Lanse’s seven labours for family business success

It is fair to say that business-owning families have a real problem with transitions. Almost a third of the CEO's of America's family-owned businesses have no intention or expectation of retiring. Their succession plan starts at the emergency room door. But that isn't all – there are other challenges that are exacerbated or more prevalent in the family business format. Objectivity, recruitment, professionalism, and competitiveness are all especially challenged when the business is a family business.

Management guru Peter Drucker advised family businesses to have neutral, non-family members on their boards and to delegate all leadership succession decisions to them. "Entrust the settlement of the succession issue to an outsider" he argued, adding "family-managed businesses should try to find the right outsider(s) long before the succession decision has to be made".

Today's family businesses have some common challenges, especially if their markets and competition are global. Businesses owned and operated by families are famous for making compromises that specially benefit family members, but each of these compromises has a cost and reduces the competitiveness of the company. If enough are made, eventually the company will see an erosion of its strategic position, especially if the company's competitive advantages are not overwhelming.

Recent research by Campden Research and US Trust/Bank of America, Protecting the Family Fortune, found that businesses owned by high net worth families that were "business centric" in their values and decision-making were more valuable that those businesses owned by families who saw the business as serving the family. While the research could only suggest a casual relationship between the family priorities and the performance of the business, it was clear that that the greater wealth was controlled by those families who placed their business' needs above the family needs.

So what are the challenges most commonly faced by business- owning families? Seven pose the greatest hurdles to the sustained, competitive success of the company.

1. An over reliance on insiders
In a 2007 survey of nearly 800 American family business leaders conducted by Laird Norton Tyee, nearly 75% of respondents reported having a board of directors, but 50% of those only had family members on their boards. At best, then, only about 37.5% of American family businesses have a non-family presence on their board. On top of that, how many family businesses have the business' lawyer and/or accountant as a board member? More than is healthy for the business. So the presence of true independents may be overstated even within those businesses reporting "outside" members on their boards.

The narrow comfort zone of families leads to populating their boards with family members and people close to the business and the family. With a strong, successful founder continuing to run the business successfully as he or she sees fit, the lack of truly independent outsiders may not impact the company's competitive position and growth in value. But in time, an "insider" board cannot and will not provide the strategic advantages that an outside board can in calling for best practices, insisting on succession planning, helping to develop strategic plans that will provide a roadmap for the business and a yardstick for measuring future performance, and connecting with networks of people, resources and thinking that go well beyond the family's inner circle.

By the way, the same Laird Norton Tyee survey found that only 29% of the businesses had a written succession plan and only 54% had a strategic plan, yet 95% said that their business was managed like any other! That's true insider thinking.

2. An instinct for privacy and secrecy
Hand-in-hand with a discomfort with outsiders, American family businesses don't like to share information, perhaps deriving from an instinctive sense that family matters should stay in the family. Some go so far as to keep family salaries and benefits on a separate set of books so non-family employees don't have access to "family information". Sometimes the instinct for tight control of information is defended on strategic grounds – "we're a private business and our competitors would love to know our costs, margins, sources of supplies and customers". All of which may have had some validity when markets were local and the world was not flat.

How many private family businesses do not share their performance measures and results with their employees in any meaningful way? More than a few, with the consequence that the employees not only don't feel fully engaged with the needs of the company, but their potential to creatively contribute to its future success is inhibited.

How many also do not share information fully with outside consultants and advisors, thereby relegating them to paid contractual help instead of long-term, trusted strategic partners with a deep understanding of the business and its strengths and weaknesses?

Today the private business that doesn't fully share critical information internally and externally is at a competitive disadvantage. Initiative from employees is hampered by not knowing all the facts and a sense of divided cultures is engendered. In contrast, the companies that share information with key stakeholders build trust and alignment for the greater good of the company – a sense of ownership by all. Here's a test that Robert Reich offers: when you walk around a company, listen to see if employees use the word "we" or the word "they" when talking about the business. It will tell you if they are aligned with its success, or simply cashing a paycheck.

3. A lack of objectivity and professionalism
Objectivity about employment performance, compensation and advancement has always been a special challenge when the employee is a member of the business-owning family. With the exception of the founder who generally doesn't care, family members working in family-owned businesses are likely to feel that they are either grossly undervalued and appreciated by the rest of the family, or significantly overvalued. Appreciating the true talents and contributions of relatives who have been watched from cradle to professional maturity is a challenge for any family, but even more so if the family owns the business where the family member works.

Families have particular trouble managing performance reviews and compensation issues with relatives. Buying peace and avoiding confrontations are the paths of least resistance too easily taken when the employee is always going to be a part of your family regardless of the future course of the business or his or her employment.

The reverse side of this challenge is making sure that family members in the business are fairly compensated. Family owners not working in the business can often begrudge the compensation earned by their relative, believing that a family member should be grateful for the opportunity to work for the family's business and accept below-market compensation.

The cost of accommodation and the lack of consistent, objective standards of performance and reward can be found in the long-term competitive position of the business. Cost structures will be elevated, employee morale and performance will be undermined, and the ability to attract and retain the talent necessary for a globally competitive business will be hampered.

Campden and US Trust identified the benefits of an ownership that sees its mission as serving the business, not the reverse. These companies incorporate objectivity and professionalism in their decisions and practices and acquire more value over time – the true goal of ownership and capital.

4. The need to recruit outside the family
In their 2007 review of over 1,000 American family businesses, MassMutual, the Cox Family Enterprise Center and the Family Firm Institute found that 80% were led by family CEO's (down from 86% in 2002). PricewaterhouseCoopers, in its 2007/2008 Family Business Survey, found recruitment to be the greatest internal challenge to the business – almost twice as important in the eyes of family business leaders as the next critical issue (managing cash flow and controlling costs).

The contrast between the presence of the family in the C-suite and the need to recruit and develop talent to be competitive is telling. The family no longer can provide all the leadership talent a globally competitive business requires. Yet, how can you to recruit the very best talent to enable your family's business to compete globally if the opportunity to succeed that you offer doesn't include the possibility of leading the company one day? Glass ceilings imposed by families will drive away the best talent and reduce the business' competitiveness in the long run.

5. Succession of leadership
That 30% of American family business leaders have no intention of ever retiring should be no surprise when survey after survey show that succession plans are the exception rather than the rule. Only 29% of the businesses in the Laird Norton survey had succession plans and 50% in the PricewaterhouseCoopers survey. Yet adequate succession planning, along with strategic planning and CEO performance oversight, is one of the top board priorities for all businesses with independent boards. Effective succession planning may be the most intractable challenge facing family businesses.

6. Achieving liquidity
Warren Buffett is the prototype of a founder. In Berkshire Hathaway, he created a unique model of a value-driven, business enterprise. Starting with a family-owned New England textile business that was doomed by market forces, he built an investment vehicle that has outperformed public markets, individual business categories and specific companies. Buffett is not just a savvy investor; he is a builder and an astute acquirer with a vision of relentless value accumulation over time. All the while he has never sold a share of his Berkshire Hathaway stock. Yet, at times, Buffett's children sold the Berkshire Hathaway stock they acquired from their parents in order to pursue their own interests.

The vast majority of owners of American family businesses have virtually all of their wealth tied up in the family's business. The Laird Norton survey found that 93% of the owners reported little or no wealth diversification. For a founder that poses few problems – ownership is fully aligned with the strategic needs of the business, and a successful business can provide for all the financial needs of ownership. Successive ownership generations, however, tend to become more investors than owners in mentality and connection to the business, often with all of their eggs in the company ownership basket. For the good of those owners, and the strategic needs of the business, liquidity needs to be a viable option.

The business that can distribute wealth to its owners so they can financially diversify but not give up control is the ideal solution for the vast majority of families that wish to retain their control over the business. The Ford family, in 2000, paid a special dividend of $10 billion to retain and enhance its control over the company while achieving personal financial flexibility at the same time.

Few companies and families have that option available without stripping the corporate cupboard bare, but focused planning for liquidity can lead to many options short of a sale of the company. These include a recapitalisation such as the Kohler family undertook in 1998, a private equity minority sale like Solo Cup of Chicago did in 2004 or a majority sale to private equity like my company, Crane & Co, did last year. It also can be a more modest internal valuation and share repurchase programme designed to provide an escape valve for those family members who have become investors and need to diversify their assets.

Whatever the liquidity option that fits the company and family, identifying it and executing it in a timely manner unlocks the company's strategic opportunities and makes owners, once again, of the family members who stay on board. Furthermore, as Belen Villalonga, associate professor of Business Administration at Harvard, has so aptly pointed out, American business-owning families have sold significant, even majority, economic interests in their companies while retaining family control through disproportional board representation, dual classes of stock, and shareholder voting agreements. Generating strategically essential liquidity does not have to come at the price of losing family control of the business.  

7. Knowing when to say when
Timing is everything in life and particularly in business. Just ask the Bancroft family who sold their interest in Dow Jones to Rupert Murdock in the summer of 2007 as the liquidity crisis was just beginning. While it was a struggle to get all the necessary trustees and stockholders to approve the sale, is there any doubt that looking backwards from early 2009 the family is fortunate to have sold when they did? Of course, some in the family would say it should have happened years earlier.

Recognising that the business, or cherished portions of the business, probably will not be as valuable tomorrow as today (especially if ownership remains the same) is difficult for business-owning families. It takes clarity of vision to recognise the family's limits in adding future value to the business, and the objectivity to know that new ownership and new resources are needed if the business is to increase in value and survive in a globally competitive world.

Transitions are daunting for the family. Retirement, hiring non-family executive leadership, encouraging family members to leaving the business where appropriate, and selling some or all of the business all pose special challenges if there is a fusion of the business with the family identity. But it is the rare business that can't sustain itself without the family that founded it, and it is the rare family that can always provide the leadership and resources necessary for the business to compete successfully generation after generation. For most businesses and business-owning families there comes a time when non-family leadership and/or ownership is in the best interests of the business. Recognising that moment is perhaps the biggest challenge of all for business-owning families.

Business-focused versus family-focused firms
In their landmark study of great family businesses, "Managing For The Long Run", Danny Miller and Isabelle Le Breton-Miller identified the formula for successful business-owning families – they put the needs of their businesses first. They "cherish the business, invest in it and manage for the long run"; they demonstrate "persistent capability building, distinctive strategies and competencies"; and they support "high motivation, loyalty and initiative" while establishing "privileged partnerships inside and out".

The great businesses they studied achieved greatness because of, not in spite of, their identity as family businesses. Properly managed, the family business has inherent competitive advantages. Successfully addressing the seven challenges of family business ownership will assure the business can compete globally and will successfully increase shareholder value for years into the future.