Family businesses are the engine of America’s economic growth. Indeed, family businesses were operating in the Colonies even before the Revolutionary War. In a 2003 study, researchers Joseph H. Astrachan and Melissa C. Shanker estimated that family firms contribute 64% of the gross domestic product and employ 62% of the U.S. workforce. But “American family business” is not a monolith. In matters involving the creative mix of family and business, there is no one-size-fits-all way of operating. Through classic American ingenuity, each enterprising family has devised its own unique way of managing the complexities that inevitably arise when love and commerce intersect. - Advertisement -
In July and August 2011, Family Business Magazine surveyed American family business owners in an effort to measure the scope of their diversity in leadership and ownership. We also aimed to assess whether their companies had been affected by conflicts at the nexus of family and business. Participants’ responses show that many of them have developed policies and systems to achieve their economic goals of growth and prosperity while preserving family harmony and loyalty. Even so, our findings reveal that relationship issues and planning deficiencies could threaten the continuity of some enterprises. About the respondents We developed an anonymous online questionnaire with input from our Editorial Advisory Board and circulated it to our e-newsletter distribution list. We also mentioned the project on our Family Business Blog and asked several leaders of university family business centers to share the link with their members. Senior leaders of U.S. family businesses or those in executive positions were asked to complete our survey. We received responses from 431 qualified individuals whose companies generate an average of $75.54 million in annual revenues. The average respondent’s company is between the second and third generation of family ownership (2.78). Most (83.9%) of the companies are privately held with no owners outside the family. Nearly three-quarters (71.8%) have one to five family owners; 20.9% have six to 20 family owners; and 7.2% have 21 family owners or more.
Leadership An overwhelming majority (94%) of respondents said their current business leader is a family member. Although it’s logical that older and larger companies would be more likely than newer, smaller businesses to look outside the family for a CEO, that was not the case among participants in our study. Of the respondents whose companies generate annual revenues of $26 million or more, 92.6% have a family member at the helm. And among respondents whose businesses are in the third generation and older, the percentage with a family CEO, surprisingly, is higher (95.1%) than the corresponding figure for all respondents. While most of our respondents’ companies currently have a family member at the helm, some have had a non-family leader in the past. Fifteen percent of the survey cohort said a non-family member once occupied the top leadership position in their companies; among businesses with sales of $26 million and above, the percentage is 23.4%. Nearly a fifth (18.5%) of respondents’ companies have co-presidents or co-CEOs. Among smaller companies (annual revenues of $25 million or less) the percentage is slightly higher (21.2%). On Wall Street, there has been much discussion about the merits of dividing the roles of chairman and CEO between two people. Some corporate governance specialists argue that a person who holds both the chairman and CEO titles wields too much power in an organization. Our survey cohort, however, does not seem overly concerned about this possibility. Nearly three-quarters (73.2%) of our respondents have a family member serving as both chairman and CEO. A fifth (20.2%) of respondents with a family CEO have a family member other than the business leader serving as chairman; 3.9% have a family CEO and a non-family chairman. Splitting the two roles is no guarantee of good corporate governance when family dynamics are involved. One respondent commented, “The founder serves as the board chair and says he is not the business leader, however he still calls the shots for us who are the business leaders. Yikes!” Many family business advisers recommend that successors work elsewhere for several years before joining the family firm. Working for a company that does not have your name on the door, these advisers say, gives you confidence that you can succeed on your own merits; it also helps you gain credibility with employees of your family business. Although this suggestion is frequently offered, it has not been universally adopted. More than half (57.1%) of our survey respondents say their business leader has outside experience. And only 26.2% have a formal policy requiring prospective family employees to have significant experience outside the company. (Among companies with annual sales of $26 million and above, 37.4% have such a policy.) Another adviser recommendation—though one that’s less prevalent in the family business literature—is that family successors be required to purchase an ownership stake in the company. Leaders who have “skin in the game,” and who bought the stake themselves rather than having it gifted to them, will be more vigilant stewards of the family enterprise, some advisers contend. Among our survey cohort, only a little more than a quarter (26.5%) require their family successors to buy an ownership stake. Selection of the leader is a potentially contentious issue in family businesses, and 13.4% of our respondents reported that when their current leader was appointed, someone in their family voiced an objection to the choice. “A non-family member was chosen over a family member and some family members were upset,” one respondent commented. “But now I think everyone feels all right about the decision.” A few of our survey participants said gender issues created conflict. “When the two sons became owners [an ownership stake] was not offered to the daughter as well,” one person noted. Half (49.9%) of our respondents reported that family members other than the retiring senior leader had input into the choice of the current CEO. Giving the family a voice helps minimize disagreement over a succession decision, advisers say. More than a fifth (22.5%) of the survey participants said a family member has been fired in their companies. More than a quarter (26.6%) received input on this decision from a board including independent and family members; 21.3% were advised by a board consisting entirely of family members. Sixteen percent of respondents said their family council was involved.
Succession Most respondents said they anticipate their next leadership transition to occur within six years or more: 30.6% predicted their new leader would take the helm within six to ten years, and 30.2% expected the change to happen more than ten years from now. About a quarter (23.3%) were anticipating a transition within three to five years, and 12.6% were planning to pass on leadership in the next year or two. Although more than 90% of our respondents’ companies are currently being led by a family member, only 69.7% said they expected their next business leader to be a family member or a family team. Of those who did not expect a relative to take over, 28.4% said no one in the next generation seems interested in doing so; 27.2% said all the next-generation members would be too young at the time a transition is projected to occur; 22.2% said no next-generation member has the right skills or experience; and 12.3% said their family is likely to sell its business before a transition would occur. While our respondents seemed amenable to having a non-family member lead their companies, they indicated it might be a bit harder to obtain buy-in from their families—at least not at present. Only half (50.8%) said their family would consider a non-family member as a successor candidate; 14.9% indicated a non-family successor was not an option for the family, and 34.3% said it was too early to say how their family would react. Many respondents’ families will end up scrambling if unforeseen events required an immediate transfer of leadership. Nearly half (45%) of our respondents said their company lacked an emergency succession plan in the event that the current leader dies unexpectedly or becomes incapacitated.
Ownership Most (72.6%) of our respondents said they have a formal shareholder agreement. In older and larger businesses, the percentage is even higher; 81.5% of respondents whose companies are in the third generation or older have shareholder pacts, as do 80.3% of companies with revenues of $26 million and above. The majority (79.7%) of these shareholder agreements include a requirement that the company (or other shareholders) be offered the first opportunity to purchase stock from a shareholder who wishes to sell. Nearly as many (78.4%) dictate who may own shares, and 62.4% state who may inherit shares. Only 29.4% of these agreements establish a tie-breaking process in the event of a dispute. Legal advisers note that the absence of an impartial tie-breaker can cause a family conflict to escalate into a court case. Family businesses—especially the smaller, entrepreneurial firms—are known for their informal structures. The lack of an entrenched bureaucracy is an advantage when speed is of the essence; for example, when a new opportunity emerges, an informal decision-making process allows managers to jump on it. But the absence of formal agreements can come back to haunt a business when its ownership group has grown into a consortium of geographically dispersed cousins with varying degrees of connection to the founder. While our survey participants have taken some steps to formalize their terms of ownership, some of their responses raise red flags. Only a fifth (20.3%) of our respondents, for example, said they have a formal dividend policy. Some of these business owners are currently focused on bringing cash into the company rather than taking cash out of it. (“We are still just trying to make money,” commented one respondent; “No dividends is the policy,” wrote another.) But as a company grows to encompass shareholders who do not work in the business, a policy can prevent disagreements. Owners who are active in management, for example, may plan to reinvest profits to fund expansion, while shareholders who don’t work in the business may expect dividends to help maintain their lifestyle. A policy can clarify the circumstances under which dividends will—and won’t—be paid. Less than a third (31.7%) of all respondents reported having a redemption plan to remove a disgruntled shareholder. “It’s kind of assumed that anyone who was given stock and leaves the company will give stock back,” one participant wrote. The percentages are higher for older and larger companies, though neither figure approaches 50%. Among companies in the third generation or older, 38.6% have a redemption plan; among companies with sales of $26 million or more, 43% have such a mechanism. A third of our respondents (33.6%) said their company at some point in its history has reduced the number of shareholders by having one or more branches of the family sell or otherwise relinquish their ownership stake. Of those who have “pruned the family tree,” 44.9% said the separation caused a rift in the family. Even so, some commenters indicated that the decision was for the best. “In the 1980s a group of shareholders who wanted liquidity were redeemed out, which significantly solidified the remaining family members,” one respondent wrote. About a third (32.7%) of our participants said their family has discussed the possibility that a majority interest in the business might be sold to an outside party. Of these respondents, 35.1% said selling isn’t just a hypothetical; for them, selling a majority interest is a real possibility. There were a variety of reasons why a sale was being considered. (Participants were able to list more than one factor.) The most common was “To take advantage of a favorable, timely offer for the company” (cited by 42.6%); next was “The family wants to move on to/increase involvement in other ventures” (40.4%). Family issues were involved in some respondents’ decision to pursue a sale. “No family member is interested in managing the company” was cited by 29.8% of the cohort, and 6.4% said, “Sale of the business is needed to settle a family dispute.” Seventeen percent of those currently considering selling their companies said a motivating factor was “Estate tax/estate planning issues.” Other companies found themselves in dire financial straits. The “economic downturn” was listed by 23.4% as a reason why they were considering selling the business; 8.5% cited a “poor position vs. competition.” Among the total survey cohort, more than a third (34.2%) said that a decision to sell their business would cause conflict in the family. A quarter (25.5%) said the decision to sell would not cause conflict, and 40.3% noted that they “Can’t say.” Some families who have sold their businesses continue to collaborate as an economic unit by managing their wealth jointly. Yet only 6.2% of our respondents said their family members would do so if their business were sold; nearly half (47%) said their family members would not. More than one-fifth (22.6%) said some family members would manage their wealth collectively and some wouldn’t. About a quarter (24.1%) replied, “Can’t say.” Although many business owners have spoken out against estate taxes, nearly half (48.8%) of our respondents said they are “not at all concerned” that their companies would have to be sold to pay an estate tax bill. A quarter (25.7%) of the respondents said they are “a little concerned,” and 16.6% said they are “moderately concerned.” Only 6.4% reported being “very concerned,” and just 2.5% said they are “extremely concerned.” “The reason we are only moderately concerned about selling the business to pay estate taxes,” wrote one survey respondent, “is that we have spent a lot of time on planning, and money on life insurance.” Though most are not very worried about having to sell the business for estate tax reasons, 46.5% of our respondents said they would make substantial changes in the distribution of their estates if estate taxes were permanently eliminated. “I would no longer have to transfer wealth to children prematurely in advance of their ability to handle the burden and responsibility of wealth,” one commenter noted. “Would probably allow for making more significant charitable bequests,” another respondent wrote. “A hell of a lot less trusts,” wrote another.
Governance and policies Only 39.9% of our respondents have established a family council—a forum for communication among family members with a stake in the family business. Among companies in the third generation or older, the figure is not much higher; it’s just 40.1%. For companies with revenues of $26 million and above, it’s 42.6%. A third (33%) of our total survey cohort has an advisory board. A fiduciary board with some independent members has been established in 30.6% of the companies; 29.5% have a fiduciary board with family/business members only. A shortcoming of many family businesses—particularly smaller, entrepreneurial firms that are overwhelmed with daily operations—is that their boards exist in name only; board members rarely meet. Indeed, 22.8% of our respondents said their boards meet less than annually. Nearly a third (31.6%) said their boards meet two to four times a year; 29.6% said their boards meet more than four times a year. Most of our respondents (81.5%) brief their shareholders on company earnings and performance. More than two-thirds (67.8%) inform shareholders about the company strategic plan. Only 36.7% brief shareholders on senior executives’ compensation. Family meetings are the most common mechanism for communication with shareholders (used by 52.8% of respondents). Nearly half (47.5%) of respondents send an annual report and audited financial statements to their shareholders. Only 20.7% send periodic letters from the CEO; 16.3% conduct shareholder conference calls; 14.4% have a print or electronic newsletter; and a mere 6.3% have a family website. Only 15.1% of respondents have a formal education program for next-generation members interested in working for the company. Among companies in the third generation or older, the corresponding figure is 18.8%; it rises to just 22.3% for companies that generate $26 million or more in annual sales. “We lobby hard to convince family members not to come into the business,” one survey participant wrote. “If they come, they will make less than outsiders doing the same job until they have proven beyond any question that they have earned the position.” Even fewer businesses (8.2%) have instituted an education program for next-generation members who will likely be owners but will not work in the company. Though only a small percentage of our respondents have formalized their training process for the younger generation, several survey participants indicated that they are in the process of creating one. “We are planning to institute a ‘Family Learning Academy’ to prepare next-generation board members,” one respondent noted.
Preventing family feuds Only 6.7% of our survey cohort said their company has been involved in a shareholder lawsuit. Formalizing policies and establishing conflict-resolution procedures—before an actual dispute arises—can go a long way toward keeping that figure low. “We had terrific advisers that helped us to build an owners group!” one commenter noted. “We are blessed with a family,” another survey participant wrote, “in which everything is on the table, discussed, and even laughed about.”
|