Why family businesses matter so much for an economy

Tuesday, 10 February 2015 00:16 - - {{hitsCtrl.values.hits}}

Dr. Rudy Neufeld is an expert advisor and consultant to family businesses and entrepreneurs. His practice and passion are focused on “keeping the family business healthy” and positioning it for future success. Rudy has worked with senior management and owners of hundreds of companies in Southern California for 35 years. His business advisory, leadership development and management training services are specifically designed for family-owned companies. Following are excerpts of an interview: By Cathrine Weerakkody Q: Rudy, you’ve invested the last 20 years of your professional career in, as you say, “keeping family businesses healthy”. That’s admirable but why did you choose this profession? Or should I call it “your passion?” A: To answer your question why I became so deeply involved in family business consulting, I have to acknowledge I was being prepared for this “mission” much of my life. I just didn’t know it then. My 20 years in sales to businesses and later in business banking provided me opportunity to talk with hundreds of business owners, learn about their challenges and the reasons they ascribed to their successes. It all came together when I joined an old line accounting firm in my early 40s. Visiting their clients to acquaint myself with their client base, I found many were established and successful family businesses. Speaking with the owners and then with the next generation—“the kids” now in their 30s, 40s and even 50s—I discovered a substantial disconnect between the optimistic views of the senior generation owners about the future of their family business future and what the younger generation told me. I began studying the emerging literature about family business and then meeting with family business consultants around the country. I joined Family Firm Institute, a national body devoted to the field, and also the board of the local university’s Institute for Family Business. A psychologist who was transitioning from individual therapy to family business mentored me for 3½ years as I introduced him to my firm’s clients and assisted him in his practice. After six years producing workshops and conferences on family business topics for both my accounting firm and the university, I began my own practice. I was fortunate it was successful from the first month due to the many family business contacts I’d developed. Q: So what were some of those differences you describe as a “disconnect” between the perspective of the senior and junior generations? A: The most striking were how differently the two generations perceived the succession process and future of their family businesses. Parents were usually much more optimistic about how well succession would work out. They hoped the next generation would somehow work out any differences among themselves about ownership and leadership of the firm. They believed that “on-the-job” learning and observation would suffice to prepare “their kids” for leadership and successful management of the family’s most important asset. The next generation rarely shared their parents’ hopes and optimism. Few actually knew the parents’ plans for sharing ownership among several offspring. Many had serious concerns about how siblings and cousins would work together harmoniously. Most recognised that business success in the future was more complicated and less sure than it was at present. And most also disputed how well the parents had prepared them for the business and ownership.

"Seventy percent of family businesses don’t make it through the second generation. Those that do typically fail or are sold within 10-15 years after the third generation assumes control. Some are fortunate to retain at least a portion of the wealth created. But family conflicts frequently destroy the harmony of the surviving generation. Unresolved family issues are the principal reason for the failure of family owned businesses Continuity of the family business and legacy is not easy but a great deal can be done by the family to improve their odds. But speaking generally, the key is planning and preparation well in advance of the predicable challenges and transitions. The planning must involve both the family and business Management of the family firm is a far more complicated and limited in exercise of authority whenever there is more than a single owner. Families must also learn to distinguish between rights of owners, business leadership and the leadership role in the family What usually motivates families to create family governance structures is family disagreement, division into family branches and intergenerational differences that threaten both business and family success. That’s unfortunate and unnecessary in my view, given that such issues are predictable and “normal” to family business evolution and development Family businesses can survive and thrive in most social and economic systems if given opportunity. Family business is “the natural” origin for livelihood and wealth creation. But their growth, contribution and impact locally and nationally depend on favourable stable social and legal structures"

Q: How do the successful family firms train and develop the skills of their next generation family members? A: What I’ve observed and also read indicates preparation ideally starts when the children are still young. By the time the youngsters are in the mid-teens, they should be included in some family and business discussions about business challenges as well as being introduced to training in finance. Brief internships acquainting them with the business and management team are appropriate for college age family members. Several families I work with offer “a job” to any family member but “a career” only to those who complete an advanced degree in a business related area and then spend at least five years employed and promoted at some other business. One family sent a son to work for a larger family firm in the same industry located 1,000 miles away. He came back with solid experience and some great ideas he eventually helped implement in the large family firm he is now being groomed to lead. Several of my clients host annual retreats for next generation members where they hear in detail about the business from top managers and spend time together learning about the predictable challenges they’ll encounter as a family in business together and options how they can deal with those. For many years I have also conducted workshops, peer groups and made personal introductions to bring together next generation successors from various industries to learn from each other’s experiences. Q: You refer to “predictable” challenges that family businesses will encounter. What do you mean? A: Excellent question. I’m glad you caught that. All businesses encounter certain similar challenges as they progress from a start up to different stages as they grow and mature. Early stage businesses struggle with survival in various forms. A growing business has a different set of organisational and financial challenges. And mature businesses have yet a different set of issues. But across all or virtually all industries, these challenges are similar and predictable. Similarly, family therapists have for decades studied developmental stages of individuals and families and developed lists of predictable phases and the challenges inherent to each. In the late 1970s management theorists and psychologists began to study of the overlap of the different family and business stages and what similar challenges and issues recurred. This led to the development of family business systems theories which have continued to evolve as an additional dimension—ownership—was included. Undoubtedly there are cultural differences in family businesses in the US compared with, say, China or India and Sri Lanka. But many of the developmental theories and observations are valid regardless of culture. Q: I understand. But why is it so important in your mind that family businesses receive this attention and study? A: I appreciate your “bottom line” approach. Family businesses are the backbone of local and national economies. As I note in my article ‘Why Family Businesses Matter…to your Community, Economy and Nation,’ they are the greatest source of wealth creation worldwide. In the United States they represent 80 to 90 % of all business, account for over 60 % of our employment, produce 78 % of all new jobs, and represent more than half of the country’s GDP (Gross Domestic Product). Statistics from much of the rest of the world are similar. Family firms account for 2/3rds of all businesses and produce 70-90 % of global GDP. They provide greater stability during economic downturns. They are also more involved in charitable and social ventures both as financial supporters and as community leaders. Q: That’s great for society and the economy but how does it work out for families in business? A: Family businesses provide good livelihoods for the family and sometimes enrich them immensely, both financially and socially. Family members typically have far greater opportunities for professional growth and success in the family business than they might enjoy working for multinationals or governmental bodies. And those family members are frequently invited to serve on boards of community and social service entities. Unfortunately the average life of a family business [in the US] is 24 years, about the active professional life span of the founders. Quite a few rise and then fall under the founder’s tenure; it’s referred to as “the founder’s trap.” Entrepreneurs find it difficult to relinquish control of their “creation” fearing the next generation may not be as passionate about it or as successful. Often they resist acknowledging their mortality. And perhaps their concerns about the succeeding generations are appropriate. Seventy percent of family businesses don’t make it through the second generation. Those that do typically fail or are sold within 10-15 years after the third generation assumes control. Some are fortunate to retain at least a portion of the wealth created. But family conflicts frequently destroy the harmony of the surviving generation. Unresolved family issues are the principal reason for the failure of family owned businesses. My second article ‘Shirtsleeves to shirtsleeves in three generations—Why Family Businesses Fail’ explains this in more detail. Q: That’s disheartening. What can family businesses do to improve the odds of successful continuity of the family firm and their legacy? A: Continuity of the family business and legacy is not easy but a great deal can be done by the family to improve their odds. My article ‘How—and Why—Families in Business Thrive for Generations’ offers more on this very important topic. But speaking generally, the key is planning and preparation well in advance of the predicable challenges and transitions. The planning must involve both the family and business. Such planning cannot be “top down”, particularly in the family. It must involve not just the next generation who do or will likely work in the business but also the rest of the family, including spouses and in-laws if it is to be successful. It requires a lot of communication, effort and patience. Usually it means the family will need to learn communication and conflict resolution skills and develop a more formal and structured approach to the issues. “Dinner table” and ad hoc conversations in the hallways of the firm will not suffice. Planning includes preparation of not only the next generation but the whole family for the significant changes from the current state of the family and business. Earlier I mentioned advanced business education and degrees as well as “outside” professional experience for career candidates. But the entire family needs education about the business, finance and some understanding of the immense difference between how a founder leads and manages in contrast with shared ownership between siblings and/or cousins. One family business I worked with was owned by four siblings after the death of their father. The four agreed the oldest daughter was the best prepared to be the next CEO. At the first board meeting after the father’s death, the eldest daughter took charge. After discussing a particular issue, she told her younger brother her decision on the matter was thus and so and she directed him to take care of it, just as her father had done in previous years. Her brother’s response? “You’re not Dad and you can’t make me.” They were unprepared to work together and the eldest daughter’s assumption she could continue to manage the business as Dad had done was erroneous. When Dad was sole owner, he could dictate policy and make decisions unilaterally. Sibling shared ownership is vastly different and leadership, even if there is a “first among equals”. Management of the family firm is a far more complicated and limited in exercise of authority whenever there is more than a single owner. Families must also learn to distinguish between rights of owners, business leadership and the leadership role in the family [which the single owner/founder held in most instances]. Successful family businesses create a family council or forum where the family’s issues which affect or concern the business are considered. Dividends, employment, and how family values inform and guide the business are typical topics. Q: That leads me to my next question. What are the governance structures the family businesses you work with have developed? A: That’s a sore subject and both my clients and I have suffered. My practice and my clients are located in California. Family businesses here are typically in their second to fourth generations. The oldest family firm I’ve dealt with started in the 1860s. The founder arrived during the California Gold Rush, failed to find gold and didn’t have money to return to the East Coast so he began farming. [It’s now one of the largest farming operations in the state.] Most of my family business clients are currently in the second and third generation. The first governance structure they develop is the business’ board of directors, which typically is limited to family members and perhaps a few family friends. Several have evolved to include independent or outside directors, which has been proven to enhance the success of the business immeasurably. What follows next is some kind of informal shareholders’ meetings. While both these include family members, the focus is still largely on “the business of the business”. When the next generation grows in numbers beyond a handful, it is likely the family will create a forum that focuses on “the business of the family.” Often this requires the assistance of professional advisors. What usually motivates families to create family governance structures is family disagreement, division into family branches and intergenerational differences that threaten both business and family success. That’s unfortunate and unnecessary in my view, given that such issues are predictable and “normal” to family business evolution and development. Q: You’re saying that “family politics” is the reason family firms develop increasingly sophisticated governance structures? A: That’s correct, though I wish it were the other way around. That is, families can know and anticipate the challenges they’ll face as they grow and evolve and with such foresight, they develop the governance structures to facilitate such growth and development. But…full disclosure—a term bandied around these days—I and other family business consultants earn our living because families in business fail to understand and acknowledge the inevitable challenges of being a business owning family. Sad to say, I can “bet” that the families who call me in to assist with business problems are motivated by family issues they don’t want to disclose at the outset. They leave it to me to “discover” what they already know. It’s a bit embarrassing but in family business consulting we joke about the “three consultants rule”. The first consultant called in by the family is asked to determine what the problems are; their response is typically rejected by the family. The family then calls in the second consultant telling him what the problem is and asking for a solution. The second consultant after investigating the matter proposes a solution, which the family rejects as wrong, unrealistic or unworkable. When the family finally calls in a third consultant, they say “here’s the problem and here’s the solution but we cannot implement it [or don’t know how to do so without destroying the family].” I’ve been the first, second and at other times the third consultant. “The rule” seems to hold true! Q: Rudy, what you’ve told me is intriguing. I know there’s much more to learn but let’s close with this question – how can government foster and assist family businesses? A: That’s both an easy and a difficult question to answer. The easy answer is all privately held businesses depend upon their governments to foster a relatively market-oriented economy and stable society. Rule of law and fair adjudication processes are very important. As is investing in education at the elementary and higher levels. Peculiar to family businesses are death and inheritance taxes. This has been a particular problem in recent decades in the US. One of the companies I work with sold a highly profitable business which employed 2,200 locally to a publicly traded European firm for more than $1 billion dollars in order to have sufficient cash to pay anticipated death duties of two major shareholders. In less than five years, local employment by the firm has shrunk by half and virtually all the local social and charitable leadership and funding have evaporated. Family businesses can survive and thrive in most social and economic systems if given opportunity. Family business is “the natural” origin for livelihood and wealth creation. But their growth, contribution and impact locally and nationally depend on favourable stable social and legal structures. (The writer is a CIMA passed finalist and a graduate in financial management.)