Family businesses tend to pursue incremental opportunities rather than radical new innovations. Growing by incremental innovation steps has proven to be more sustainable than giant leaps of change. This incremental approach is prevalent partly because family businesses are less prone (not adverse) to taking high risks and leveraging large amounts of debt.
One finding that stands out when reviewing Family Business research is that successful, long-lasting family firms exercise moderation. Typically, family firms do not over leverage, over risk, over plan, or over innovate. Seldom do we read about a family firm that has discovered or developed a groundbreaking new product, like the iPod or Viagra! These developments emerge from the heavily funded research and development departments of large public companies like Apple or Pfizer.
Whereas venture capital firms talk about burn-rate, the amount of cash a start-up venture plows through in the early stages, family businesses talk about less exciting things like self-funded developments or modifications to existing products. This moderate approach to business, while less exciting, has for the most part served family businesses well. The steady, moderate approach creates a more stable firm.
Unfortunately, at times this status quo climate can be the underpinning cause of the decline of a family business. When factors change and a family business does not adapt quick enough, there can be a noticeable drop in the value of the family business. The print media industry is one of those very visible industries, populated by many family-owned firms, that has faced rapid transformation mainly because of the delivery of content through channels very different from traditional printed formats. The digital age, specifically the internet, has changed this industry dramatically. Some have adapted. Some have not, and suffered for it.
While moderation in a family business may be admirable, is your family business adapting to new trends in today’s accelerating pace of change?
Research indicates that family firms take fewer risks compared to non-family firms. This lower risk-taking viewpoint has led to the myth that family firms are risk adverse. Another conclusion is that family businesses take “safer” risks that are closely associated with their core business. Since other studies indicate family firms show higher performance over the long run, it could be argued that family firms actually take more “high-probability” risks than non-family firms. While these risk are not as exciting as what venture firms and some publicly owned firms may take, the family firms’ conservative, calculated approach to risk-taking appears to deliver stronger value over the long term.
As the New Year gets under way, what are some risks that your family business is considering for 2014? Are you looking to expand your business? Add more employees? Develop new products? Acquire a business? Open a facility in another country? There are risks associated with each of these initiatives. The competition could introduce an advanced product just before you go to market with your new product or the country you plan to enter could fall into an economic slump. Regardless of these possible occurrences, family firms have a history of carefully selecting investment risk levels so they can endure these possible setbacks. Families do take risks. They are not adverse to risks. They simply take measured risks that have a high probability of providing a long-term return.
“We have a looming transition with no real plan. Not sure why, but my father has just now decided he would like to get out of the day-to-day operations and sell the business to my brother and me before the end of the year!” Why do senior family leaders often wait until the last minute to address succession? Is it simply human nature? Hard charging family entrepreneurs are more inclined to work on growing and developing the business than to work on family leadership and ownership planning. Succession is not a topic that people dwell on because it usually only happens once in a generation. It is tough when a patriarch or matriarch has to select the next leader amongst three children or go outside the family for leadership. Deciding how to transition ownership is another difficult task – should the stock be sold, gifted or some combination? Should those family members working in the business get more stock, a controlling interest? How can this be done fairly? These are tough questions that cannot be addressed quickly. Thus, they tend to get delayed or avoided. Yet the keys to successful transitions are communicating and planning. Most family business leadership and ownership transitions take three to ten years depending on size and complexity of the business and family. Since succession is long-term, complex and emotionally-tied to family dynamics, a succession task force that includes independent outside board members or othertrusted advisors often works extremely well to keep the process objective and moving forward. The main goal of a task force is straight-forward: to ensure an effective leadership and ownership transition. Members of the task force provide guidance and checkpoints to keep the process moving forward in a positive manner, making adjustments along the way when needed. This takes a huge burden off the senior family members and greatly improves the probability that both the family and business will continue to prosper in the next generation.
“Hey dad, could we talk about what Uncle Ted is doing to turn-around our construction division?” asked Jerry Bates, third-generation family member working in the business as Vice President of Development. His CEO father, Donald, replied: “Sure son, we can address this in 2016 when Ted is ready to retire!”
Why do so many members of an enterprising family avoid discussing difficult matters? Some of the brightest family business leaders simply cannot, or will not, take on issues that could create a potential fissure in a family relationship. As close brothers, Donald and Ted have gone through many challenges together in life after their father died when they were in their twenties. Although not fully prepared, they had to grab the reins of the business and learn quickly on the job to lead the family firm. They built the company into a thriving entity that now employs over 300 people, including five family members. As the Great Recession severely impacted the business, particularly Ted’s division, they have not been able to fully discuss some tough measures to take with employ lay-offs and other expense reductions to bring the division back to profitability.
Whatever the reason, family members are prone to avoid many tough issues when they believe the risk of damaging the family is too high. Unfortunately, most difficult family business issues do not go away. Like a weeds in a garden, the “un-addressed tough issues” can eventually choke out the valuable elements of the family business.
As strong family business leaders juggle their many demands while balancing the needs of the business and the family, they also demonstrate these additional characteristics.
1. Mentor & Role Model: Nurtures, cultivates and develops family member talent as well as non–family talent.
2. Innovative: Leads and supports diversification efforts and drives towards preparing to reinvent portions of the business.
3. Tough Minded: Is willing to discipline and even fire family members when necessary.
4. Listener: Willing to listen to independent outside board members and advisors both in the business and outside of the business.
5. Succession Preparation: Plans ahead both for leadership succession and ownership succession of the business. Is willing to let go when the time is right.
While this list covers a lot of ground – there are many other attributes that make a successful leader. What would you say is missing from this list – what else do you think makes for a strong and effective family business leader?
What is the make-up of an effective family business leader? From my own observations and interactions with family business leaders for over 30 years, as well as listening to my FBCG colleagues who have worked with 2000 family businesses, I have recognized some traits that stand out in those leaders who demonstrate an uncanny ability to develop both the family enterprise and the family.
As you develop your own leadership skills, you may find it helpful to review these ten common characteristics of successful family business leaders.
1. Visionary: Looks towards long-term performance versus the short-term returns.
2. The Balancing Act: Understands how to constantly balance the attention needed for working in the business sphere and in the family sphere.
3. Birth right vs. Earned right: Articulates and demonstrates the importance of family members needing to earn their right into the family business versus making the entry a presumed birth right.
4. Family Voice: Supports the voice of family shareholders and other family members who are not working in the business, either through direct contact or through an entity such as a family council.
5. Non-Family Employees: Ensures that executives and employees, who are not members of the “descendent” family, actually feel as though they are part of the family and are appreciated as key parts of the family business.
Check the next blog for the final five characteristics & meanwhile, join the conversation….
What would you add as a key skill from your own experience? If you are a family business leader – what would you want to see your successor really manage to do well?
Rick DeVos, a 28-year-old highly-entrepreneurial third-generation family member, wanted to create some new business ventures that did not fit into the current family business. His parents wanted to encourage their son’s entrepreneurial spirit yet ground him in business reality.
Entrepreneurism runs in the family. Rick is the grandson of Rich DeVos, who is the co-founder of Amway. Rick’s father, Dick, led Amway into the international arena where the majority of the business is conducted today, and his mother, Betsy, comes from an enterprising family that developed a large auto parts company with many creative products that line the inside of cars. Thus, with two creative blood lines coursing his veins, Rick possesses an abnormally high degree of creativity.
To harness this creative energy, the family provided a “loose leash” and seed money to create a host of ventures, including an internet film business, an entrepreneurial award business, and an open social-network art contest. The highly-acclaimed ArtPrize (www.artprize.org) has taken the art world by storm, creating one of the most innovative ways to engage an entire community in the conversation about art while providing a great opportunity for artists to share their work.
How are you capturing the creativity of the younger generation in your family business?
Family businesses show a high propensity to continuously innovate. One family business expanded its trash business to capture the methane gas in their landfills. Energy is now nearly half the family’s business.
And some family businesses have helped shape the world we live in today. It was a family business bicycle shop, owned and operated by the Wright brothers, from which emerged the creative ingenuity for man’s first successful flight. It was the Tuthill family who developed the first bread slicer around the time of the depression which spawned another innovation aphorism: The best thing since sliced bread.
Family-led inventions build stronger family businesses that endure for multiple generations. In fact, when innovative ideas build a better family business we witness the world of customers, employees, and vendors beating a path to their door.
So which innovations in your family business have made you stronger?
Would you characterize your family business as innovative? Can you think of an innovation that has helped strengthen the business or the family?
Back in 1961 a few doctors doing research at the University of Florida developed the formula for what would soon became known as Gatorade. Applying their research to create a drink that more quickly replenished an athlete’s energy (salt and sugar) was a great “product” innovation.
But perhaps an even greater innovation was the creation of a Gatorade Family Trust to ensure ongoing distributions from drink sales regardless of who owned the brand. Today just two shares of Gatorade yields over $500,000 per year according to Darren Rovell, author of “First in Thirst – How Gatorade Turned the Science of Sweat into a Cultural Phenomenon.” It is not one family that is part of the trust. It is three extended families that comprise this “family of affinity.”
The Gatorade story shows how one product innovation can endure for multiple generations, and how one ownership innovation – a group trust – can also endure for multiple generations.
What innovation in your family business can you share with us? A product, service, process, communication technique, estate plan, governance structure —- Innovation comes in many forms for a family business.
“Let them eat cake,” proclaimed Marie Antoinette upon learning that the peasants in France had no bread. Since brioche was enriched, as opposed to normal bread, the quote reflected the queen’s obliviousness to the nature of a famine. This arrogant attitude exhibited by a family leader of a nation is linked to the initiation of the French Revolution.
We find that occasionally younger generation family members of successful multi-generational family businesses may inadvertently exhibit this attitude. As they grow up around tremendous wealth and privilege, they sometimes act in ways that show their obliviousness to what it takes to keep a family business prospering from one generation to the next. When the younger generation enters the family business profoundly out of touch with reality, they actually create the seeds of discontent among the “working class” of the family firm.
As with the revolutionary reaction to Marie Antoinette, valuable employees of a family business will carefully watch the motives of the next generation, and may chose to resign if they do not believe the family will be properly led in the future. It is the wrong signal to send employees when family members do not show the same level of passion and work ethic that the employees observed from earlier generations. Thus, it is never too early to teach the younger generation the gift of work – hard work.
Clean the bathrooms at the company early in life, and your family firm will most likely avoid the “Marie Antoinette” syndrome.