senior management team, who say they have lost confidence in the CEO. They say the CEO is not performing and is misdirecting the organization. However, the CEO is a trusted individual, who was trusted by Matt and Joe during their tenure and are a long-standing member of the organization with years of experience. Assuming that this group is an advisor to or has a position on the board, what do you do?

  • It must be thoroughly investigated and taken very seriously.
  • The company has a board and has a chairman as a guardrail against CEO misconduct. For all the closely held family companies there is a voting group.
    • Matt: (re: voting) What is currently in place is based on structures from three years ago, so they need to be reviewed. We now have independent boards above them, though this is new and evolving. There’s a legal board and an advisory board.
    • The question is what role the FAB plays in this:
      • Need to ensure the right investigation is done.
      • Could we have a structure where an advisory board springs to life as a fiduciary board in the event it needs to?
        • Yes, and if something happens to Matt and Joe, the voting share devolves to FAB.
      • This group would be the owner, working with the overseers of the company
        • Joe: That would be good to revisit this year.


How would you navigate the tremendous amount of loyalty towards the individual competing with the risk to the company?

  • We consider the issue of waste and seeing relative value.
  • Joe: But we take the game seriously, we want to win it.
  • Doing the smart thing. There’s loyalty, but the right thing to do for the business and its non-CEO stakeholders.
  • It may benefit both the team and the individual to move on.
  • A decision of lack of confidence is very far gone for a company, and signals a failure of the FAB itself, for not better monitoring the CEO’s performance and staying on top of the assets.
    • The asset requires governance, key performance indicators, holding the CEO accountable. We need a framework for FAB/management team relationships.
    • Wouldn’t the independent operating boards held accountable?
  • Matt: Not currently, as they are non-fiduciary. Joe or Matt serve as the chairman or lead of each “operating board”.
  • Joe: It’s human nature is to screw up in a thousand different ways. Ideally this isn’t a surprise, there are benchmarks, periodically we have outsiders auditing the company, etc. Maybe it’s not just the CEO. But stuff slips.
  • Matt: One question to put on the floor later, is that in this world the FAB represents ownership, whether or not on the board itself.
      • What is the way the FAB is engaging with companies to understand it is going well and that the underpinnings are strong.
      • That the operating board is thinking in the right time frame, that the people sitting on the boards are solid.
    • One key issue is the multiple constituencies for the multiple companies. There could be some push-pull between the FAB as the successor to Joe and Matt. The board would probably not be far from agreeing with the advisors, who would want the company to do well. But it might be in tension with the others.
      • Joe: In many of my other companies this is not true, we have made decisions against the bottom line. In terms of procedures unless there is benchmarking, reviews, etc, things happen.
    • Need to consider the FAB’s expected level of commitment to be able to supervise, manage, and have these relationships.
    • Recommend pressing for multiple levels of governance. Decisions should be made with some level of consensus in operating board, also an auditing committee. It seems better to set this up now.
      • Joe: I can envision this board level above the CEO not getting along with the CEO and causing chaos for the company
        • This is when the FAB would get involved. You need checks and balances, and you also need different types of expertise.
      • Matt: It seems like we would be setting up ownership representation here, oversight representation at the board, and continuing to improve leadership at the firm. And then there would be legal stuff as well. But it would be an ever-ongoing conversation balancing these factors.
      • Joe: There are people within the organization who hate this because it becomes time consuming, but I was thinking of an annual retreat to maintain a sense of family and collegiality. But I’m not sure what the right mix is to not overdo it.
        • Berkshire Hathaway’s annual two day meeting brings together CEOs, board members, and shareholders, and includes a teach-a-thon, he teaches how he thinks. There’s parties and meetings, Saturday is the major meeting and all businesses display their products like a tradeshow, and then Buffet does a shareholder Q&A that goes on for eight to nine hours. It is their version of community, quality, and values. You could do some version of this now if you chose to.
      • There is some design work to be done to see that the FAB engages all the critical parts of the portfolio without overwhelming it.
      • The last question tested the boundaries of what the FAB should be weighing in on.
      • Governance structure is a to-do, next step. Next meeting, we can iterate, and think of more nuanced scenarios to help us evaluate the limits of the FAB.
      • Matt: I think I learned that the principles we have discussed are too flexible, too contradictory.
      • What does ownership responsibility mean?
        • There will always be some level of interpretation, too.
      • Joe: Even before early warning systems, there should be predictive systems to spot issues before they happen.