Family firms account for a majority of global companies. They provide 70% of the global GDP and 60% of global employment. They are key drivers of global business and growth, so their sustained long-term value creation is important for the global economy as a whole.
Family businesses are a force for good, contributing billions of US$ into impact investments, foundations, philanthropy and social programmes. Business families have always benefitted society, and next-generation leaders seem to have a renewed appetite to make lasting change.
Brands are strong assets for companies and an important part of a successful family business strategy. The building and management of iconic, impactful family business brands can be strong competitive drivers and represent significant financial value. Many family businesses carry the name of the family behind them, and with that comes opportunity but also the burden of responsibility to ensure a long-term, clean reputation.
However, long-term success for family firms is not a given, and it is definitely not an easy task to succeed across multiple generations. There are many complexities involved when ownership, management and family roles tend to overlap with less-clear distinctions between them. How do family business owners, leaders and next-generations cope and prepare for the future?
Although family squabbles often receive headlines from the business press, recent studies have shown that family businesses, on average, outperform and last longer than non-family businesses. They are also providing and driving strong society impact through impact investing, foundations, philanthropy and social programmes.
Successful family businesses must have a clear view of what the family and the business bring to the world, why it should matter to multiple stakeholders, how the family will create and run the business, and who in the family will be responsible for doing it. A successful family business strategy is a careful and curated balance between the past, present and future.
There are many factors involved when creating a successful family business strategy, and every business family will create their own operating framework and model for success. A few of the typical success factors will be discussed in the following.
Professionalisation: From owner-led to business-led
Many family firms face the need for professionalisation when they move from, typically, first to second, and second to third generations. Till then, owners/principals tend to be heavily involved (controlling) in the business across all aspects; often the reason why the business is successful in the first place.
But the quest for longevity and long-term success – including handing over to the future generations – also requires the business to professionalise and be adaptable to meet market conditions, competition, innovation etc. A significant part of this is also the decision about roles of family members in the business, as they can essentially play three different roles: work in the business, serve on the board/ advisory boards, and/or act as responsible shareholders. It is not uncommon, though, for family members to leave the business and family sphere entirely and seek opportunities outside.
Professional business cultures are nurtured through the efforts of leaders and through ‘formal’ processes like setting clear goals and rules, appraising employee performance and ethics, and hiring and promoting based on the ability to contribute. They achieve these standards by building cultures which emphasise performance while adhering to core values of the company.
The professionalisation of family firms may also imply establishing an independent board comprising family members and, preferably, outside independent directors. The aim should be to create a diverse board with a variety of competencies, experiences and industry backgrounds that can ensure good governance and act as a sounding-board for the business family.
Family business boards can play an instrumental role in aligning family businesses successfully for the future. However, it can be a balancing act for non-family board members/chairs – particularly navigating the complex landscape of legacy, interests, power, and the constant need for change and renewal.
For example, an independent non-family board of directors should understand and care for the business family and its legacy, and have a deep interest in the company and enthusiasm for its purpose. But it can get tricky, and high sensitivity is needed when conflicts of interest and serious challenges emerge. Boards of directors must have high ethical standards, integrity and reputation, and a willingness to say “no” to the business family and/or the CEO.
Independent board members need to work with family firms to assist them in dealing with the dilemma of balancing growth of their businesses with a long-term perspective and yet ensure family harmony and welfare. The key for board members is to bring objectivity, independence and diverse point of views to ensure longevity and success for the business.
Serving on a family business board is a curated balance between the past, present and future. It involves dedicated involvement from the board, the family and multiple stakeholders.
Building a multi-generational family business
A Chinese proverb states that “wealth shall not pass three generations”. The first generation builds wealth, the second manages it, and the third generation destroys it. The challenge often arises when the next generation takes over from the original founder who had personally poured everything into the business, whereas the next generation tend to have less of an emotional connection to the business.
However, founders and generations after them also have obligations to fulfil in ensuring a successful changeover to next generations. Unfortunately, they may not be forthcoming or willing to engage – which leads to friction, conflicts and lack of commitment from the next generation. A long-term partnership requires both parties to be motivated from the start.
According to research by consultancy PwC, only 15% of family businesses worldwide have a plan in place for management succession; and research by BCG found that more than 40 percent of family businesses have not adequately prepared for succession during the past decade.
For many family-owned businesses, succession-planning is challenging. While family businesses offer substantial economic and social benefits at the local, national and even global level, many face significant challenges planning for leadership succession. Despite recognising the importance of selecting and preparing a successor, the leaders of a family business often do not give succession-planning the attention it deserves.
With founders and leaders often reluctant to relinquish control of the business and subsequent generations unable or unwilling to assume responsibility, the transfer of power becomes contentious. With leaders holding onto family businesses for too long, and children insufficiently exposed to the business, succession planning often falls by the wayside; leaving the business exposed to internal conflict and management upheaval.
The result is that businesses are exposed to cracks and wounds, threatening their brands, longevity, and ultimately their legacy.
The key ingredient in building sustainable, long-term-oriented family businesses is communication; but it is sometimes missing, because talking openly about succession is considered inauspicious (or even taboo) in many business families. Communication is key to success across all stakeholders, and successful communication takes time and dedicated efforts.
It is also paramount to understand the complexity and develop a systems-perspective for succession-planning. Business families and owners should start planning early, manage the process carefully, involve all relevant family members, and take advantage of outside help to learn from similar situations and be inspired from best global practices.
Succession should become a well-planned partnership between generations, and the leadership and control of the business should be transferred in a step-by-step process that allows for smooth adoption of new roles and responsibilities by all generations.
Finally, current owners and leaders should establish a target-date for their retirement (far enough ahead for planning) and be guided by transparency and fairness in letting the next generation into the family business. Next generations need to see a clear path to professional involvement, ownership and incentives more broadly to dedicate themselves to the family business – potentially for life. That is a serious commitment to make, and they need proper guidance and support for that to happen.
Family firms should embrace constant change – with a long-term view
Leadership in the 21st century will be influenced by constant change. Next generation family leadership will have to deal effectively with multiple demanding global challenges – spanning from geopolitical volatility, technological disruptions, economic and political uncertainty, the rise of new challengers like China, Asia and shifting demographics, to name a few.
The implications for next generation family business leaders will include learning to view challenges from both a short- and long-term perspective, building resilience and character, keeping both a horizontal (industry) and vertical (company) outlook, balancing global perspectives and local insights, and developing strong leadership strategies.
Successful family business leaders develop and employ six important strategic skills and personal traits which will help them to lead with clarity through turbulent times:
Purpose: A family leader needs to have a clarity of thought and clear personal vision and direction to lead the company, and pursue this objective with unwavering focus.
Resilience: A strong character and the capacity to recover quickly from difficulties is also needed to manage tumultuous business changes and stay ahead of the curve.
Networks: The power of networks cannot be underestimated in family businesses, as a strong network of leaders will allow a leader to effectively cascade relevant messages and change.
Long-term lens: Family business leaders also need to have a long-term lens of the business (compared to a short-term lens focusing on quick returns), be able to think and plan strategically to unlock sustainable business value. Family ownership is often an advantage as it allows for a fairly long-term view.
Adaptation and Agility: Innovation is becoming a hygiene factor in business today, and family business leaders need to integrate disruption management into their strategies. This is not always easy, as preservation of harmony and peace with families may sometimes block new views and changes.
People and Culture: Last but not least, it is also important for a family business leader to be directed by their culture, ethics, values and beliefs, as this will create authenticity – something that is often overlooked in brand-building and strategic management.
The late professor Peter Drucker once said: “Wherever you see a successful business, someone once made a courageous decision”. Leadership in the 21st century will be a combination of multiple courageous decisions.
Although it is more challenging, the impact of purpose-driven leadership on business families will also be very high during these times. Some of the headwinds which global business is facing currently are the strongest ever in the history of the world economy (followed closely by the two World Wars).
To effectively navigate a family business organisation through such headwinds, it needs leaders with courage, conviction, strong mental resolve, unwavering focus and a strong sense of purpose.
But one also needs to keep in mind the fact that a leader cannot achieve anything alone. This is more relevant now than it was before. To achieve critical organisational objectives, a leader needs to have an open mind, should be open to collaboration across stakeholders, have the ability to align differing viewpoints – and should have the charisma to lead teams with differing motivations and needs.
As Johan H. Andresen, 5th generation owner and chairman of the family firm Ferd from Norway has said: “I have reformulated the traditional idea of the long-term with the idea of we can be impatient for a very long time”.
About the author:
Martin Roll is an experienced global business strategist, senior advisor and facilitator to Fortune 500 companies, Asian firms, family-owned businesses and family offices. He advises clients on strategy, transformation, leadership & family business topics, and is CEO of Martin Roll Company with more than 25 years of board & C-suite counselling experience. He is Visiting Professor at CEIBS, teaching family business strategy, succession and next generation leadership.
Read more: www.martinroll.com