Q1: Your company deals mostly with generational transitions. What are some issues confronting family businesses that are usually overlooked by families?
To their credit, most of the family business leaders we meet think a lot about succession. The vast majority are very interested in having what they have built continue into the next generation. More than anything else, the senior generation tends to focus on who is going to replace them in their current role. And there is no question that it is essential to find the right person to lead the business in the next generation.
At the same time, that focus on identifying “the one” sometimes gets in the way of addressing other essential issues. For example, one of the most important decisions that each generation makes is about how ownership will be passed to the next generation. Will it be done equally or will some be given a greater percentage? Will shares be passed down directly or through trust? These decisions fundamentally affect how the family will live and work together in the future, though too often they are either unaddressed or driven mainly by tax planning.
It is also essential for the current generation to think about what kind of organization they want to leave behind. It’s risky to put all of the eggs in one basket by choosing a successor. Instead, it’s better to focus on making sure that the company has a clear strategy as well as the organizational structure and capabilities to support whoever is in charge. For example, while a well-functioning board may not have been necessary for the senior generation, it may be essential to help guide the next generation and make sure that the interests of the broader ownership group are protected.
Lastly, the succession process tends to focus on passing the baton down to the next generation without thinking through how the senior generation leaders can continue to support the family enterprise. One of the reasons why succession tends to happen so late is that leaders feel like they have lost their purpose in life once they hand over the reigns. When that happens, it delays succession beyond when it would best benefit the company. It also deprives the family enterprise of someone who can still add tremendous value even when no longer leading the business. So, think carefully about the role or roles that the senior generation can play once the leadership transition takes place. That may be as an informal advisor to the CEO or on special projects within the company. Or it might be focused on something outside the core business, like training the next generation, starting something new, or leading the family foundation. Regardless of what it involves, having a clear place to land will make the transition go far more smoothly.
Q2: Is bigger always better? Do you see a situation where the basis of competition will change which undermines scale?
I think scale is becoming less important than it used to be in most industries. For many decades the focus of strategy was on how to help companies get as big as possible. For instance, one of the most important concepts in the field was the “experience curve”, which said that if you grew bigger faster than your competitors that you could sustain an advantage based on cost leadership. There were truly “first mover advantages” in the sense that the company that established its position would be able to stay there for a long time.
Today, we see many examples of long-time leaders being knocked off their perch or even run out of business. The way in which Amazon essentially decimated traditional bookstores is a great example. Or look at airlines. The only ones making any money over a sustained period of time are the low-cost upstarts. Having an existing network of planes, routes, and employees becomes a disadvantage when new entrants can come along with more efficient planes and lower costs, while only flying the profitable routes.
Scale used to be essential to moving from an idea to a viable product, since doing so required building manufacturing facilities, logistics capabilities, customer support operations, and so on. Now you see companies that are based in the West, with manufacturing in China, call centers in the Philippines, and IT experts in India. And even many of the largest companies are outsourcing their logistics to save money. What all this means is that the barriers to entry for a business that wants to tap into the global marketplace are lower then they have ever been.
The most popular concept in business strategy right now is “disruptive innovation.” Clayton Christensen and others argue that even when companies are doing everything right, someone new can come along and take their business away. Like most good ideas this one has gone too far, since many companies can continue to succeed without disrupting their entire business. But the basic concept is true. Being bigger is no longer in and of itself a defensible strategy. And it may be an impediment since it often creates layers between top management and their customers. The CEO of Microsoft recently reorganized his business with the goal of reducing the distance between executives and the frontlines. In today’s competitive environment, if you lose the connection to what your customers most value, you are in trouble, no matter how big you are.
Q3: What should be the management style of family members in contrast to professional managers?
Here are a few suggestions. First, be yourself. If you are following in the footsteps of a previous generation, don’t try to mimic their style. An important part of being a good leader is authenticity and people can tell when someone is playing a role rather than being true to who they are.
Second, be aware of the impact of your status. Employees love to work directly with the owners of a business, so that is a positive. But everything you say and do will be taken with even more weight than a typical executive. So, for example, if you are having a conversation with someone who is not your direct report, know that whatever you “suggest” is likely to be taken as a directive, even if it contradicts what their supervisor has told them.
Third, get feedback, preferably a “360”. It’s critical to getting better as a leader. Your employees are unlikely to give you honest feedback directly, so consider using an outside firm or asking your board to oversee the process.
Lastly, think about how you can inspire your employees. As the labor market gets more competitive, the top people are looking for more than a paycheck. They want to know that they are part of something bigger than themselves. As a family executive you are uniquely positioned to help people understand why you are in business, since it is almost always not just about the money. Think about how to communicate your passion in a way that fits with your personality.
Q4: How can family businesses build a ‘talent machine’ within the family?
We use the term “talent machine” with our clients because that is something we believe is essential for family businesses to thrive across generations. The bigger your business and your family get, the more talented people you will need to lead it. Some of them will be serving as executives, but that is only the beginning. Multi-generational family businesses also need people to serve as leaders of the ownership group, their board(s), their family, their foundation, and so on. No one person can fill all these roles, no matter how good they are.
So, when you are thinking about creating your talent machine, here are a few suggestions. First, start early. Build an emotional tie to your family enterprise from an early age. Expose them to what you do and look for age-appropriate ways for them to get involved. For example, one of my clients is in the shipping business. The patriarch took one of his grandchildren on the maiden voyage of a new ship. I am confident that for the rest of his life that child will have an emotional tie to the business.
Second, design a formal next generation education program. There are some fantastic examples out there of what business families have done to ensure that family members are developing the skills and capabilities they will need to serve the family enterprise, whether that is by working in the business or in some other way. Especially if you plan to pass ownership down to the next generation, think about what knowledge and experiences they will need to be effective owners at some point, especially if they do not work for the core family business.
Third, establish a family employment process. Many family businesses have a policy in their Constitution about what criteria need to be met by those who want a job in the company, such as educational degrees and outside work experience. That’s important, but it’s only a start. You will need to think carefully about not just how family members will get in the door, but what will happen to them once they are inside. It is critical to think about how they will get feedback, be promoted, or – hopefully rarely – get managed out if they are not performing. Family members in the business should have development plans and there should be resources in place to help them improve, such as an assigned non-family mentor.
Fourth, don’t judge too early. There’s a tendency in some families to designate someone as a leader too early in life (sometimes at birth!). I have seen that backfire all too frequently, as either it turns out the “clear winner” did not develop as expected or buckled under the pressure. And I have seen the opposite, where the person no one expected became the leader. For example, in one family business I know there was a person who spent 15 years pursuing a career in music, with no interest in the business. After reaching the conclusion that she had gone as far as she could in music, she became interested in the business. She started working for the company at a low level. Very quickly it became clear that she was the most talented member of her generation, and even that her musical training was relevant since it taught her the importance of focus, dedication, and team work. After she had demonstrated her capabilities, she stepped into the chief executive role and has done an outstanding job in it.
Q5: How should family businesses not just navigate but exploit downturn? How can they develop endurance maximization vs profit maximization?
One of my colleagues, George Stalk, co-authored a fantastic article in Harvard Business Review (http://hbr.org/2012/11/what-you-can-learn-from-family-business/ar/1) comparing family and non-family businesses across business cycles. What they found is that while non-family businesses do better in good economic times, family businesses do better in down times. There are a host of reasons for this, including that family businesses take on less debt, are more conservative about hiring, and tend to be more careful about spending money.
This is an important point if you believe, as I do, that the future will hold at least as many bear markets as bull ones. If that’s true, then the most successful companies will be more like the tortoise than the hare – focused on growing at a sustainable rate rather than levering up and placing huge bets. It also means that perhaps the best time to grow will be when the market is down rather than up. In a bull market, everything is expensive and companies will pay a premium to expand, whether organically or through acquisition. The reverse is true during a bear market, when bargains can be had for those in a position to go shopping.
So, how can family businesses position themselves for exploiting a downturn? First, keep growth at a reasonable level when times are good. The temptation is to take advantage of the opportunities in a growing market, but make sure you are not outpacing your ability to sustain what you build when the economic winds change. Remember that some of your competitors may be getting ahead of you by riding the wave up, without being prepared for the crash landing at the end. Second, minimize the use of debt. Ideally growth should be financed from reinvestment of your earnings. Of course every now and then there is that deal that is too good to be refused, which requires you to lever up. But as a general rule you should be careful about taking out loans that will be difficult to repay if the economy tanks. Third, if you can, build up a rainy day fund that can be used to acquire distressed assets during downturns. Debt often becomes scarce when the bubbles burst. Those that have cash can often set the terms for deals.
Q6: Which family or families can be examples of a good family history project?
I have seen some remarkable examples within my clients. While I can’t reveal the names, I can share of the best practices. Most importantly, make it truly reflect the family’s experiences. There is a tendency to gloss over the hard times and focus on the positives. But that’s a disservice to the next generation. There is some very compelling research out there that shows that children become much more resilient as they get older when they have an understanding of their family’s past. But what is most useful to them is what’s called the “oscillating narrative,” which describes how the family’s fortunes have waxed and waned over time. Most families have been through successes and failures to get to where they are. The key is that no matter what went wrong they kept going and stayed together. That is the message you want to tell. Avoid the mythology of the “perfect family” or the “perfect business” – it sets an impossible standard for the next generation to live up to.
Another lesson is that the process is at least as important as the end product. You can hire someone to produce a professional quality output, but you may miss the benefits of learning that come from it. Focus on engagement more than production value. For example, one the best things I have seen is asking the youngest generation to interview the senior generation. Children have a remarkable ability for asking the most incisive questions, and they are more likely to get their grandparents to answer them than their parents would be. Take the time to get people involved and use the process as a learning opportunity.
Lastly, try to get creative. I have seen family history projects where family members act out scenes from their history in period costumes. I have seen others where the next generation uses puppets to tell the story. There’s nothing at all wrong with a video based on old photos, but if your family has some creative energy, then go for it!
Q7: Is there a difference in business performance between families that have common purpose vs those with no authentic corporate social responsibility or CSR vision? How should philanthropy be encouraged and treated?
I think an active philanthropy and/or corporate social responsibility program can have an extremely positive impact on business performance for family companies.
Studies have shown that having the opportunity to contribute to others increases job satisfaction, which will help companies to retain their employees. It also can improve customer loyalty and create some goodwill in case the company makes any public relations missteps.
Those benefits are there for any type of company. But family businesses can gain additional ones. For instance, social initiatives can help create a common purpose that is beyond only generating wealth, which can keep the family owners together as their interests diverge. They also provide a way for those who are not interested in the business to do something that benefits the family enterprise.
Additionally, philanthropy and CSR are excellent ways to develop the next generation. They help make sure that the family does not become too isolated and lose its connection to the reality experienced by most of the country. They can provide an opportunity for family members to learn to work together in an environment that is less political than the business. And they can provide experience in working on boards and building leadership skills. For example, in one of our clients there was an extremely talented next generation member who was uninterested in the business but was willing to run the family’s CSR program. He discovered through that experience that he actually enjoyed leading an organization and saw the positive contributions he could make by bringing some of the long-term investment mindset from the CSR program to the rest of the business. He is now the lead successor to the CEO and is preparing to take on that role when his father retires.
Lastly, philanthropy can provide an avenue for a smooth transition for leaders out of the business. A philanthropic role can help those family members find purpose in the next stage of their lives and continue using their talents to advance the family’s legacy.