Keeping the Family in Business

Family businesses are a very common form of ownership, from the working couple on-farm or in-store to the family trust (settled by the founder, and run by beneficiary trustees), and occasionally growing to massive family-controlled corporates. 33% of S&P 500 companies and 40% of the 250 largest French and German companies are family-controlled (think News Corporation, BMW, Wal-Mart, Bertelsmann, Bombardier). In New Zealand, the annual Rich List gives a glimpse of the wealth derived and fostered in family business.

For me, an interesting question is why business dynasties are rare. My father was an accountant of conventional views, whose clients were generally SMEs and families. He recognized the predictability of the adage “Shirtsleeves to shirtsleeves in three generations” and was unsurprised by terminal decline of long-established businesses. Wondering whether this was almost inevitable, I researched the matter and found that worldwide very few family businesses survive beyond the 3rd generation. Even the corporates referred to above are generally younger than the 4th-generation “barrier”. But why? Why does this economic Darwinism occur? Why don’t family businesses thrive beyond the 3rd generation?

I found McKinsey & Co’s work on the issue most enlightening. In several strong articles (three copied here), McKinsey offers practical pointers on how families can beat the odds. McKinsey interviewed 11 family chairpersons, whose family-owned businesses spanned 4 – 11 generations, and along the way had built family wealth in the billions. Their wisdom distilled over the centuries contained general truths, as described in Keeping the Family in Business. For further research and analysis, another relevant and solid piece of work is The five attributes of enduring family businesses.

The core of their research and advice is distilled in two Musts and five Policies to maintain a long-lasting family-owned business.

Musts: 

  • Professional management 
  • Family’s ongoing commitment to carry on as the Owner

Policies: 

  • Strong boards
  • True meritocracy
  • Prudent but dynamic portfolio evolution
  • Long-term performance focus
  • Keeping the family happy

All interviewed chairpersons articulated a strong belief in their particular family’s philosophy, governance and organization system, attributing to it the reason for the enduring success of their family’s wealth creation and cohesion. They illustrated these beliefs well: 

  • “We must not be managers. We must be experts in corporate governance.” 
  • “You cannot expect the family to consistently generate top managers.”
  • “My uncle, who had been appointed chief executive, died early. Otherwise, he would have ruined the business.”
  • “Our key factor of success is that we hire the best people in the market, and if they turn out not to be the best, we fire them. We would not be able to do that if we had family members in management”. (See also Who should – and shouldn’t – run the family business )
  • “We want to provide diversification for our shareholders within the business so that they don’t have to take the money out and do the diversification themselves.”
  • “Why would you keep the family business if it returns less than the stock market?” (Most sample conglomerates had exited their founding business)
  • “We explicitly tell all banks we will not bail out a subsidiary in trouble. This makes debt more expensive at subsidiary level, but protecting the family’s wealth makes it worth it.”

Call to Action! Since this overall topic is close to all of us, I invite you to make comments on the points raised here and by McKinsey & Co, and to provide anecdotes and war stories on this fascinating and nationally important ownership model.

Next month, I will pull together your responses (without attribution) and develop the discussion further.