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A Lot to be Learned from Families' Successes

Daily Journal of Commerce
October 24, 2014

Overview

By making decisions with a long-term perspective, family-owned businesses are getting it right

Family businesses account for approximately 80 percent of U.S. companies and 80 to 90 percent of businesses across the globe. Some of the world's biggest companies are family-owned, including Samsung, Tata Group, Wal-Mart and Cargill, and about one-third of all companies in the Fortune 500 are family-controlled.

Yet family business models often are overlooked because only 30 percent make it past just one generation, only 12 percent remain viable into the third generation and only 3 percent operate into the fourth generation and beyond. Nevertheless, there are valuable lessons to be learned from successful family businesses and the characteristics they all share.

Adopt a long-term vision and investment strategy

Many non-family businesses manage investment for near-term growth, or measure short-term performance; however, family businesses tend to take a longer-term perspective, focusing on benefits for the next generation rather than immediate gains by taking on risks. Family businesses will accept a lower return in good times to ensure survival in bad times; they will invest in an upturn or a downturn because of their long-term outlook.

This vision may be documented in a Family Constitution or Value Statement, or it may be manifested in the election process for those who serve on the board. Documenting this longer-term thinking and a broader perspective often sets the stage for stewardship and lasting culture. Recently, much talk has taken place about non-family businesses being encouraged to manage for the long term, yet many fail to put processes in place to measure progress in this regard.

Inspire more trust and commitment from employees and communities

Many decisions in family-owned businesses are measured by looking at family, employees and the community, including customers and suppliers.

While non-family companies use stock grants and options and other short-term incentives to reward behavior, many family-owned businesses create a culture of commitment and retain talent by investing in people and rewarding performance over the long term. Other businesses support and invest in their communities either through loyalty programs, gift giving, job creation and other mechanisms, while family-owned businesses tend to be more committed and reliable to the "family" causes.

The family may act through a foundation or independently through individual trusts, scholarships and other charitable vehicles.

Cope with exploration, conflict or change

Exploration, conflict and change are inevitable when the ownership, the family and the business have different interests. The owners have a financial stake, but the family holds the emotional core, including family communication, trust and rivalries. The business may be the only asset or one in a number of businesses within a family enterprise.

Providing a process for exploring different approaches and/or for anticipating and predicting how the family, the owners and the business will confront these issues as they react and respond to change is critical. Family-based issues often are more critical than business-based ones. Choice of entity, shareholder agreements, liquidity programs, family councils, family constitutions and other mechanisms help deal with multi-generational dynamics and inevitable disputes. Non-family businesses often have the same issues but don't plan for this type of conflict resolution.

Nurture and take care of the family

Successful family businesses actively build connection and shared purposes over generations. Careful estate planning will preserve family assets and assure family control. Communication vehicles, such as family meetings, single-family offices (whether physical or electronic) and other training provide for future continuity. Non-family businesses have similar constituents and stakeholders, and these tools could be beneficial.

Plan ahead for leadership transition

Orderly transition requires planning whether succession is to own, manage or sell. Transition can build or break the family firm. Successors have to be selected, trained, groomed and given the opportunity to lead – and more importantly, they should want the job.

But in a family-owned business there is also the exiting CEO and the task of defining that person's role going forward. For a smooth, conflict-free transition, the former head of the company needs to have a clearly defined role after stepping down. Oftentimes, an outside board of advisers or independent directors can assist this essential function. Non-family businesses must also plan and cultivate human capital for the next generation or next owner.

Transition is going to happen, whether planned or not. Given that family-owned businesses play a key role in our economy, there are numerous lessons to be learned from their successes and their failures. Family-controlled businesses can serve as an example of how planning and using a variety of corporate tools and processes can lead to long-term success and stewardship.

As published, Daily Journal of Commerce, October 24, 2014.

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