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The dangers of ‘cultural fit’

Last month Knowledge@Wharton, an online newsletter from the University of Pennsylvania’s Wharton School, published an article with a provocative title: “Is Cultural Fit a Qualification for Hiring or a Disguise for Bias?”

“The biggest problem is that while we invoke cultural fit as a reason to hire someone, it is far more common to use it to not hire someone,” Katherine Klein, a professor of management at Wharton, told the publication.

Culture, of course, tends to be put front and center in family companies. Business families and their employees talk about the “family feeling” in the workplace. And family ownership groups -- often on the recommendation of their advisers -- develop a set of family values as a way of uniting family shareholders and creating a framework for making business decisions.

For many families, “culture” involves their faith. It is common to incorporate a statement of religious principles into family values statements. While some families develop separate sets of values for the business and for the family, others proudly weave religious ideals into their business values. The danger of doing this is that it can lead to excluding talented employees who don’t share the owners’ faith.

The Knowledge@Wharton article asserts that while cultural fit has “a legitimate role in the workplace,” it shouldn’t “eclipse the importance of diversity.” The article cited a study by Katherine W. Phillips, Katie A. Liljenquist and Margaret A Neale, published in Personality and Social Psychology Bulletin, that found heterogeneous groups process information more carefully than homogeneous groups do.

Wharton management professor Sigal Barsade offered this suggestion: “The only way that culture in the workplace is effective is if there are sets of values that help the company achieve its strategy.” Hiring managers might seek out, for example, candidates who are results-oriented, innovative, ethical, customer-focused or team players. But in practice, the Knowledge@Wharton article lamented, “discussions around cultural fit can also involve certain euphemisms for what amounts to justifying prejudice or, at least, bias.”

The late family business adviser Léon Danco, a revered pioneer in the field, addressed this issue way back in the Summer 1996 issue of Family Business Magazine with another provocatively titled article, “Religious Extremism Can Hurt the Bottom Line.”

Danco cautioned in his 1996 article: “Some may be able to get away with hiring only ‘their kind’ -- companies do it despite antidiscrimination statutes -- but often at the price of cutting off the company from valuable talent or resources. Same goes for limiting a company’s choice of directors to members of a single faith; you may feel most comfortable with people who share your religious beliefs, but will they bring to the table the diversity of viewpoint, the strategic perspective, and specific business skills you need?”

What these management experts are suggesting is this: It’s important for the business to support the family’s values -- but it’s also important for the family to support good business values.

Recognizing your impact on your community

Last month, after engaging Goldman Sachs to help them assess the issue, the Wanek family announced that they had decided against selling their business, Ashley Furniture. A Wall Street Journal report on their decision illustrates the impact that a family business can have on the community. In the Waneks’ case, that impact is huge.

As the Journal reported, Ashley Furniture has its headquarters in Arcadia, Wis., which has a population of just 3,000. Ashley is “by far the biggest employer” in Arcadia, the article noted. (The company also has plants and distribution centers in other Mississippi, Pennsylvania, North Carolina and California, in addition to importing furniture from Asia.)

So connected is the town to the Waneks and their business that a statue of the company founder and chairman, Ron Wanek, stands Arcadia National Park, the Journal noted. Ron Wanek’s son, Todd, is Ashley Furniture’s CEO.

When Ron and Todd Wanek announced -- at a meeting held at the local high school -- that their family would be holding on to Ashley Furniture, a standing ovation erupted, the Journal article said.

Even if your company is based in a metropolis like Chicago rather than a small town like Arcadia, there are people who rely on your business for their livelihoods -- not only your employees, but also those who work for your suppliers. The good news is that these people are rooting for you to keep your business in your family.

The downside is that community members will notice any signs that you might be looking to sell or that a generational transition might go awry. Your children’s ill-advised Facebook posts or other misbehavior, your public arguments with your spouse or a reduction in your contributions to local charities could be seen as red flags.

In a bigger hometown, your family won’t stand out as much. But every business family should be aware of the positive as well as the negative aspects of their community ties. The bottom line is that communities want -- and need -- their family businesses to succeed.

Defining ‘family business’: Did Credit Suisse get it wrong?

A recent study by Credit Suisse Group AG, cited by the financial news site 24/7 Wall St., found that family-controlled public companies outperform non-family companies on several metrics. According to the “Credit Suisse Global Family” analysis, as reported by 24/7 Wall St., family businesses have a 4.3% higher return on equity than the benchmark, and a cash flow return on investment that is more than 9% higher. (The “Credit Suisse Global Family” index is limited to companies with a market cap that exceeds $1 billion.)

This news is nice to hear, especially since it confirms earlier studies. For example, Morgan Stanley reported in 2005 that family businesses listed on the S&P 500 outperformed the index in 2000-04 by 4.4% over one year, 19.6% over three years and 109.7% over five years. And a 2003 study by researchers Ron Anderson and David Reeb found that return on assets for companies still controlled by the founding family was 6.65% higher on average than for non-family businesses.

All well and good. But when I examined the companies in the latest Credit Suisse study, something seemed amiss.

The 24/7 Wall St. article identified the top 10 U.S. companies from the Credit Suisse Global Family list. The first company is no big surprise: Wal-Mart. Descendants of founder Sam Walton have a stake of about 50% in the retail giant, and the late founder’s grandson-in-law Greg Penner just succeeded his father-in-law, Rob Walton, as the company chairman. Though it’s publicly traded, Wal-Mart certainly qualifies as a family firm.

But farther down the list, things get murkier. Oracle? Google? Facebook? Kinder Morgan? Nike? Does anyone other than Credit Suisse consider those to be family companies?

What makes a company a family business? No one knows for sure. As researchers Melissa Shanker and Joseph Astrachan wrote in Family Business Magazine’s Spring 1996 issue, “When pressed, even experts in the field have trouble articulating a precise definition.”

When Shanker and Astrachan set out to measure the impact of family businesses on the U.S. economy in the 1990s, they didn’t settle on one definition -- they used three alternatives. To quote from our article:

• In the broadest and most inclusive definition, family has an influence over strategy and major policies, and has at least stated the intention of keeping the business in the family. Family members may own significant portions of stock and sit on the board, but none necessarily work in the business.

• The middle group is defined by the same criteria, plus one other: The founder, or descendants of the founder, still run the company on a daily basis.

• The tightest definition includes only firms in which multiple generations participate; family members are involved in daily operations, and more than one of them has significant management responsibilities.

Dan Rottenberg, my predecessor, came up with his own definition in 2000:

• A single family controls the company’s ownership.

• Members of the controlling family are currently active in top management.

• The family has been involved in the company for at least two generations -- or seems likely to be.

• The company must pass an indefinable “feel test”: Does it feel like a family business?

In compiling its “Global Family” list, Credit Suisse used a simple criterion: Companies on the list have a family shareholding of at least 20% of shares outstanding. But while Larry Ellison (Oracle), Larry Page and Sergey Brin (Google), Mark Zuckerberg (Facebook), Richard Kinder (Kinder Morgan) and Phil Knight (Nike) own large stakes in the companies they founded, their companies feel more like sole proprietorships (or, in the case of Google, a two-person partnership) than family businesses. In my view, they don’t fit any of Shanker and Astrachan’s definitions, nor do they fit Rottenberg’s.

If the U.S. government required companies to register as family businesses (as businesses must register as C or S corporations or LLCs, or file for IPOs), researchers would have an easier job of identifying which ones qualify as family firms and which ones don’t. But given business families’ desire for privacy and dislike of government regulation, that seems unlikely to happen in the U.S. anytime soon.

One thing is clear, no matter which definition of “family business” you prefer: There is plenty of room for debate on the issue.

Bringing gender diversity to your board

Last month our sister publication Directors & Boards hosted a webinar entitled “Women on Boards: Teeing Up Talent for Your Board’s Future.” The program presented recent research studies linking gender diversity in the boardroom to improved financial performance, better decision making and an enhanced corporate image, among other advantages.

The webinar focused primarily on public company boards, but much of the discussion was also relevant to privately held family companies. Nancy E. Sheppard, founder and CEO of Women2Boards -- a referral service for women director candidates -- provided evidence demonstrating how the presence of female board members can help a company. Among the studies Sheppard cited were the following:

• A 2013 report from Credit Suisse on gender diversity and corporate performance, based on the performance of 2,360 companies globally, found that “companies with one or more women on the board have delivered higher average returns on equity, lower gearing, better average growth and higher price/book value multiples over the course of the last six years.”

• Aaron A. Dhir of York University’s Osgoode Hall Law School found that gender diversity on boards results in enhanced dialogue; better decision making, especially around the value of dissent; more effective risk mitigation and crisis management; higher-quality monitoring of and guidance to management; positive changes to the boardroom environment and culture; and more orderly and systematic board work.

• A 2015 analysis by MSCI Inc. found companies that invest in gender diversity at high levels are less likely to fall prey to fraud, corruption and governance-related controversies.

Family businesses have been making slow progress in this area. A report in the March/April 2015 issue of Family Business Magazine focusing on women directors noted, “Over the past three decades, an increasing number of business families have recognized that granting leadership opportunities to qualified women makes good business sense. But in most family companies with women directors, the women who serve on the board are members of the family that controls the company. Women independent directors are still a rarity.”

In our article, Susan Stautberg, CEO, co-founder and co-chair of WomenCorporateDirectors (a global membership organization for female directors), said, “Boards can’t afford to have directors who all think alike. They need men and women who will bring the best ideas to the table and offer the broad thinking companies need to deal with the challenges they face.”

In addition to Sheppard of Women2Boards, speakers who participated in Directors & Boards’ webinar were Jim Kristie, D&B’s editor; Jeffry Powell, executive vice president of Diligent Board Member Services; and Gabrielle Greene-Sulzberger, who is a director at Whole Foods and Stage Stores and a general partner in the private equity fund Rustic Canyon/Fontis Partners (and the wife of Arthur Sulzberger Jr., publisher and chairman of the family-controlled, publicly traded New York Times). A replay of the webinar is available, free of charge, here.

What ‘Consumer Reports’ missed in its ‘Made in America’ exposé

In its current issue (dated July 2015), Consumer Reports explains that the “Made in America” label often gets misused, and the standards for permissible use of the label are confusing. The article listed a number of U.S. companies whose products are not 100% made in America with all-American components.

The Consumer Reports article noted that nearly 80% of U.S. consumers say they would rather buy an American-made products than an important one, and 60% say they would be willing to pay 10% more for an item made in America.

We at Family Business Magazine thought Consumer Reports missed something: an appreciation of U.S. family businesses whose products are 100% made in America by American workers.

I wrote a letter to the editor of Consumer Reports, which you can read below.

A coalition of family business education programs across the country -- spearheaded by Ira Bryck, director of the UMass Amherst Family Business Center -- has developed a website, madeinusabyfamilybusiness.com, to highlight family companies committed to making their products in the USA.

Here’s what I wrote to Consumer Reports:

To the Editor:

I read with interest your July 2015 article “Made in America.” You provided a public service by explaining that the Federal Trade Commission’s standards for acceptable use of the “Made in the USA” label are confusing, and that some manufacturers misuse the label.

Your article helpfully included a list of American companies whose products contain components made outside the country or assembled overseas.

At the same time, it is important to note that there are American family businesses that are committed to making their products here in the USA and employing American workers.

Family businesses face the same competitive issues as other companies, which is why many family firms have opted to use overseas labor or materials. However, one can indeed find family businesses whose products are truly “Made in America.” Here is a sampling:

• Just Born Candy, makers of Peeps, Mike and Ike and other brands: www.justborn.com

• The Wiffle Ball Inc., producing equipment for the classic backyard game since 1953: www.wiffle.com

• K’nex, makers of the popular building toy: www.knex.com

• Thorlo Inc., sock makers: www.thorlo.com

• Annin Flagmakers, American flags made in America: www.annin.com

Sincerely,

Barbara Spector

Editor-in-Chief & Associate Publisher

Family Business Magazine

www.familybusinessmagazine.com

 

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