With the Great Recession behind them, U.S. family business leaders have exited survival mode and are contemplating measures to strengthen their competitiveness. So reports accounting and advisory services firm PwC (PricewaterhouseCoopers), which recently released its fourth survey of U.S. family businesess. The survey is part of PwC's global study of family companies.
For the U.S. study, 154 family business executives were queried by phone and online by Kudos Research, an independent firm, between April 29 and Aug. 29, 2014. The firm questioned company leaders who ranged from founders to the fifth generation of the founding family; annual revenues of the enterprises spanned from less than $5 million to more than $1 billion.
Nearly all survey participants said they were confident that revenues would grow over the next five years. More than half (51%) said they were “very confident,” and 46% reported being “somewhat confident.” In the 2012 edition of the study, respondents were more likely to describe themselves as “somewhat” rather than “very” confident, the survey report noted.
While the U.S. family business leaders are optimistic about the future, they are not naïve about the challenges they face. They seem to recognize that in order to compete, they must embrace innovation and recruit talented employees. More than half (53%) agreed that family businesses reinvent themselves with each generation, and nearly two-thirds said family businesses tend to be more entrepreneurial than other types of enterprises. However, 65% said they view the need to continually innovate as a major challenge. And more than a third said having family members in key positions can make family companies less open to new thinking and ideas.
“Nobody's sticking their heads in the sand,” says Alfred Peguero, U.S. Family Business Survey leader at PwC's Private Company Services unit. “Nobody is looking through rose-colored glasses and saying, 'Oh, everything's great.' They all face the future with eyes wide open.”
Focus on competitiveness
The 2014 survey revealed an increased focus on what the competition is doing. While in 2012, 21% of the family business survey participants said their competitors were a major cause for concern, more than a third (36%) of the 2014 respondents said they worried about the competition.
Six in ten of the PwC respondents reported that they see recruitment of skilled personnel as a challenge for the coming year; in the 2012 edition of the survey, only 46% had flagged that issue. Two-thirds said the talent gap will continue to be a problem in five years, compared with 52% who made that prediction in 2012. And 60% of respondents said they worry about filling the talent gap right now, an increase from the 46% who cited it as a current concern in 2012.
Nearly half (47%) of the survey participants said that meeting the need for new technology poses a major or substantial challenge, up from 39% in 2012. Furthermore, twice as many respondents in 2014 as in 2012 cited business and product development as a major issue in the coming year.
Optimistic respondents
Peguero notes that the respondents' focus on future competitiveness is evidence of their optimism. Family business leaders, Peguero says, “are saying, 'I've got to go out and compete for resources, I've got to compete for talent, I've got to invest in technology.' ” The desire to make those types of investments is a characteristic of a business that is thriving and focused on growth, he points out. The U.S. family business leaders' global counterparts are also thinking about innovation. In PwC's global survey of nearly 2,400 family firms across more than 40 countries or regions, 64% of the respondents cited innovation as a key concern in 2014, a slight increase over the 62% who said this in 2012. About six in ten global survey participants (61%) listed “skills” as a key issue over the next five years. Interestingly, the global survey revealed a potential blind spot for family members who are leaders of their families' businesses. The study found that family leaders' priorities were more likely to involve family, community and their personal legacy. By contrast, non-family leaders of family firms listed their priorities as innovation, international expansion, diversification and professionalizing the business.
Family business governance
Six in ten of the U.S. respondents said their ownership group includes family members who don't work for the company. In such cases, forums for communication and conflict-resolution mechanisms are essential. The companies studied have made some progress in establishing these structures. Two-thirds (67%) have shareholder agreements, and 54% said their boards include non-family members. However, only 35% have created a family council.
Respondents to PwC's global survey are faring better in this regard. Eighty-three percent of the global respondents have at least one of the following conflict-resolution measures in place: shareholder agreement, family council, provision for third-party mediation and family constitution. The percentage of respondents reporting the existence of one or more of these mechanisms rose from 79% in 2012.
The 'sticky baton'
PwC's U.S. survey found evidence of “sticky baton syndrome”—the senior generation's reluctance to turn over control to the next generation. Only 18% of the U.S. respondents anticipated an ownership change within five years. Of those, nearly half (48%) said they would pass the business to the next generation to own as well as to run, while 26% said they would pass it to the next generation to own but not run. Nineteen percent planned to sell the family company, while 7% were unsure what they would do.
Peguero notes that some respondents might be planning to appoint an interim non-family leader to run the company while the family's next generation is groomed to take over at a future date. “The next generation may or may not want to take on [leadership of the company], may or may not have the skills to take [the mantle of leadership] on,” Peguero says. “Or, at least, the presumption of the current controlling stakeholders is such that they have a hesitancy about transitioning.”
The U.S. survey revealed some nervousness about how successors will fare. Forty percent of current leaders said it would be difficult to let go when the next generation takes over, and more than half of them believe they'll need to stay more involved with the company than they would prefer. The global respondents feel the same way; 41% of those currently in charge said it would be tough to let go.
The PwC survey of U.S. family business leaders, like many other studies of this population, found a hesitancy to put a succession plan in place. Only slightly more than a third have designated a successor, and only 27% have a documented succession plan for senior roles.
“The entrepreneurs see everything moving faster,” Peguero reflects. “They see the technology just coming at them with a fire hose.” CEOs are reluctant to cede control to their children during a time of fast-paced change in the competitive landscape, he notes.
Planning for emergencies
Even amid such hesitation, Peguero emphasizes, business leaders must think about succession and create a plan to guide the company in the event of the CEO's unexpected death or disability. “I think it's a critical mistake not to have some type of succession plan that's documented and shared with at least two or three people,” Peguero says. “It's a responsibility to the other stakeholders, which are not just the family, [but also] the customer base, your vendors, employees and their families, too.
“It's like going to the doctor for a physical. You've got to do it.”
Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.