"Family Business "

Legacy of a Family Business

Abid Malik | Lees Summit, USA | October 3, 2016

Like politicians, entrepreneurs are of three types; Professional, Accidental, and Legacy or Family and there are three types of businesses; Multinational corporations, corporation and family business that yet to become a corporation. For now, we will keep our discussion limited to “Family Business”

Despite the inherent risks associated with succession and non-business issues disrupting operations, we can't deny the impact of family business on the economy.

Family businesses make up as much as 80% - 90% of all firms worldwide and the top 500 largest family-owned firms account for a combined $6.5 trillion in annual revenues.

The 2012 Harvard Business Review shows that family businesses out-perform their peers in tough times, but under-perform when the economy is bullish. This suggests that family firms are more resilient.

Du Pont, a French political refugee, who founded a mill in Delaware (USA) in 1802, was the leading supplier of gunpowder to the U.S. government to build roads, canals and railroads. Later they diversified business into a chemical company, inventing Nylon and Teflon.

The family, now with an estimated 3,500 members, no longer run DuPont but still own an estimated 8% of its shares.

During 1800s, Huber family of German descent survived for six generations. They are known for combining tradition with innovation in engineering materials. Collectively, they’re worth $1.3 trillion.

Top Management

No-one is born a CEO. Despite having extensive industry experience, nothing can fully prepare a person for a demanding role of leading the company.

Family firms often avoid conflicts between managers and owners altogether by selecting a CEO who is a member of the family.

While the average tenure of CEO in large US companies is roughly 5 years, those currently in charge of one of the 100 largest family businesses have already served 13 years on average.

One of the most interesting features of family businesses is their “Strategic Patience.” Even when single strategy does not produce stellar results in the short-run, they tend to stick to it to avoid confusion among staff and customers.

Take Hermès, a French luxury goods producer. In the 1970s, their focus on craftsmanship, top quality finishing, and exquisite materials seemed outdated. Company resisted the temptation to change direction to start mass production. But it was prepared to fight fiercely for its conservative style of business. In the long-run, “Strategic Patience” paid off. Both revenues and operating incomes grew steadily even during the financial crisis of 2008 – their return on investment was 41% in 2013.

Understand the Realities

According to the 2014-2015 Family Business Survey from a global business consultancy, PWC, nearly two thirds of family-owned businesses have some kind of succession plan, but only 20% of them put it in writing.

A successful succession plan is gradual and incremental, not sudden or haphazard. When it comes to family members, give them a chance to show their interest and talent, but don’t force them or let them start at the top. Allow them to work as interns and in positions that they may hold in other companies at going salaries before they start moving up the family business ladder.

An owner of an electronic firm in Silicon Valley, California made his son work as a supply chain manager in another electric chain before he offered him an executive position in his own business.

Don't hire a family member that you're not willing to fire and don’t let them take a job in the family business they are not prepared to quit. As they say, “Hire slow, fire fast”

Delegation, Consultation & Decision Making

As many business might admit, one of the trickiest things about business success is maintaining it, especially over generations.

During 1786, three years before the French revolution, a French ambassador writes a letter from Istanbul, He is trying to explain why he is not making good progress with his assignment. And he says, here things are not as in France where the king is sole master and does as he pleases; here the Sultan has to consult with all kinds of people, with all types of holders of office, and even with retired former officers.

Likewise, top dictatorial & emotional judgements can easily choke a business to its demise. When an emotional head of the family makes the irrational decision alone, it could destroy the person and the family. If leader is not interested or willing to nurture next generation of leadership by consulting with and developing its mid-management, his plate will always be filled with endless tasks but most importantly, he loses the capacity to make informed decisions. The problem starts with “Resistance to share power” and unwillingness to adapt to changing environment and time young entrepreneurs are living in.

In a well structured business, strategic decisions are made by the CEO, tactical by Senior to Middle Management and operational decisions are by the Middle or First Level Of Management. Role of the middle management is between owners and floor or field staff

It's a “Servant Leadership” approach that drives a business, not the other way around. Humility is first order of business. You don’t have 200 people who work for you, you work for 200 people. The only way a Leader “Adds value” is through developing and enabling the people they support.

Innovation and Creativity

Multinational corporations set aside millions in funds for R&D to innovate. They understand how to plan and position their products in changing customer demands to capture market share.

The innovation of trial and error is a high risk high gain play. The reluctance of family businesses to engage in such high stake undertakings is also reflected in their innovation activities.

A study of German companies between 2000 and 2009, show that family firms invest less in R&D than non-family firms. But they were better at exploiting their new products. In other words, they are efficient innovators.

Family firms tend to focus on narrowly defined market gaps. Germany’s mid-sized companies, such as Kärcher,  produces high-pressure cleaners and window vacuum cleaners. Ekato manufactures industrial mixers. Both firms match technical expertise with customer knowledge.

The frugality of family business trickles down in creativity. They concentrate only on ideas that can be implemented. The family approach towards innovation has its benefits, but also comes with a downside: it is less likely to produce breakthrough innovations.

Having said that, I have seen young entrepreneurs, starting their own ventures at LUMS Centre for Entrepreneurship, taking huge risks with innovative ideas. And most of that approach is paying off. In other words, young venture captains take far more risks in creativity than same risks taken by their parents in family business.

Succession in Family Business

Humans can't conquer old age. If parents are retiring or worried about their ability to make sound judgements, starting the process of business succession makes perfect sense. Family-run businesses can be filled with drama, but they can also provide valuable lessons for others.

Companies get tangled in culture old vs. young, family vs. non-family CEO. It's always better to know potential of each family member while putting a strategic succession plan in place.

In a growing family business, owners are required to maintain teamwork and harmony while sticking with both family and business values. If the business structure is sound and scalable, it's ready to handle next generation of “Cousin Consortium.” Rules and policies about roles, fair allocation of funds & profits, shareholders liquidity, family-business relations and conflict resolutions are clearly defined and followed through.

However, passing the torch of a family business is not a child play, a task easier said than done. If not carefully planned and executed, succession can break the firm.

One of my close friend told me that when you join the board, start looking for your replacement. When I asked why? He said, because it takes that long to mentor the successor.

There is no one-size-fits-all rule for how to best structure your family business to ensure a smooth transition. Overall, two-thirds of the world’s billionaires are self-starters with many of them looking to pass their companies on to a family member.

Mentor Them to Lead

It’s important to train the successor in the depth and breadth of all aspects of the business, even if he or she has worked in a similar company.

Most successful businesspeople who want to pass their company onto their children, foster in them a clear set of values and teach them the basics of business. Collaboration and decision-making starts at early age.

My brother-in-law got involved in his father's business at the age of six. Today, he is one of the most successful businessman in our family.

If you live next to a river that floods often, you’re going to have to teach your children to swim and if you own a family business you’re going to have to teach them how to keep their heads above water during hard times.

Carl Pohlad (d. 2009), billionaire financier, longtime Forbes 400 member, was careful to think about his successors early. His ability to pass the torch to his three sons was based on his focus on cultivating good business values and discipline.

Carl began with good education for his children, allowed them gain experience outside of the family business before starting long careers at various outposts in Pohlad organizations. He then worked with them over three decades, sitting down to discuss business practices, providing them with mentors and including them in the decision-making process.

Effective Communication

World’s leading family businesses emphasize clear communication. According to a survey, 90% of respondents have regular family or shareholder meetings to discuss business issues and 70% have regular family meetings to discuss family affairs.

A good business family have informal, monthly family board meetings to encourage close dialogue between family members. The need for effective communication ties into a larger point that: Family bonding is crucial.

Set a Timeline

Draw a timeline for crucial milestone of the succession journey and on turning over the leadership of your company. Otherwise, you could find yourself lost in a dump.

You can also expect high degree of conflict in family business. Mitchell Kaneff, CEO and author of Taking Over: Insider Tips from a Third-Generation, says that after he and his father, founder of Arkay Packaging, ran into business-transition problems in 1997,  especially around the timing of turning over the leadership, he ended up “firing” his dad, who’d stayed on longer than their agreement.

The father and son discussions about how to run the company had turned into shouting matches, Kaneff recalls. “It was a hard thing, but we worked through it and our relationship is stronger than ever,” he says.

According to PWC’s report on family businesses, 40% of business owners find it difficult to let go of the decision-making and leadership power, even after the handoff choice has been made. PWC experts call this the “Sticky Baton Syndrome.”

What If Succession Fails

Strings of sudden business or nonbusiness events may require a backup plan.

“They recognize the need for succession,” says Hall. “And with all of that good planning, they have contingency plans as well. The world is not static— a plane crash or unexpected disaster could change everything. You have to recognize that things change.”

Universal Life Insurance’s Maceo Walker had been grooming his daughter, Patricia, to be his successor when he retired in 1983. But “when she died in 1985, Walker had no backup plan,” says Edmond. At age 75, Walker came out of retirement. Ultimately, the company — without a Walker at the helm —  merged with another insurer in 2000.

Family Bonding

We have observed that you always need bonding elements of beliefs and values to keep the family strong while it's growing and thriving.

Since caring and mentoring starts at home, there is lifelong commitment and loyalty among business family members. Their knowledge of each other’s traits help create mutual trust.

Besides highlighting regular family meetings, a survey indicates that those behind leading companies encourage family cohesion by engaging in activities that keep the family focused on its legacy.

As wealth controlled by the ultra-rich family businesses is growing at an amazing rate, they are increasingly interested in establishing their own family foundations. There are many inter-connected reasons why wealthy create a family foundations.

Honoring the business founders or their spouses is an effective way to rally the family around something worthwhile.

The appealing quality of family foundations is that they last for decades or even centuries. The family wants to make sure that their charitable foundation will continue to be funded after they are gone.

Eighty one percent of business family respondents say they engage in philanthropy, and 85% have a codes of ethics, as opposed to just 57% of the world’s biggest companies overall.

Setting up the Structures

One of the big questions a business person has to ask is “What is the goal of my company,”. Is it designed to pass on to multiple generations or is it designed to create wealth for the family.

In order to survive, grow and sustain a family business, founders and family council need to have a clear organisational structure in place. As new members come on board, confusing roles and parallel decision-making can weaken the business and the family. Letting the business issues act out in family and vice versa is a recipe for disaster.

A non-documented set of fluid rules in someone's head invites favoritism and incompetent team to take hold in family business. Undue interruptions and interference from family members can make prized employee leave the company.

Timing is everything in family business. Any plan without deadlines and follow up is doomed from the start.

The first step in building family structure is to defined the family, its values and purpose. Then comes the family history and its trajectory into the future.

Part of the family structure are the family assembly, council, and its board. Family-business structure covers employment, education & mentoring of the sibling, ownership, dividend, top leadership nomination and conflict resolutions policies.

Founder(s) initially manage the
family business but as firm grows in
size a formal management
structure is required. Board of Directors (BOD) consists of key family members, partners, and consultants. The board is autonomous and free from unwanted family influence or interference.

All business executions are carried out under a well defined performance management. Standardization and improvement in daily operations are done by keeping them aligned with company’s top to bottom and bottom to top strategy, from vision down to individual actions

A team ownership include, employees, their departments, areas of responsibility, equipment they are using and responsible for, and process they are following.

In one of the family business I visited, operator was also responsible for upkeep and maintenance of the machine he was using

Business Values

It's the top values and traits of a business founder that creates a competitive business culture.

According to Gallup survey of 2,500 business owners, who have successfully established and grown their business 3 to 5 times faster than their peers, are Business Focused, Confident, Creative Thinkers, Delegators, Determined, Independent, Knowledge-Seekers, Promoters, Relationship Builders and Risk Takers.

Family Values

Family values are same as traditional or cultural values that are passed on from generation to generation within families. It's about family's beliefs, structure, roles and best practices.

It's recommended that family values identification & transfer to next generation should be the top priority of the business and family leaders.

There are many family values but here are couple of my favourites;

“Actions are from intentions” “Leave what doesn't concern you.”

Abid Malik is managing director at Indus Venture. He can be reached at abid@indusventure.com

A.R. Arif of MNBEC Consulting contributed to this article