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Episode 27: A Deep Dive into the Three-Circle Model of Family Business Systems

In this episode of the Family Business Show, hosted by Michael Palumbos from Family Wealth and Legacy in Rochester, New York, we are treated to an insightful discussion with James Hughes Jr., a renowned expert in family wealth and legacy planning. James Hughes Jr., affectionately known as Jay, has significantly influenced Michael's approach to family wealth, prompting him to reach out to Jay years ago after reading his book "Family Wealth – Keeping It in the Family." This connection led Michael to the Purposeful Planning Institute and deepened his commitment to serving families of wealth and family businesses.

Jay shares his extensive experience and wisdom, emphasizing the importance of families viewing themselves not just as a collection of individuals related by blood, but as a "family of affinity" where relationships are built on mutual respect, shared values, and a commitment to collective success. He highlights the critical role of understanding and nurturing the human, intellectual, social, and spiritual capital within a family to ensure long-term flourishing.

The conversation delves into the three-circle model of family business systems, traditionally depicted as intersecting circles representing family, ownership, and management. Jay challenges this static representation, advocating for a dynamic, three-dimensional perspective where these circles are spheres, constantly evolving and influenced by the family's collective actions and decisions.

He underscores the necessity for families, particularly those in the second or third generations of a family enterprise, to engage in deliberate learning about each other's strengths, learning styles, work preferences, and personalities. This knowledge is foundational for effective governance and decision-making within the family enterprise.

This episode serves as a compelling reminder of the complexities and nuances of managing family wealth and businesses. It underscores the importance of a thoughtful, educated approach to fostering family unity, developing competent ownership, and ensuring the family's legacy endures through generations.

Watch the entire episode!

Episode 27 Transcript


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Michael Palumbos: Well Hello everyone and welcome to the family business show my name is Michael Columbus with family wealth and legacy in Rochester New York, and you are in for a treat today, today we are joined by James Hughes jr Jay Hughes.

 

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Michael Palumbos: And Jay For those of you who don't know what is probably the reason that i'm doing a lot of this when I read his book family wealth, keeping it in the family, it struck a chord with me and I had to reach out, he was kind enough many, many, many years ago to guide me through a journey and.

 

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Michael Palumbos: That introduced me to Johnny warnecke and the purposeful planning Institute and.

 

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Michael Palumbos: So Jay, thank you for everything that you've done for myself and the community that you know, is part of the purposeful planning Institute and those serving families of wealth and affinity and families family businesses welcome.

 

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jay hughes: Well, Michael Thank you, I am delighted this morning to be joining you and whomever out there, decides to have a listen and.

 

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jay hughes: Hopefully, in the conversation some things will occur that will help human beings flourish, as you and I have said.

 

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jay hughes: that's why we exist that's what we do it, why we do what we do, and so this morning will be another opportunity or this afternoon, wherever your timezone is hopefully to add to that work.

 

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Michael Palumbos: Perfect so one of the things that we like to do when we kick off is you know this this world of family wealth, the world of family business.

 

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Michael Palumbos: You know, when you started your journey, there was, you know very few, if any, university studies or there wasn't tracks of information, there was lots of you know.

 

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Michael Palumbos: How would you say trial and error, maybe.

 

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Michael Palumbos: And so you know what I like people to talk about just a three minute version of the journey of what what brought you to working in this world.

 

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jay hughes: Michael i'm 70 years old, so i'm getting close to antediluvian before the flood and age and stage of life, however, I am one of the few.

 

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jay hughes: People very few people who were very privileged to be trained in this work by in my case, lawyers and also very senior bankers and others.

 

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jay hughes: A back in the late 1960s now, why does that matter well It matters because those men and some women but mostly men at that time.

 

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jay hughes: had come into the professions banking law, accounting The other thing is that server families had come into the profession in the late 30s or when they returned from the Second World War.

 

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jay hughes: In turn, they had been trained by men were men at that time, who would come into the profession around 1900 just think of the life of a professional and how many years, it would be generationally.

 

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jay hughes: The interesting thing is that the men who came into the profession around 1900 were the first people in America who had to deal with great fortunes created during the robber Baron period in the post civil war.

 

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jay hughes: So they were the pioneers in this field.

 

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jay hughes: And they trained the men and women who trained me at the end of their careers so i'm one of the last living people, I think, who comes from the tradition.

 

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jay hughes: of having looked at the questions that families face with resources beyond their normal spending needs up that really go back through the history of our country.

 

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jay hughes: And there were a few I don't want to extend this too much, yes, there were a few fortunes before the civil war, but not many the astor's would be one of the very rare ones that.

 

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jay hughes: preceded the war, but essentially that process of study and assistance to families who have basically the same issues.

 

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jay hughes: They would today, and then the other thing I would say to keep this short is.

 

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jay hughes: That in that process of working with those men who trained me and women, I very quickly began to see that there were vintages of trust, just like wine.

 

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jay hughes: And that each of those vintages whether it was 1917 1931 35 years old yeah I was working as a young lawyer with trust created with those vintages and essentially as the law evolved fiscal was evolved.

 

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jay hughes: Each of those periods had an event that affected the wealth of those families and so trust came to life that are vintages if you will.

 

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jay hughes: And that's still occurs today, but again, having seen how families responded to those events external events and also these men's experience of how they responded to the internal events in their family is what they taught me.

 

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Michael Palumbos: You know we've we've talked several times, through the years and i've never heard you talk about the vintages of trust.

 

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Michael Palumbos: And when you really start to look at it, I have seen exactly what you're talking about and and it might even be kind of like the wines were upstate New York version of trust versus the Colorado or the California, or the.

 

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jay hughes: Delaware trust.

 

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Michael Palumbos: as well, just like the grapes in those areas that's a.

 

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Michael Palumbos: Really that's a neat analogy.

 

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jay hughes: And that is exactly so.

 

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Michael Palumbos: So today we're going to take a deep dive into the three circle model of family business systems.

 

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Michael Palumbos: For you know i'm not, I would like you to talk about that, but this is, you know widely regarded as the you know the model that is still utilize today, and it was.

 

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Michael Palumbos: A professor at Harvard and his graduate student that came up with this Renato to Gary and john Davis going back into the the late 70s.

 

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Michael Palumbos: um what I thought we would do is you know if you wouldn't mind let's just start with the big picture and and then dive a little deeper as we go as we go through it, what what is the three circle model.

 

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jay hughes: Well i'm hoping that our listeners Michael have a pad and paper in front of them because we're going to do some diagramming and i'm going to go a little slowly.

 

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Michael Palumbos: perfect.

 

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jay hughes: In the hope that each of the person is listening will find a pad and paper, and let me just suggest to each of you, that it would be good if you had maybe four sheets of paper and a pencil so.

 

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jay hughes: I can take you through it this way, so in diagramming the three circle model as its come to be, this is a venn diagram V and N, which is a diagram in which you have three circles that intersect.

 

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jay hughes: So if you put on the on your paper on the upper left hand side a circle and you write in it family.

 

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jay hughes: And on the upper right hand of your paper intersecting that circle, you make another circle that says.

 

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jay hughes: owners.

 

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jay hughes: slash board Bo a RD and then below the two kind of in the middle of the two intersecting another circle and you put in that circle, the word management.

 

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jay hughes: So you should have three circles that intersect create a kind of three place intersection in the Center the left one up or one saying family.

 

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jay hughes: The right upper one saying board or or owners owners dashboard and the bottom central one saying management, so what Mr Davis john Davis integrate imagine.

 

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jay hughes: Was the family enterprises and i'd like Michael to extend for a moment the word business to the word enterprise.

 

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jay hughes: and suggest this morning, to the extent that they're interchangeable that we use the words business or enterprise interchangeably in order to include listeners, who is businesses are today enterprises managing the fruits of businesses that have turned into financial assets.

 

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jay hughes: So that we're encompassing the whole range of resources, whether their business resources or what I will call enterprise resources that include families whose enterprises are now in financial form rather than in business for greed.

 

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jay hughes: and make sense.

 

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jay hughes: Does that seems to you to paint a picture of the three circle model.

 

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perfectly.

 

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jay hughes: All right now, let me then ask our wonderful listeners, on the other, pages i've given them to take the next step on this.

 

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jay hughes: to realize that when john Davis, and Mr degree imagined this all those years ago.

 

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jay hughes: They imagined it in a certain way that is static.

 

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jay hughes: So if you're looking at this set your paper you're looking at a two dimensional picture of.

 

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jay hughes: What i'd now, like all of our listeners to do is to turn on as my wonderful wife, the storyteller says to turn on their imagination stations.

 

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jay hughes: And to realize that each of these circles in three dimension is a sphere.

 

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jay hughes: That the family circle is not a two dimensional flat, it is around sphere, full of energy.

 

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jay hughes: And the owner business owner manager, excuse me, the owner board circle is also a sphere of energy.

 

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jay hughes: And that the management circle is a sphere of energy.

 

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jay hughes: Because if we think about it inside family there multiple relationships of human beings.

 

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jay hughes: Inside the owner board there multiple relationships of what I call dynamic stakeholder conserving stakeholders.

 

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jay hughes: And there are board members of many different relationships.

 

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jay hughes: And in management they're all different kinds of managers.

 

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jay hughes: So this is not a flat.

 

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jay hughes: Horizontal or vertical picture it's actually a picture of a dynamic system.

 

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jay hughes: And surrounding that.

 

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jay hughes: Those three seat spheres is a larger sphere that's invisible, which is the field of family evolution.

 

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jay hughes: So when your imagination stations, please imagine that surrounding the three dynamic spheres, there is a larger sphere somewhat mysterious hard to see.

 

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jay hughes: That is the whole sphere of the family's field of experience.

 

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jay hughes: So that's a lot of imagination, but that's actually what it looks like and Michael one of the difficulties in our field has been that the teaching of the three circle model so as we refer to it in my opinion has been far too static.

 

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jay hughes: That is studying products and processes as if this was flat.

 

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jay hughes: and never changed.

 

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jay hughes: While in fact it's a dynamic system.

 

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jay hughes: in which the energy of each sphere is constantly flowing.

 

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jay hughes: So i'm going to stop there and see if my imaginable way of describing it as giving you at least and our listeners, a way of seeing that this is a dynamic thing not a static picture.

 

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Michael Palumbos: It makes perfectly good sense, because when you when you start to think about it, if you if you don't think of it as dynamic you're excluding things like what happened for me.

 

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Michael Palumbos: Two days ago, two days ago, three days ago my daughter just got engaged and and so when you're bringing in a new Member, to the family.

 

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Michael Palumbos: And, especially when you're thinking in terms of a family of affinity and maybe even maybe even more so if you're not currently a family of affinity that is going to have a dramatic impact.

 

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Michael Palumbos: On all of those other spheres as you're going through things if you bring in a new manager, who has a different skill set.

 

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Michael Palumbos: If you bring in a board member that just has a different way of thinking it changes all of those spheres, so it is 100% dynamic and and now you go back to the family evolution piece that surrounds it and I think about.

 

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Michael Palumbos: My family again and I use it as the example where this summer in July we had Columbus family vacation 22.

 

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Michael Palumbos: And for the first time ever we we have done some family meetings that were static meetings meeting here's where we stand with what the estate flow looks like but it wasn't a discussion of what could be done with it.

 

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Michael Palumbos: And we didn't talk about the people that were part of the system, but this year, the family allowed.

 

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Michael Palumbos: me a little bit of leeway and we brought in a facilitator, just to do something simple we brought in, and we, we did a disc.

 

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Michael Palumbos: profile on every family member and then had a discussion about how that works and how that you know you know integrates.

 

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Michael Palumbos: And that is was part of the evolution of our family, because we all looked at each other and thought about how we communicate in our personalities in a different light that makes sense.

 

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jay hughes: Well, not only does it make sense, but it is the dynamic awareness that the different relationships in society, each of those spheres of energy, each one is dynamic.

 

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jay hughes: So it isn't it isn't a family of this new many people who did this.

 

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jay hughes: It is actually a system, a very complex relationships between each person who fits the name family of affinity Member.

 

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jay hughes: How those relationships work inside that sphere of energy and then how that whole sphere of energy affects the other two.

 

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jay hughes: it's constantly constantly changing.

 

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Michael Palumbos: agreed a lot that's it's a really you know it's like I said we've talked many, many times and I, you know, the one thing and I shared this with somebody else recently and i'll share this with you.

 

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Michael Palumbos: The biggest mistake, in my opinion that I have made to the years is not asking for more time with people like yourself and john a through the years.

 

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Michael Palumbos: Because you have always willingly given it and you know as long as you don't push that envelope, but in hindsight.

 

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Michael Palumbos: How much faster that development happens when you're talking to somebody who just has that many more years of experience than than you do and that we've talked about the mentor mentee relationship many, many times so.

 

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Michael Palumbos: um what i'd like to do is just want to bring up and talk about before we dive more into the family, enterprise and how that works and the three circle model.

 

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Michael Palumbos: We just use the term you know the family of affinity I want to define that for people so that they understand family of affinity versus a family that's not have affinity and you know what that looks like Would you mind sharing on that.

 

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jay hughes: Michael i'd be like to.

 

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jay hughes: Let me offer this.

 

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jay hughes: Any family that thinks of itself as blood.

 

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jay hughes: is almost certainly not going to flourish.

 

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jay hughes: Now Why do I say that well because most families that comes themselves somehow is blood.

 

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jay hughes: So why do I say they will not flourish well in the biblical sense if you build your House on sand.

 

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jay hughes: it's going to fall down.

 

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jay hughes: If you build it on rock it's going to stand up or you look mate like the three little pigs better to have a brick house, then one made of stronger one made of wood.

 

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jay hughes: What am I laughing about well.

 

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jay hughes: No family ever began with blood.

 

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jay hughes: it's a fallacy.

 

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jay hughes: Every family ever Adam and Eve, or whatever mistake my family's we want always begin with two people who have an affinity.

 

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jay hughes: And they share no blood, as one of my great demographer friends said, Michael many years ago, the only thing that blood knowing blood is good for is if you're in the emergency room.

 

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jay hughes: And you need a transfusion they said that's very helpful, they said, otherwise it's completely fallacious so if a family builds its journey on blood it's building its house on sand.

 

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jay hughes: If it builds its house on rock it's because it recognizes that from its inception it's an affinity group it's two people who have an affinity for each other affinity is the word in webster's of there's I think 14 or 15 different definitions.

 

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jay hughes: it's the word in Webster for positive connection whether it's in biology or physics or art or the humanities.

 

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jay hughes: And here's the really interesting thing the very first definition of affinity in webster's is.

 

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jay hughes: Relations of human.

 

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jay hughes: beings other than by consent, which is a very large word meaning blood.

 

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jay hughes: So what Webster says is that the first meaning of affinity is relations of human beings, other than by blood.

 

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jay hughes: And when I discovered that many, many years ago, I thought gosh.

 

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jay hughes: that's how families start.

 

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jay hughes: They start with positive connection to each other.

 

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jay hughes: And, and that connection itself is usually that of a partnership, not a joint venture between mean by that was my dad taught me many, many years ago.

 

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jay hughes: Partnerships are about giving to each other, so your daughters can congratulations to them, your daughter in the young man or young lady today have made a decision to be each other's partners, which means they're each going to give a lot to each other.

 

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jay hughes: Joint ventures and families, by the way, that constituted as joint ventures you're getting something from each other and they all fail, they fail the affinity principle.

 

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jay hughes: So that's a lot of words, but that's exactly what i've seen those families that start understanding we are an affinity Community we're a partner community but giving to each other, helping each other flourish do very well.

 

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Michael Palumbos: Thank you, not that's great and it's it's funny as i've gone through, it is a really.

 

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Michael Palumbos: In the day and age that we're in today I think that's a hard concept, sometimes for people or it's a very easy concept.

 

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Michael Palumbos: I don't think there's a lot of middle ground, you know, and for many families it's a you know, the idea of everything that we created in this family stays together, but you know.

 

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Michael Palumbos: I see a lot of that and that does make it very difficult when bringing in that new knowledge from the external side, as some people would call the outlaws or the end you know the in laws.

 

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Michael Palumbos: and

 

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Michael Palumbos: The.

 

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jay hughes: Michael let me add something here I didn't mean to speak over.

 

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jay hughes: The interesting thing about married ins, which I think is a lovely term because it pretty much descriptive up is that they are the only people who choose us.

 

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Michael Palumbos: that's right everybody else wasn't a choice.

 

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jay hughes: If a family wants to get rid of hubris of blood if it's still stuck there and it wants to get to affinity it can get there fast by asking that person, why would you choose a crazy bunch like us.

 

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jay hughes: So the married in is have a particular deep awareness.

 

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jay hughes: because their objective to some extent.

 

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jay hughes: sure they they're making a conscious choice to join and that principle is the affinity principle because they'll say something like well.

 

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jay hughes: I love you I like your good I enjoyed being part here there's something going on here that's positively attracting to me not just my relationship to the one person, but all of you.

 

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Michael Palumbos: Right it's funny because, and I just want to reiterate one more time for those that just joined us, we were talking about the difference between a family of affinity to family of blood.

 

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Michael Palumbos: And what Jay said, you know at the beginning was.

 

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Michael Palumbos: Every family is a family of affinity at one point, so if you're three generations down the road with the family business somewhere along the lines your grandparents chose.

 

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Michael Palumbos: to marry each other and start that family and they did it because they had an affinity for one another that's there was no blood at that point, it was just the blood from that point forward their descendants forward that's really interesting J.

 

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jay hughes: and avoiding fallacy can be very useful.

 

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Michael Palumbos: So so we've talked about we've laid this framework out for the.

 

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Michael Palumbos: The three sphere model we're going to tell you we're going to change that thinking now from it's not three circles to the three spheres and it's that.

 

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Michael Palumbos: You know the family evolution that surrounds those three spheres, whether it be family, the ownership and the board or the management of the company management within the company.

 

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Michael Palumbos: What are the potential consequences for families that ignore you know those three circles and they're paying attention to all sides of you know all pieces of the sphere.

 

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jay hughes: Well, Michael, let me start first with philosophy and then move to practice I always think why matters, and then to get to how.

 

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jay hughes: All families start in the way that we're discussing it enterprising families with one human being doing something very, very unusual in fact that should be something that's impossible.

 

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jay hughes: That person has a dream.

 

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jay hughes: And that dream become so manifest for that person that they actually take the energy of the dream dreams are energy they're not matter.

 

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jay hughes: And they manifest that dream into matter.

 

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jay hughes: That should not be possible for a human being to do.

 

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jay hughes: So the first thing we have to understand is that all families that have enterprises of these sorts are not normative they're not better they're just not normative that's, the first thing.

 

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jay hughes: The second thing is that, if that particular individual and another individual have an affinity and create this thing we call family by having future generations.

 

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jay hughes: Then the question that that family has to consider is why in three generations universally in the world.

 

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jay hughes: Through the bonds of family fall apart.

 

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jay hughes: Why well, most of the time, it is because the family doesn't have an overriding interest in the growing the affinity.

 

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jay hughes: It gets caught.

 

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jay hughes: In the financial capital it doesn't grow its human intellectual social and spiritual capitalist.

 

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jay hughes: So in three generations around the world, all different proverbs the family bonds come apart.

 

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jay hughes: Now the families that don't have that the families that go beyond the third generation, with the bonds intact, where they don't know it, but this is critical, they are deciding when the bonds break.

 

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jay hughes: So no family ever can avoid coming apart eventually that's physics in our universe second law of thermodynamics entropy but every family has free will, as to when.

 

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jay hughes: That interesting.

 

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jay hughes: Every family has free will, as to when now to your question about the three sphere model.

 

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jay hughes: If we understand, as we do that each of these spheres is a sphere of energy.

 

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jay hughes: A sphere of energy that emerges from that first action of taking energy and making it matter and the first action of family, the affinity energy between two people.

 

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jay hughes: The question is, how do we sustain and grow the energy.

 

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jay hughes: How do we create fusion, instead of fission or inertia.

 

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jay hughes: Ah, well let's come back to our three spheres now let's be practical.

 

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jay hughes: Well, the first thing is that when we look at the three spheres, they look like they're the same size.

 

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jay hughes: They aren't.

 

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jay hughes: So if i'm that first generation person who took energy and made it matter my dream and manifested it when I look at the three circle, the three spheres, what do I see, I never see family at all right it's opaque.

 

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jay hughes: I see ownership but that's me.

 

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jay hughes: So I don't see that circle very well.

 

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jay hughes: And when I look at it, what I see is a huge sphere around management succession.

 

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jay hughes: So when I look at it, I don't see three equal spheres at all.

 

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jay hughes: Now if i'm a great grandchild of a family great grandchild fourth generation.

 

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jay hughes: of a family that is intact, what do I see management's opaque I can't see it at all, I have no connection to it.

 

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jay hughes: The owner and board seat.

 

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jay hughes: sphere is pretty important.

 

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jay hughes: I know something about stakeholder ownership, either as a beneficiary directly and I know something about the board, because they come and see me.

 

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jay hughes: So that circle is pretty big, but the family circles enormous because now there might be I don't know 50 or 60 different sets of complex relationships in the family sphere.

 

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jay hughes: So over the four generations, the dynamism of the spheres keeps shape shifting.

 

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jay hughes: depending upon who looks at it.

 

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jay hughes: it's almost like you know I don't want to get deep into physics, but almost like the law of special relationships that Einstein created where the trains going by and we all see it differently.

 

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Michael Palumbos: you're sitting.

 

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jay hughes: yeah or we see through a darkly and something darkly and maybe later we see more clearly, but the point is that the spheres are constantly shape shifting.

 

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jay hughes: As the energy inside of them evolves.

 

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jay hughes: to match the needs of the overall system that surrounds it.

 

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jay hughes: So this imaginable, this is the actual way to imagine understand the three sphere model that it is constantly dynamically changing.

 

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jay hughes: and its relative importance is changing, depending upon who's looking at it so Now let me be very direct.

 

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jay hughes: If i'm sitting with a dreamer as I call them who dreamed a dream that became so large for that person that he or she actually brought it to matter manifested it.

 

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jay hughes: If I talk to them about the family circle sphere, or the board and owners fear, I will get dead eyes.

 

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jay hughes: can't see it.

 

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jay hughes: No matter how many times on the pieces of paper all of our listeners and watchers have and no many times, I draw it all they can see his management succession and a glimpse of owner succession.

 

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jay hughes: If I talked to a second generation family member.

 

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jay hughes: What they can see is management as relatively important.

 

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jay hughes: they begin to see ownership and board.

 

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jay hughes: As manifesting.

 

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jay hughes: And they begin to understand that the that family sphere is emerging.

 

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jay hughes: And if I talk to a third generation member of an intact family.

 

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jay hughes: They will begin to see the family sphere as most important the board and owners fear as dependent and management sphere is shrinking.

 

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jay hughes: Now it isn't that each isn't important.

 

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jay hughes: It is simply that these are dynamic fears that evolve with the evolution of the family and that larger sphere of system energy that surrounds it.

 

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jay hughes: Now i'm apologizing that's too much in to try to but that's actually Michael the way it is, and let me say candidly the terrible damage has been done with this three circle model not three sphere model because it's seen a static.

 

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jay hughes: And it isn't seen through the eyes of the person looking at it, depending upon which generation of the intact family of affinity he or she is in when they look at it you're a.

 

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Michael Palumbos: Again, it goes back to like you talked about the train perspective.

 

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Michael Palumbos: Is everything, and that was about the the best analogy, and you know description of looking at it from G one G two 2G 3G for you really need to see it through those different lenses so also different if you're a married in its depth.

 

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Michael Palumbos: yeah absolutely it's different if you're a number of a family business, but not a family member.

 

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Michael Palumbos: And so it's that's a very, very good way of looking at it, the consequences to ignoring those things you know is goes back to you know whether you're growing and flourishing.

 

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Michael Palumbos: or not and it's I would I would imagine and tell me if i'm wrong with the challenge becomes if i'm only seeing things to my perspective.

 

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Michael Palumbos: I may be missing the perspective of others to a detriment.

 

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jay hughes: Oh absolutely absolutely.

 

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jay hughes: It really dealing with something as powerful as this model actually is.

 

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jay hughes: The first thing one has to do is get rid of one's own subjectivity now that's impossible i'm not creating something impossible, but the subjective look at this, how do I see it, is fine as long as it is followed by how does everyone else in the system, see it.

 

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jay hughes: But if it stops with how I see it, terrible damage is going to occur because it fails, the great test of Oliver Wendell Holmes, who said, if you recall, I wouldn't give a fig, for the simple made complex.

 

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jay hughes: But I get would give everything I own for the complex made simple.

 

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jay hughes: Well, if i'm looking at it subjectively only from my own view I got the simple looking at something infinitely complex and i'm in terrible trouble.

 

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jay hughes: If I can look at it and say what is the complexity of this and how do I now become objective and looking at it, it now becomes incredibly powerful as a positive tool.

 

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jay hughes: Now let me add one more thing quickly here so because I think it's also a part.

 

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jay hughes: Of the system that is opaque.

 

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jay hughes: i'm going to quickly touch this.

 

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jay hughes: In America and in other common law countries Britain, Canada, Australia, New Zealand.

 

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jay hughes: it's very common Michael that buys a third generation of a family that's who has significant resources and enterprising family it's very common and common law countries that by the third generation of the family, the grandchildren 90% of the resources are in trust.

 

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jay hughes: there's a wave effect so that founding dreamer has nothing interest.

 

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jay hughes: The children, the second generation as we refer to it, the rising generation usually has about 50% interest because.

 

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jay hughes: Along the way they got some shares that owner circle begins to appear, and then the estate lawyers and everybody got helping and then the trust came so often it's about 5050 for them and they create trust to.

 

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jay hughes: So by the grandchildren generation about 90% with a wave of trust is in trust now i'm going to ask our listeners, and you to tell me where in the picture that we made does the word trust appear.

 

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Michael Palumbos: You just made it way more complicated.

 

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jay hughes: yeah where's the word trust anybody see that in the picture is that they do.

 

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jay hughes: Now, and yet there's another family members sneaking in.

 

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jay hughes: The trust her family members.

 

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jay hughes: they're not other.

 

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jay hughes: they're not something other family members.

 

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jay hughes: yeah they're right in the middle of this system and, in fact, when you look at the owner board circle.

 

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jay hughes: And you don't write the word trustees in there.

 

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jay hughes: And you don't put sort of dotted lines up in the family circle to trust.

 

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jay hughes: The picture is completely incomplete and In fairness to Mr Davis, and Mr degree, they were trying to describe a business problem, principally, by the way of evolution of management.

 

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jay hughes: because their business professors.

 

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jay hughes: it's only when you get into the complexity of the future of the family's enterprise ownership.

 

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jay hughes: That you begin to realize that you have family members who are identified in the picture.

 

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jay hughes: But boy, are they important sure.

 

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Michael Palumbos: They hit they each have their own unique tax ID number and bus.

 

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Michael Palumbos: According to the US, you know irs they are a part of the family that's interesting I am again.

 

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Michael Palumbos: i'll always enlightening when we when we talk I learned something every time.

 

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jay hughes: Well i'm only showing my scars today my old facial scars at 78 years old, of what I didn't know when I first started studying this model, but I have the scars to prove what I didn't see as physically a part of it.

 

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jay hughes: So I added that because I thought that that completes, in my view, what the picture really looks like yeah.

 

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Michael Palumbos: which goes back to that you know the the sphere that you put around all of this it's that family evolution and understanding that, regardless of whether you like it or not.

 

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Michael Palumbos: It is changing daily and it's you know it's the people that have the foresight to say hey you know what what got me here, probably won't get me there.

 

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Michael Palumbos: And I need to bring some people that may have been down this journey before to think through these things and it's all you know, one of my.

 

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Michael Palumbos: an avid listener not not happen doesn't happen to be on today, but their family had you know, an enormous amount of success, and it was.

 

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Michael Palumbos: You know, a two brothers, you know just did a great job and building this business.

 

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Michael Palumbos: And they're now in their late 70s, or 80s, but one of the things over the last 10 years that they said is they did reach out.

 

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Michael Palumbos: And they created you know, a an advisory board they created a family constitution, they created a family board family, you know the family Advisory Council family Council.

 

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Michael Palumbos: And they did that in the first you know, in the first generation, while the second generation was learning, one of the reasons you know in conversations that we've had was they realize that the amount of it was only driven because of the amount of wealth.

 

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Michael Palumbos: And the fear of what could happen, but the amount of foresight, like you said typically.

 

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Michael Palumbos: That first generation person can't see that, so I just take my hat off and tip it to them to say you know good on you, for for having that foresight to say I knew how to build a business.

 

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Michael Palumbos: I didn't wasn't I never went to you know to associate I never became a therapist or associate sociologist and a psychologist to understand how do I keep my family together.

 

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Michael Palumbos: that's that's interesting.

 

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jay hughes: Well, Michael I think it makes perfect sense.

 

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jay hughes: How this happens because think for a moment, all of us how non normative how truly unusual, it is that a human being takes a dream.

 

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jay hughes: and actually manifest.

 

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jay hughes: That is a taking it pure energy and turning it into matter that's actually what happens.

 

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jay hughes: And naturally.

 

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jay hughes: To do that action in a lifetime, particularly in a very large result.

 

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jay hughes: One becomes captured by the magnificence of that journey, and rightly so.

 

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jay hughes: And therefore, many other things that one might have thought about simply, even if they are imagine don't get into one's consciousness, because one's consciousness is very full.

 

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jay hughes: that's why i've often said, Michael that it's the second generation rising the first rising generation, the second generation, whose principal question is family not business.

 

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jay hughes: itself principal question is what How does a family emerge.

 

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jay hughes: And, of course, that question sits fundamentally in a question of Canada make joint decisions so when you mentioned constitutions, you mentioned Councils, all of these bodies or documents are important.

 

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jay hughes: they're only useful, however, if the rising generation can make them work.

 

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jay hughes: Which is.

 

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jay hughes: Not a question of the document.

 

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jay hughes: Or the system it's a question of practice.

 

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jay hughes: Sure, and what often doesn't come.

 

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jay hughes: Is the manual of practice, along with the document and the structure.

 

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jay hughes: So the second rising that first rising generation, the second generation, not only has to figure out how to make family joint decisions.

 

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jay hughes: family has to be two or more people who have a single person household but you can't have a family that Webster says that isn't two or more people, which means joint decisions.

 

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jay hughes: So the second generation has the very complex problem of both having to learn how to practice, these different.

 

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jay hughes: systems that they inherit.

 

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jay hughes: boards of whatever it may be documents.

 

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jay hughes: But they also have an even deeper question can pay as individual family members, make decisions together.

 

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jay hughes: Now, not to go too far field.

 

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jay hughes: But the tragedy that they need to understand all of our listeners is the tragedy that Roy Williams and vic pressures great book preparing air say that 80% of families don't have a joint decision making system.

 

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jay hughes: or can't make it work.

 

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jay hughes: 70% when the second generation becomes the decision makers.

 

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jay hughes: Bad odds and what are those odds REP reflecting those odds are reflecting that the practice of joint decision making wasn't in the mind of the first generation.

 

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jay hughes: Second Generation has to find advisors who can advise them, like you, Michael, by the way, here's your problem.

 

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jay hughes: So you have this wonderful three circle model oh it's fears oh it's not circles, no it's spheres.

 

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jay hughes: Oh, and by the way you have to imagine that they're dynamic their dynamic it looks flat to me know it's a brown sphere in space it's not a flat land oh God and then there's this whole big imaginary sphere around it, a family.

 

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jay hughes: And evolution what and, by the way, the only way the spheres grow is, if you make good joint decisions.

 

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jay hughes: But I don't like my siblings I know you don't, but you have a choice.

 

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jay hughes: And by the way.

 

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jay hughes: Your children the grandchildren their future depends upon whether you can learn to make this system, dynamic and make good joint decisions and all three of the spheres and the larger sphere.

 

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Michael Palumbos: oftentimes, you know as you're saying that I think about some of the fifth generation or sixth generation businesses family businesses know.

 

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Michael Palumbos: And the reason that did don't have a governance system within the family.

 

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Michael Palumbos: And that they call themselves a family business and they are fifth generation but through the years the business entity only flowed through one family line.

 

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Michael Palumbos: And it's all wholly owned by that one family line so even though it's still in generation, you know I mean it's a fifth generation business.

 

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Michael Palumbos: In the in the essence that you're talking about if you're trying to have three or four different family lines.

 

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Michael Palumbos: Control a business manager business on a business together without when the absence of learning how to govern together learning how to make decisions together, they will fall apart.

 

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jay hughes: Well, it has to be that way because they're not accreting energy, energy is running away.

 

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jay hughes: By the way, and and stead it governance, as you just said so beautifully Michael.

 

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jay hughes: If everyone could stop looking at boxes and boards and entities and just realize that all government is is joint decisions by those who can vote.

 

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jay hughes: that's all it is right and it's just as simple as how's the kids the second rising generation who they decided to go to send a dad and mom when there's a message and my father taught me that the person selected is never the person that dad would select to run the business.

 

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jay hughes: No, because that person is not objective the kids figure out who's the one among us who is actually a kind of fiduciary mindset who cares about all of us that's the person they send.

 

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jay hughes: Well it's figuring out that in joint decision making.

 

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jay hughes: Does that make sense governance is joint decision making.

 

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Michael Palumbos: yeah and it's.

 

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Michael Palumbos: In the absence of governance, again I think it's important to understand, make sure that people hear this, is that in the absence of governance.

 

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Michael Palumbos: Somebody gets a black guy somebody gets a bloody nose and that's what's the piece that causes the harm is that they're not part they're not joined in that decision making process, I didn't have you know part and saying that we're going to move from dairy farming to cattle farming.

 

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Michael Palumbos: And without without being a part of that.

 

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Michael Palumbos: i'm taking my ball and i'm leaving and i'm not going to be part of this.

 

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jay hughes: Well that's right so either there are people with I call fiduciary mindset so small F duty of care loyalty input to the whole who emerge.

 

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jay hughes: And who facilitate the development of those joint learning systems in each generation and they're learning they're not just decision.

 

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jay hughes: there's learning before the decision there's learning before decision it's growing the intellectual and human capital of that family, so the social capital is joint decision making system.

 

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jay hughes: grows to that's core now one further thing on back to our subject on the enterprise family enterprise and the three circles and looking for a moment at the evolution of the owner board circle or sphere.

 

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jay hughes: I do want to say something important I hope for those listeners, because that sphere tends to get forgotten.

 

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jay hughes: Management looks very present and family looks very present.

 

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jay hughes: The ownership board circle sphere gets missed.

 

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jay hughes: Let me say that one of the great problems in our field as Michael will attest, is there are no programs, I know of.

 

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jay hughes: to learn how to be a great owner.

 

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jay hughes: This becomes even more mysterious if you're this thing called a beneficiary that nobody understands what that means, and you don't own anything, even though everybody around you says you're an owner, but in fact you discover you're not an owner, so now you have a lot of cognitive dissonance.

 

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jay hughes: cognitive dissidence stands in the way of good decision making, because that's confusion.

 

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jay hughes: it's very, very important very early on in each family enterprise, whether it's a business or financial family, in my opinion that, at the earliest moments.

 

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jay hughes: The rising generation that second generation begins to learn how to be and i'm going to use a string of words dynamic.

 

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jay hughes: conserved over.

 

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jay hughes: Eventually, turning it over and equal or better condition than they received it stewarding that means growing.

 

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jay hughes: stakeholder not shareholder stakeholder owner dynamic can server stewarding stakeholder owner five words.

 

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jay hughes: Great families, Michael that i've studied all new without the terms.

 

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jay hughes: That that's the kind of owner they needed.

 

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jay hughes: And they also knew that people whose disk process, which suggests, they would be great managers often are terrible owners.

 

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jay hughes: they're really good at tactics.

 

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jay hughes: And unfortunately rarely good at strategy.

 

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jay hughes: were all given different gifts in this lifetime great families very early on into it and develop the elders do this work.

 

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jay hughes: into it and develop the skills of the rising generation members, those who will be good braves and go out and hunt, and what have you and those who might have fiduciary mindsets and grow one day to be elders.

 

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jay hughes: Because they're the strategist.

 

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jay hughes: So they seek to discover inside the fabric of their family, the strengths of its Members by learn by beginning very early this quest to learn to be a dynamic conservative stewarding stakeholder owner.

 

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jay hughes: different strengths that make up that knowing.

 

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jay hughes: What they don't miss the fact of growing great owners.

 

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Michael Palumbos: So let me just.

 

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Michael Palumbos: paint a picture for you, and if you know a lot of the families that we serve in upstate New York kind of look like they're in second or third generation or the transition between second and third.

 

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Michael Palumbos: they're typically you know let's put it at they're running somewhere between 20 and $100 million of revenue, the focus for the family is mostly on the business.

 

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jay hughes: Right so.

 

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Michael Palumbos: So now, based on what we just talked about there's there's there's three there, I mean there's, we know that there's more than that it's much more dynamic than this one, but i'm going to simplify it a little bit.

 

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Michael Palumbos: From the family side you're working through the family Council the family governance you're putting those rules in place on the business side you're putting together your leadership team your management team, and that is a mix of family and non family members that are running the business.

 

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Michael Palumbos: And, and then on the on the on the ownership side you're talking about the WHO is the Board of Directors right so now now we've so we have that picture for people.

 

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Michael Palumbos: i'm running a family business where I have the vast majority of the Members happened to all be family, the vast majority of Members are owners and the vast majority of Members are management.

 

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Michael Palumbos: How do you and how do you help them to separate those pieces and create a rhythm, in which that they can they can pull those pieces apart, to make that work for them.

 

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jay hughes: well.

 

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Michael Palumbos: that's a whole nother subject so it isn't.

 

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jay hughes: It is and i'm going to try to.

 

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jay hughes: offer a.

 

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jay hughes: Reasonable reasoned answer.

 

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jay hughes: We live in a time of positive psychology.

 

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jay hughes: We live in a time where industrial organizations have developed multiple means of discovering our talents, not our weaknesses discovering our talents.

 

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jay hughes: In the years Michael that I was active i'm now mostly, as you know, retired.

 

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jay hughes: I was one of the earliest people in this field.

 

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jay hughes: To ask families to do three things once they decided they wanted to go on a long journey.

 

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jay hughes: That, by the way, that's a conscious decision.

 

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jay hughes: Are we interested in a short term process.

 

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jay hughes: Or are we interested in long term are we interested in seven generation thinking as the iroquois taught us up in your region of New York.

 

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jay hughes: or not, if we're not it's fine, but then lots of what i'm going to say is meaningless in fact lots of what we discussed this morning is meaningless if, on the other hand, a family does one would separate generation picking.

 

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jay hughes: It does want to decide when the proper of comes through the short sleeve proverb, hopefully, many, many generations into the future.

 

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jay hughes: Then one of the early things that it does before it starts making big decisions it stops.

 

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jay hughes: And it says what do we need to learn about each other that modern positive psychology and industrial psychology can enable us to know about each other.

 

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jay hughes: As real resources to this process that we don't know.

 

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jay hughes: So, very often, Michael with those families, I would ask them to do a learning styles assessment, how do we learn.

 

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jay hughes: Because if we're willing to process thousands of facts and information pieces over the next hundred years, the first thing we have to know.

 

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jay hughes: about each other is how we learn, because one thing we know is once we have five or six people making joint decisions at least two if not three different learning styles will be their special way of learning.

 

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jay hughes: Second work styles which piece of work, do we most want to do, I won't go into it in detail, but there are four different quadrants as young pointed out.

 

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jay hughes: of actually how we like to do work well if we're going to be doing a lot of decisions that then generate work to do it matters hugely to know which one of those four kinds of work we most like to do.

 

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jay hughes: And then any a gram what's our personality.

 

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jay hughes: That that's hugely valuable.

 

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jay hughes: And then some pretty good learning about making difficult decisions, having difficult conversations well, let me just tell you that if a family pauses.

 

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jay hughes: that's, the key word it pauses at the point.

 

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jay hughes: That it says we want to do, seven generation thinking we want to be a family of affinity we want to seek to enhance the journeys of happiness of each member toward all the boats rising when they make that conscious deep spiritual capital decision, then you don't start you pause.

 

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jay hughes: And in the pause you go and find these resources.

 

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jay hughes: about who you are what you can know about each other so that when you then start picking up the joint decisions that are the journey of that seven generation thinking you know who to rely on for what kind of decision.

 

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jay hughes: You actually find trustees, believe it or not, who are congruent with your journey.

 

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jay hughes: And who do all those tests to.

 

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jay hughes: Who are you if i'm going to be in an intimate family journey with you as my trusty inside that family circle, I need to know who you are not your biography right well, the point is pauses.

 

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jay hughes: lead to great growth.

 

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jay hughes: skipping the pause means greater dis association and cognitive dissonance.

 

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jay hughes: pauses are critical.

 

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jay hughes: But its first awareness.

 

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jay hughes: Oh, this is not a flat three circles it's fears and they're dynamic and they're moving all the time and they've got lots of different people inside them will keep changing wow.

 

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jay hughes: Oh that's something big to think about and then this large fear of the whole family journey that surrounds it.

 

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jay hughes: pauses important pauses one of the great things about coven.

 

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jay hughes: Is that i've seen are the families that are doing really well and they're going to do generationally well have used covert as a time of understanding that they're out of the river, they were in.

 

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jay hughes: There sitting on the Bank and they didn't try to dive back in that river, they said no, no, no, no, no let's sit here and learn.

 

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jay hughes: Because that river is not the same river when we get back in it, it changed and we're not the same either.

 

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jay hughes: pause pauses are so important for gathering information gathering knowledge gathering even wisdom.

 

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Michael Palumbos: Time to.

 

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Michael Palumbos: time to think.

 

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Michael Palumbos: while allowing allowing it ah Jay I just so appreciate your time and sharing with everybody here, I have two pages of notes and i'm trying, you know, every time I looked away as we were going through, it was only because I was writing notes.

 

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Michael Palumbos: and capturing things i'm glad this is recorded in respect for your time it is after one o'clock yes, I appreciate you joining us and say thank you again.

 

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jay hughes: Well, Michael it was an incredible privilege i've enjoyed our association so much over the years and to each of the people that have been kind enough to join me today and join Michael and I.

 

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jay hughes: Thank you, I it's your it's your participation today that's helped me enormously feel from your energy how I could best answer michaels questions, so thank you until and as we, the young people today say until soon.

 

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Michael Palumbos: Until soon.

 

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jay hughes: bye bye.

 

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Michael Palumbos: Thank you everyone for joining us again, my name is Michael Columbus this has been the family big show and i'm with family wealth and legacy in Rochester New York everyone have a great week and we'll talk to you next week.

 

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jay hughes: bye Michael bye everybody.

 

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Craig Sessler: Thank you.

 

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Michael Palumbos: How are you doing Craig thanks for joining us.

 

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good night.

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