The Great Balancing Act: Keeping control during growth

What does it take to start then grow a business into a successful, multi-billion dollar holding yet maintain total family control through the generations? Alison Ebbage reports

Take a look at the world’s Top 25 wholly-owned family businesses and certain similarities start to occur. Family businesses need time to grow and develop–which is often why they feature so strongly in mature economies. Many of the largest family businesses are highly focused on the production and retail of consumer goods, as well as the associated areas of supply chain and transport activities. All of these sectors are people intensive, which is reflected in high employee numbers. Collectively, family businesses in the 100% Club (the 25 largest wholly-owned companies) employ just over 1.6 million people worldwide and the average number of employees per family business is 55,700. Family businesses benefit from large home economies—some US businesses have not even ventured abroad. Some countries celebrate business and family business more than others.

The Campden Wealth Family Business Report looked at leading multigeneretional businesses in its Top 25 Family Businesses 2015 study to see what characteristics they shared. The result seemed to be a combination of controlled growth which fitted around a robust strategy of governance to underscore and reinforce family ownership.

Indeed ‘family businesses’ in this study were defined as one that is still 100% owned by the founding family and has or had multiple generations in senior positions within the firms. These businesses have been around for decades. They have had to grow to thrive but doing that without diluting control either via people or finance is challenging. For this reason organic growth and internal innovation is a key factor in the success and evolution of top family businesses.

Growth—investing in the company and keeping up with industry trends

On balance, the report says, family businesses are more focused on organic growth due to their internally-funded model.

The Swedish furniture retailer IKEA was set up in 1943 by Ingvar Kamprad, who remains a senior adviser to the business. The company has followed an organic growth model and concentrated on product development/differentiation and customer base expansion. 

BCD is another example of growth via product differentiation, customer base expansion and increasing market share. In 2015, US-based travel management company BCD merged two of its subsidiaries BCD M&I and BCD Travel Groups in an attempt to restructure for greater prosperity.

Large family businesses can also do well by adapting to the markets they serve and being innovative to survive and prosper, as Advance Publications demonstrates. Founded in 1922, it owns some of the world’s best-known magazines, such as The New Yorker, Vogue and Wired, as well as newspapers, websites, television stations, and other media outlets. The founder’s grandson is chairman of Advance.net and has been a key player in refocusing newspapers as digital-led operations.

Love’s Travel Stops & Country Stores is another example of how innovation can keep a company ahead of the times yet within control of the family. It has more than 350 travel stops and convenience stores in 40 states in the US. It introduced wireless internet access in the early 2000s in order to give back to customers and offer added value.

Mergers and acquisitions

However, organic growth is only a part of the story. Every firm reaches a point where growth cannot be achieved internally and they need to look elsewhere. Unsurprisingly acquisition has been more popular than merger because a merger would dilute family ownership while acquisition subsumes the acquired company into the family business.

US-based Reyes Holdings has made more than 130 acquisitions since 1976. One of its key factors for acquisitions is that the business must be privately held, and ideally family-owned.

Other companies have not gone as far as this but have still been actively acquisitive. Mars, for example, founded in 1911, operates in 73 countries. It is committed to research and development of new products and has innovated across its large product range. But it was the acquisition in 2014 of Procter & Gamble’s pet food business that contributed massively to its 2014 revenue growth to $33 billion.

Koch Industries, meanwhile, is the second-biggest family business globally. It has invested more than $70 billion in acquisitions and capital expenditure since 2003.

John L Ward, academic director at the Kellogg School of Management at Northwestern University in Illinois, US says while most family enterprises treasured private control to achieve unconventional results, “I don’t believe private control necessarily compromises growth or innovation.

“Controlled growth and balanced sources of growth are a big part of the family enterprise success recipe. The other key element is a patient long-term perspective. Family businesses believe and prove that prudence and consistent fundamental culture win out over short-term conventional wisdom.”

Control

Growth is one thing but family control is its twin. Stability and a consistent fundamental culture win out when it comes to family control and governance. Knowing what the business should be looking to achieve and how that can be done while keeping control through the generations needs a clearly defined culture and strategy that applies to everyone.

In fact retaining family control might actually serve to bolster the company’s fortunes. In theory a big family block and a family constitution provides stronger motivation to make sure senior management is meeting the needs of the company rather than their own.

Having a robust governance plan is central. Germany’s Würth group, for example, has second generation Reinhold Würth on its board. He joined the family business aged 19. It also has third-generation Bettina Würth, Reinhold Würth’s daughter, as chairwoman of the advisory board. There is a written corporate constitution that lays down all the rules of interaction between the company and its owners, the Würth Group’s Family Trusts.

Ensuring that family member gain experience elsewhere before joining the business is another way to make sure the business is kept within the family but that it has the experience and skill-set to grow.

At Dutch firm Steenkolen Handels-Vereeniging (SHV) family members have worked outside the business, with fourth-generation chairwoman Annemiek Fentener van Vlissingen working in the US and becoming a management consultant before joining.

John Van Reenen, professor of applied economics at MIT Sloan School, says: “A family firm needs to make sure potential family chief executives get high-quality education and experience in a range of other firms and sectors so they do not become too parochial.

“They also need to be faced with the real possibility of a non-family member coming in. This is good for keeping them on their toes as well as indicating to non-family employees in the firm that they also have a chance to rise to the top.”

Indeed, looking exclusively inside the family is not always the best option and can lead to the least-suited people running the company. As when knowing when organic growth cannot meet a growth strategy, knowing when to look outside the company and bring in external expertise to ensure it survives is key.

“The key thing for a family-owned business is to consider who might be the best person to run the firm,” Van Reenen continues.

“When a family-owned firm succeeds and becomes too large to run informally, the founder needs to think seriously about bringing in more professional management. Family owners should at least consider the alternative of bringing in some professional outside management.

“Unfortunately this often doesn’t happen and generally the only transition is to another family member typically the eldest son. These primogeniture firms have been found, on average, to have worse performance and management.”

Happily many firms recognise this and actively promote diversity and promotion based on actual worth rather than family connections.

Top 25 Family Businesses 2015 found the average number of family members employed by businesses is 3.2 but numbers ranged from zero to seven individuals. While family ownership was cherished and promoted, for many businesses the priority was to achieve balance between involvement of family members and the appointment of executives with expertise. Most commonly, family members sat on the board or served as chairperson. There are some who will also serve in an executive capacity within the group.

Bertelsmann is one firm that has an active aim of diversity. It is woven into the entire German company, from employee level to executives and board members. It thinks balance is key so, for example, if the chief executive is from the family then the chairman should not be. It wants all branches of the family to be represented and has written rules as regards the next generation–the hiring process is managed by a non-family member.

Mars is governed by a board of directors who are members of the Mars family and who receive independent advice from four external board advisers.

Supporting non-family members and providing them with opportunities ultimately benefits the company and ensures its survival. No surprise then that family businesses tend to have a strong interest in promoting corporate and social responsibility both internally, to promote their employees, and externally, to promote and strengthen links with the wider community and business sectors in which they operate.

At French company Sonepar family shareholders and employees alike are encouraged to become intimately acquainted with its business activities. The group actively promotes corporate social responsibility decisions into daily operations.

Regional US supermarket HE Butt Grocery has actively sought to build up lasting rapport with nearby growers. Another US retailer C&S Wholesale Grocers engineered a corporate social responsibility strategic plan to ‘redefine’ community commitment. The move was to become a more values-based company, engaging employees to take action on behalf of others, investing in community groups and leveraging its strategic non-profit partnerships to drive change nationally.

Giovanna Campopiano, assistant professor at the Witten Institute for Family Business in Germany, says families really can benefit from dealing with social issues.

“Corporate giving and socially-responsible initiatives are both considered to be important vehicles to foster and maintain family commitment to long-term goals and positive reputation among stakeholders.”

Family-owned companies which succeed need to work hard to straddle the desire to grow and diversify for future success with the desire to stay family owned. This has meant careful thought around funding and in many cases the growth has been achieved by keeping ahead of the market and being highly innovative as well as by careful acquisition.

Ultimately the aims of the business and of the family are one and the same—to survive and prosper. Having the right strategy for growth and expansion and the right people and experience in place are not mutually exclusive. Family businesses know this and have worked hard to make sure the governance is in place to balance the business’s needs for skills and experience and retaining family control. These Top 25 wholly-owned businesses are the template for others to follow.