15 Apr 2016
The notion of a family business stretches back hundreds (if not thousands) of years, from parents who passed on their trades, to siblings who have set up enterprises and transformed them into empires. While traditional values have waned in many aspects of society, this structure of business continues with fervour. In fact, in Europe alone, the top 243 family-run businesses contribute $2.89trn to the economy and employ more than 8.9 million people, according to the University of St Gallen.
Family bonds can make for a formidable force in business, and, together with the embedded goal of longevity, working as a family is a proven formula for success. Relations in business tend to go above and beyond the normal call of duty when it comes to individual responsibilities, causing family members to offer their utmost commitment and dedication, in ways that counterparts simply do not. What’s more, the pride behind a family name, as well as the need to provide for future generations, deepens ambitions even further.
Of course, when it comes to family, nothing is quite so simple. Family feuds and rivalries have been the downfall of many, with succession issues being perhaps the biggest stumbling block of all. Ultimately, the benefits of family businesses can only come into fruition when potential pitfalls are warded off and a watchful eye is maintained. As Grant Gordon and Nigel Nicholson wrote in their book Family Wars: “Family firms have to be smarter and more alert than other kinds of firms to regulate the flow of positive energy and avoid the dark side. They need to practice constant vigilance to manage the risks that are germane to this form of business.”
Providing for one’s family is perhaps the most powerful driver of success – with so much at stake, often failure is simply not an option. And, when a business has got itself off the ground, the urgency to maintain and bolster revenue never ceases
Providing for one’s family is perhaps the most powerful driver of success – with so much at stake, often failure is simply not an option. And, when a business has got itself off the ground, the urgency to maintain and bolster revenue never ceases, and nor does the sense of fulfilment that comes with preserving the qualities that a family’s name and reputation rest upon. The ethos of doing whatever it takes to push forward is what motivates individuals to take on tasks that are not necessarily within their remit, but simply need to
“If you look at what keeps the CEO of a family business awake at night, their fear is to harm or to destroy what they have created or inherited. So, they will always think about the long-term prosperity of the company, not the short-term performance. They are willing to invest today for the prosperity of tomorrow. That doesn’t mean that they are complacent with today’s performance, but they really manage better the tension between the long term and the short term”, explained Nicolas Kachaner, Senior Partner at Boston Consulting Group (BCG). “While a professional CEO that will be around for five to 10 years doesn’t necessarily think about whether the company will still be thriving 20 years from now, they are under pressure for results. What keeps them awake at night is whether they will make a mark in their time at the helm – that can push them to taking risks they shouldn’t be taking.”
As decision-making has an outlook that stretches decades, as opposed to quarters, family firms are more likely to reinvest their profits within the business. “That also allows them to innovate and invest in new products and services, as they have the ability to plan for the longer term. They can look at their expansion on a more strategic level”, said Fiona Graham, Communications Director at the Institute for Family Business (IFB). In addition to fostering greater stability within a company, another benefit of business continuity is that those in charge are able to look at issues, whether internal or external, with a historic perspective. “They are able to weather storms better because they have more experience of what happened the last time, or three or four recessions ago”, Graham added.
The reputation for outlasting other types of companies can also be attributed to having greater discipline with finances and a lesser propensity to ‘splash the cash’. Family-owned companies tend to self-finance where possible, take out loans only when necessary, and keep debt at bay by all means possible. “What we found is that European family businesses tend to overperform in periods of recession, and they usually underperform in periods of expansion”, said Kachaner. “They are more prudent with capital expenditure and acquisitions; on average, for the same size company, they carry out 50 percent fewer acquisitions over a long period of time.” This approach plays into the philosophy that the company is a sort of trust fund for children and grandchildren, and that, essentially, the company’s money is theirs.
A corporate environment can largely benefit from the values that come with many family-run businesses. “There’s very strong loyalty among employees in family-owned firms versus non-family firms; they feel that they’re part of a greater community”, Graham explained. This sense of team spirit is a huge motivator within the workspace and, in that sense, a priceless tool in business. As indicated from the research conducted by BCG, family businesses tend to find it harder to let employees go too. “They hate to have to fire people, because they feel their employees are part of their extended family”, Kachaner added. This in turn makes them more cautious during the hiring process, which can be beneficial during times of recession. Of course, the other side of the coin is that in periods of growth, this sense of caution can stunt a company’s development and continued expansion. What’s more, the lack of fresh blood can also mean less capacity for a company to reinvent itself and evolve with the changing times.
Nonetheless, a higher retention rate can develop deeper expertise, while individuals are involved in projects from start to finish, thereby enhancing the rate of success through management continuity. Moreover, a strong sense of loyalty extends beyond the confines of an office. According to the IFB’s 2015 Branding Report, 66 percent of members of the public that were surveyed believe that the corporate reputation of a family firm is superior to non-family competitors. In today’s present climate, trust in business is a highly sought-after leverage, and this is something which family firms can boast in abundance, together with a tendency to do better when dealing with other family-run firms as well.
Generally, there are two distinct types of atmosphere and attitude for family businesses. The first is one of inclusiveness, wherein employees feel supported and compelled to contribute to the organisation’s success. However, in some cases, there is an atmosphere that can breed resentment within the shared space, which occurs when those family members in positions of power are actually unqualified, unskilled or unable to lead. In this scenario, family members may have a sense of entitlement and a lack of team spirit and work ethic. “There are situations where an incompetent family leader has driven the company to problems, but it is manageable through the attitude of the individual and through the team that is put around this person”, said Kachaner. “It’s also the role of the governance system of the family and the family business to make sure that people who are nominated in top positions have gone through the proper selection and training process.”
Some family members may work in the company out of obligation, rather than actual desire to participate in the business or even the industry itself. This too can foster a bad attitude in the workplace, adding to complacency and idleness. There are even cases when family members cost a company money, yet are kept on because of their blood ties. Firing relations that are doing a bad job can be an impossible task for some, particularly given the pressure a CEO or director may have from others within their inner circle. Of course, this is where non-family businesses differ; when dead weight needs to be dropped, given that the appropriate rules and legislation are met with, doing so is far easier.
Conflicts can be damning for family firms. This is also true for non-family companies, but with the former they tend to be of a far more personal nature. Informality between relatives and the raw emotions often involved can turn small disagreements into great schisms. Such arguments can create a toxic atmosphere in the workplace, which affects other employees and their ability to effectively fulfil their duties.
Not having a succession plan in place is most commonly the cause, and can be the downfall of even the most successful family-run operations. This failure can come down to the person in charge neglecting to acknowledge the inevitable, or when he or she imagines that the matter can be settled without their involvement. The result, however, can lead to a badly managed transition, as well as internal clashes and even financial difficulties.
To navigate around this common pitfall, companies are advised to start planning as early as possible, even though various factors are likely to change over the years. “It’s a challenge, but it’s one that you can get right if you plan early and you have good communication within the family, and within the wider business as well”, said Graham.
Expectations, values and goals must be established from the outset, with family agreements in place that dictate the direction of the company. Robust governance practices are essential for difficult conversations, as well as for quashing any quarrels before they turn into feuds. A family constitution and a family council are thus crucial mechanisms for ensuring that all family members adhere to a pre-determined set of guidelines.
Survival of the fittest
Scenarios to bear in mind include new family members entering the business from subsequent generations, and how responsibility and wealth will be shared as the business and family expands. As explained by Kachaner, the issues confronting family firms alter with each generation. At first, a clear hierarchy is in place, with the founder in control to arbitrate and direct the company in line with their vision. Even when sons and daughters join the ranks, if the founder is still around, conflicts are more easily resolved. However, “at the third and fourth generation level, there are some critical moments when the tension in the family can break the company”. At this time, cousins begin working together. Without a natural hierarchy in place, the situation can quickly become complicated. There is also often, at this point, a lack of institutionalisation at the company, as this tends to come into place by the fifth generation, when there are 50 or so stakeholders involved.
“During the third and fourth generation, when the number of stakeholders goes from 10 to 20 or 30, it’s a big enough group that there can be a divergence of duties and views, and it’s still small enough not to have been organised – this is where you have the moment of truth”, Kachaner observed. “At 50-plus stakeholders, usually things have been organised and institutionalised, so you have a family council and a family charter in place. One individual cannot change everything – if one individual disagrees, he or she has to go and there is a process for that, so, laterally, things are somewhat stabilised.”
Family businesses boast many benefits, from having an integral long-term focus, to company loyalty and even a greater level of trust from the outside world. Yet, with family, allowances can be made which would not be permitted in a non-family setting, even if losses to the company are incurred as a result. During widespread economic decline, the characteristics of family businesses are what keep them going strong, while this very nature is also what can cause missed opportunities during economic booms. In essence, the strength of a family business is also its weakness. “They really have the disadvantage with the dark side of their advantage”, Kachaner concluded. For the most successful examples, it is knowing these flaws that can allow mistakes to be avoided and the best of both worlds to be achieved.