In a recent study of large successful family businesses, I noticed an interesting trend. Families businesses that have spent generations discouraging family members from entering the business are now developing programs to pull them back into the fold. They have learned that in their efforts to ensure that only the most qualified members of the family entered the business, they have discouraged family interest in the business.
While businesses only become old and successful by having strong management, family businesses also need to maintain owners’ interest and engagement in the business in order to survive as a family owned entity. So, many of our study participants are putting in place orientation programs for next generation family members to help them learn about the business and increase the chance that the most qualified will elect to join. Regardless of whether the family members join, the business benefits from well-educated owners who appreciate the business and may one day take on important responsibilities on the board of directors or family council.
Family businesses often pride themselves on maintaining a strong and consistent culture built on the family legacy and values. While this adherence to a strong culture can be one of the greatest strengths of a family business, it can be particularly challenging when entering foreign markets.
Family businesses that successfully expand beyond their country borders manage the balance of loose and tight controls. They identify the key elements of their culture – the ones they can’t operate successfully without – and develop ways to transmit them across borders. Transmission mechanisms may be formal – such as training programs or job evaluations that measure adherence to culture. Or, they may be informal, such as visits from headquarters personnel to remote locations or opportunities for managers in remote locations to visit headquarters.
At the same time, successful international family businesses understand when they need to relax their culture to accommodate differences in international markets. Successful international family businesses in a recent study unanimously supported the empowerment of local management to run their international operations. Clearly defining priorities for those managers at the outset, gathering data that allowed home country management to track performance and hiring strong in-country talent were all identified as keys to success.
In Tuesday’s entry, I talked about the value of sticking to what you know. But, if you follow that tack forever, how do you ever grow? The answer is by building your institutional skills and experience. Companies can build their base a number of ways – by encouraging family members to get great educations, by bringing in talent from the outside, by investing in training and development for employees…. All the companies in our study of successful, old family businesses leveraged these strategies – plus one more. They were willing to do something a lot of family businesses are not – partner. Many family businesses place a high premium on control. They are not willing to work together with other companies to achieve their vision. Those who were willing to partner – by purchasing an interest in an existing company or starting a joint venture with another company – were able to enter new geographic markets and businesses more rapidly and successfully.
In a yesterday’s post, I shared a lesson from a study of large, old, successful family businesses – innovation is a key to success. But, while companies in this study demonstrated an ability to innovate, they also clearly recognize their core competencies and stick to them. So, we uncover another family business paradox – trying new things vs. sticking to your knitting. How do we resolve this paradox? As with all paradoxes, the answer is “both and” not “either or”.
Successful family businesses are willing and able to try new things, but they select carefully when they branch out. They choose new business areas that leverage prior knowledge and skills. Sure, occasionally the businesses in the study branched out well beyond their comfort zone. But, when they did they often did it with a partner (more on that in a future post). And, many of the businesses were currently in the mode of paring back their portfolio to focus on what they do best, then innovating around that core.
The key to successfully executing this strategy is to clearly understand what your competencies are, the ones that clearly differentiate you from your competitors, and how you might use them to take you to new places. The fact that family business owners provide patient capital creates the opportunity to build and leverage these core competencies to their greatest potential.
I recently had the good fortune of conducting a study for a client on the characteristics of multi-billion dollar, multi-generational, international family businesses. While many of readers won’t fit into this category, there are definitely lessons to be learned by studying these unique businesses – and they aren’t what you might imagine…
The first thing that struck me about these businesses is how innovative they are. Once family businesses get beyond the 1st generation entrepreneur, we often see a more careful, measured approach to running the business. With all of the family’s eggs in one basket, the desire to take risks can decrease in later generations. Slow, steady growth becomes the objective.
Yet, the businesses in the study unanimously demonstrated the desire and ability to reinvent themselves to stay ahead of trends in the market. They routinely built and acquired new businesses and, perhaps more important, were willing to exit legacy businesses. In some cases, they acquired businesses twice their size in order to build a dominant position in the market. In other cases, they were willing to sell off half their business because they didn’t see that business as a path to the future.
The freedom to make these big strategic bets requires a clear mandate from the owners to pursue new opportunities and trust in a strong management team to execute the strategy
Many successful family businesses have made the decision to become publicly traded while still maintaining a controlling interest within the founding family. Since family controlled companies represent approximately one-third of both the Fortune 500 and the S&P 500, it is logical to conclude that funding from the public markets is a useful strategy for some family firms. In fact, some of the most famous family business names, such as Ford and Nordstrom, have taken this path.
Initial public offerings (IPOs) have been used successfully to fund growth and provide liquidity in conjunction with ownership structures that provide for control to be maintained in the family. While the current recession significantly reduced the appetite for IPOs in most markets, as the economy improves so does the expectation that IPOs will once again become popular. However, before a family business decides to trade any portion of its shares in the public markets there are several important issues to consider.
Of course, the help and advice of excellent attorneys, accountants and investment bankers is critical to any successful offering. Yet even before engaging experts to take their company through an IPO process, business owning families need to have open and honest discussions regarding how even the smallest portion of stock in public markets can drastically change the way they do business. Here are some issues to consider:
When your business becomes a publicly traded company it will be subject to a wide range of regulations, reporting requirements, and scrutiny that you and your management team may not be familiar with or comfortable in performing. Even with structures in place to preserve family ownership voting, the responsibility to meet SEC and other regulatory requirements can be onerous for many. In a very real sense it ceases to be your company, your capital and your decisions, even when it represents the combined wealth of your family. While perhaps a dramatic example, it has been argued that some of the business practices that led to fraud convictions for members of the Rigas family (Adelphia Communications) would not have been illegal if the stock had not been publicly traded.
Those who buy your stock may have very different interests from you and your family. Today’s public markets are largely driven by traders not investors and they do not share the “patient capital” perspective that has traditionally represented the strength of family business. Their desire for timely returns on investment can represent a major conflict with the long-term planning and next generation focus of family owners. Under existing legislation, an owner of as little as 3 to 5 percent of a public company has significant rights that impact corporate governance. Both Barnes & Noble and the New York Times have faced challenges from these types of conflicts of interest, at considerable costs in both money and the time of leadership.
In addition, the rules keep changing for public companies. In our post Enron/Lehman Bros. world the costs of being a public company have increased significantly. Smaller firms that once found IPOs a great source of capital now must carefully consider the “carrying costs” of public filings and the professional services needed to meet these requirements.
The very nature of public markets drives decisions that have short-term pay-offs. While good corporate governance theory maintains the importance of long-range results, efforts to incentivize, regulate and monitor such decisions have met with mixed results at best. Once a family business becomes publicly traded it may find that the very values that made it successful are under attack.