Family firms account for 70% of the global GDP and 60% of global employment according to a recent study by INSEAD Business School. They are a key driver of global business and growth, so their sustained long-term value creation is important for the global economy as a whole.
However, the long-term success of family firms is not given, and it is not an easy task. There are many complexities involved when ownership, management, and family roles tend to overlap, and there are less clear distinctions between them.
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 founder who personally had everything poured into the business whereas the next generation tends to have less of an emotional connection to the business.
However, founders and generations after them also have obligations to fulfill to ensure successful succession to the next generations. Unfortunately, they may not be forthcoming or willing to engage, which leads to friction, conflicts, and a lack of commitment from the next generation. A long-term partnership requires both parties to be motivated from the start.
That being said, there are exceptions where family businesses have managed to overcome this challenge. Hoshi Ryokan from Japan is an example of longevity. Operating a traditional Japanese guesthouse-styled hotel featuring hot springs spa baths, the company was founded in the year 718 and has spanned 46 generations. This demonstrates that with proper processes, governance, and risk management, family firms can rein successful for generations.
The long-term value for family businesses is driven by Performance (business) and Platform (family). Balancing the two drivers is critical, as is looking at strategies through a long-term outlook to build an enduring entity that lasts for generations. Optimizing performance is crucial to survival as it generates income, cash flows, and dividends, while the platform needs to have the right set-up in organization, governance, ownership, and leadership, and be fit for the long-term purpose of the family.
Sometimes success will follow from having the two pillars overlap in various ways, and sometimes it is better to keep them separated. It is important to remember that one of the key characteristics of a family-driven firm is that it is a business with “heart and brain combined” as opposed to a pure shareholder value-driven company, in the case of institutionalized companies.
The family should consider whether they are the best owner of the business and best suited to take it forward compared to external investors/ new owners, i.e. private equity, larger companies. Some of the questions to consider are whether sufficient capital is available, if large future investments are necessary, whether there will be a better owner that is more capable and/or experienced to run it, and whether future family generations are interested in leading and/or owning the business.
It is not easy for a family to invite external investors on board or to sell the entire business, but a different ownership set-up may sometimes help the business as the family gets access to capital, valuable know-how, global market access, and a diversity of leadership views.
Families should also be prepared for outside take-over attempts and ensure their ownership structure can meet those challenges. The family owners behind the French luxury brand Hermès learned a hard lesson when luxury and fashion conglomerate LVMH controlled by Bernard Arnault launched an attempt to control Hermès. Despite owning 70% of the shares (Hermès is publicly traded in Paris) across more than 70 family members, they could have lost the company entirely if they had not created a holding company that had the first right to buy any family shares. This was the mechanism they created so minority shareholders could not divest to non-family investors to shield LVMH and others from getting control of Hermès in the future.
The management issue is important because the family needs to decide who will run the business, hence determining whether the CEO is a family member or an outside talent. The key to success is most often to implement a professional process where potential family talents are compared with external talents to select the best CEO. This issue is often contagious and loaded with conflicts due to personal expectations, lack of communication between generations, and unclear succession plans.
In Asia, communication between generations is typically less direct as compared to Western cultures. When combined with an inherent respect for seniority, open discussions, and potential disagreements tend not to surface so issues can hang in the air for a long time. In the next 5-10 years, many Asian family firms will have to go through succession but their paths are less clear, even though the younger generations are getting more outspoken and are demanding clearer answers about the future.
Taking the adequate time and drawing up a proper process, with expert help where necessary, can help minimize conflicts and steer the family through the decision. The key virtues here are patience, inclusiveness, and transparency.
When the Danish family-owned toy company LEGO found itself struggling to transform its business to respond to its environment, the family decided to nominate an external CEO. Jorgen Vig Knudstorp, a former McKinsey consultant, joined from within the LEGO group strategy team and led the company’s stellar turnaround – despite all the odds. It regained its pole position while the family took roles at the board level rather than the operating level.
Successful family businesses are characterized by some distinct traits:
It is a careful and curated balance of the past, present, and future.
For example, LEGO has stated: “Our ultimate purpose is to inspire and develop children to think creatively, reason systematically and release their potential to shape their future – experiencing the endless human possibility”.
Family business strategy requires the creation and definition of a distinct clarity at the core, the definition and agreement on a shared future vision among family members (often across multiple generations with diverse perspectives and motivations), and the relentless leadership and execution of the overall future strategy.
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, 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 clarity of thought and a clear personal vision and direction to lead the company, and pursue this objective with an unwavering focus
Resilience: A strong character and the capacity to recover quickly from difficulties are 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 also 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), and 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 the preservation of harmony and peace among families may sometimes block new views and changes. The manifestation of Asian cultures within businesses is a good example of that
People and Culture: Last but not least, it is also important for a family business leader to be directed by her culture, ethics, values, and beliefs as this will create authenticity – something that is highly overlooked in brand building and strategic management.
The success of next-generation family business leaders will be defined by their ability and willingness to drive a powerful transformation agenda across their organizations: To be Daring, Bold, and Different.
This article was featured in the German business magazine COMAG in July 2018.
Download PDF: Succession In Family Business: Leading With Impact – Martin Roll
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About the author: Martin Roll – Family Business & Family Office Advisor
Family Business Strategy book: Family Business Strategy – Leading Future Paths With Impact
Family Office Strategy book: Family Office Strategy – Creating a Multi-Generation Legacy
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