Bound to succeed

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| The European | 28th February 2017
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It’s impossible to find an industry where family-owned businesses don’t have a significant presence. From London-based wine merchant Berry Bros. & Rudd, founded in 1698, to the largest company in the world, Walmart, family enterprises operate at all levels of the global economy. The term ‘family business’ often conjures up an image of small-scale, local enterprise, and while this may be true of many firms, much can be learned from major family companies that have reached the top of their fields.

EY and St Gallen University have complied the ‘Global Family Business Index’, which ranks the leading family-owned companies from around the world, to spread light on the impact these firms have in driving economic growth and offering opportunities for employment. The index found that the top 500 family businesses employed almost 21 million people and contributed $6.5tn to global GDP in 2013. Perhaps more intriguing is the fact that 44% of family businesses on the list are at least four generations old, which demonstrates their staying power.

Distinct priorities

What distinguishes family businesses from many non-family firms is the attributes which they possess. Daniel Van Der Vliet, Executive Director of the Smith Family Business Initiative at Cornell University, believes that trust, alignment and values set family firms apart.

“True, in many non-family firms, you will find these [values], or purport to find these, but families, in my opinion, can embody these as few can.” Although, he adds, these attributes can be abused or go awry, showing family businesses do not have a singular capacity to ‘do good’.

“However, families remain the primary brokers of trust worldwide and we see them in many countries where the political institutions are weak, or may not even exist, become critically important to that country’s economy and even security. When ownership and management are closely aligned, as we often see in family-owned enterprises, they can act quickly and decisively, easily out-manoeuvring their public counterparts,” says Van Der Vliet.

The last point Van Der Vliet raises will certainly be of interest to leaders of non-family firms, who compete with family-run businesses day in, day out. Dozens of studies have been released that compare family and non-family enterprises, with the vast majority finding that over the long-term family-owned businesses outperform their rivals.

UBS, Credit Suisse and other organisations have reported the success family-run companies have had over the past decade, with the latter attributing this to stable management structures and forward-thinking strategies. Most of these studies found that while family firms did not often takes risks by over-expanding or entering sectors they had little knowledge of, they did invest heavily in core business areas and, for example, spend large amounts in R&D.

Large public companies often go down the acquisition route in order to grow quickly and increase synergies. Whereas family-owned businesses on the whole, avoid high-risk acquisitions and try to focus on smaller purchases, which are closely related to their core business. The Harvard Business Review found that family firms only spent 2% of revenues on acquisitions, compared with 3.7% by non-family businesses.

Another hallmark of family enterprises is the ability they have to retain talent. Even in mega-family businesses, workers can feel like they are part of something important and they are working towards a shared goal. This sense of family is hard to accurately define but essentially it means employees feel a closer connection with the corporate leadership.

Family firms with long histories can capitalise on their heritage to gain a competitive advantage, as consumers become increasingly interested in the background of the companies they purchase from. Public firms, who are on average younger than family-run organisations, have less compelling stories to tell about their background and will not be able to connect with the general public through this type of messaging.

For example, private bank C. Hoare & Co., has been owned and directed by members of the Hoare family since it was founded by Richard Hoare in 1672 and counts Jane Austen and Lord Byron among past clients. Newer banks of today cannot hope to compete with this sort of linage and ultra-high-net-worth clients of C. Hoare & Co. will be in rarefied company, something that cannot be guaranteed at other financial institutions.

POST1 14 - Bound to succeed

Boom-bust cycle

As opposed to executives at private corporations, who either have no shareholding in the firm they work for, or stock options at best, CEOs of family businesses usually have a much stronger financial connection and a sense of continuing the family’s legacy. The awareness of future generations creates a markedly different mindset at family-owned businesses, which can help these firms survive downturns and periods of economic turmoil.

“Family firms define long-term as ‘at least another generation’ which makes them act more cautiously and reliably. They, on average, take less risk, are more inclusive and are stakeholder-oriented rather than shareholder-oriented,” says Sabine Rau, Professor of Entrepreneurship and Family Business at King’s College London.

While this cautious business approach means some opportunities are missed in times of growth, it puts family firms in a powerful position in an economic environment that is becoming increasingly volatile. The wider attitude of frugality many family enterprises hold can be seen in their aversion to high levels of debt and scrutiny of capital expenditures, with their publicly run peers not being as rigorous. The leadership of non-family firms are also generally more likely to engage in high-risk, high-reward business activities as they stand to gain massively if they are successful.

Transitional challenges

Planning a smooth and conflict free transition from one generation to the next is vitally important to the continued survival of family-owned businesses, but this process can often cause major governance issues if handled improperly. According to the ‘2016 PWC Family Business Survey’, only 15% of family firms have any type of succession plan in place, with this figure remaining practically unchanged over the past few years.

While family members involved in the business could believe the same long-term strategy is shared by all, the devil is in the detail. “Research shows that levels of trust from customers drops off significantly after a succession event, meaning the next generation has to work harder to regain that trust and demonstrate they wish to remain in it for the distant future,” says Van Der Vliet.

However, handing the reins of power to the next generation needn’t be a source of weakness, with younger family members potentially offering a different perspective on how to do business, especially when it comes to the use of technology. The Irish edition of the ‘PWC Family Business Survey’ found that 45% of companies believed they were prepared for a cyber attack and only 55% have an all-encompassing digital strategy.

In a world where long-standing corporations are being displaced by innovative startups, family businesses can’t allow themselves to stagnate and leave themselves open to digital disruption. Younger generations have grown up with technology that their parents and grandparents are still, in many cases, coming to grips with, making it important for all generations to be involved with discussions over IT and digital security.

“Family businesses face the same basic business challenges and opportunities from technological changes as do all businesses. However, as the technology landscape changes with ever increasing speed, family business leadership may be more less flexible in adapting to that change,” says Doug Baumoel, founder of family business consultancy Continuity. “This is because in some family businesses management succession and leadership advancement may need to consider family DNA as a job qualification as well as best-in-class skill sets.”

While there is not a one-size-fits-all framework for family-owned firms, all must ensure a comprehensive succession plan has been agreed, as failing to do this could spell an end to the business entirely. Family business consultants have created mentorship programmes aimed at the younger generation who will soon become leaders of family firms. Initiatives like this are urgently needed, as only one in three family businesses make it to the second generation, partly due to problems with succession.

Family-owned firms can prosper in an increasingly competitive business environment, as long as they recognise the need to move with the times and separate any family issues from the business. “While this will not preclude family members from being in key positions of management or ownership, the best family firms employ professional governance practices and involve family members not directly involved in the business through family councils, family office and transparent conversations with family and business alike,” says Van Der Vliet.

The general threshold for family ownership is as low as 15%, giving families influence but allowing very professional business practices and public accountability, adds Van Der Vliet.

Family enterprises can be expected to continue to play a vital role in every possible facet of the global economy for the foreseeable future, with these firms being the predominant form of business worldwide. According to Patricia Angus, Director of the Family Business Program at Columbia Business School: “It is impossible to talk about global competition without naming the world’s major family enterprises. Family businesses that focus on the business for its own sake, and ensure its competitiveness, will be major players in an increasingly competitive global economy.”

With so many family-owned business standing the test of time, it appears they harness an outlook and a business model that others would do well to follow.

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