Economic cycles and family firms: Remembering again basic values
Family business management has evolved over the past 20 years. In the current economy, some of those shifts should be rethought.
By Craig E. Aronoff
Family Business Magazine's 20 years of publishing has corresponded to dramatic growth in the recognition, appreciation and sophistication of family businesses. During that period, the generation that grew up during the Great Depression, won the Second World War and launched the postwar entrepreneurial boom has been appreciated as “the greatest generation” and largely left the scene to their baby boomer children. Many of the issues confronting family businesses were viewed through the lens of encouraging that older generation to “let go” and dealing with conflicts between them and their baby boomer offspring, reflecting the demographics of that particular era. We increasingly take a broader, more comprehensive view of family business dynamics.
Over the past 20 years, societal trends and increasingly focused research and collective experience have led to changes in how we think about the issues confronting family businesses. Preoccupation with identifying, developing and installing a successor to the founder has been enlarged by the recognition that succession is rarely a uni-dimensional matter of replacing an incumbent. Instead, generational transitions deal with leadership in multiple dimensions; development of structures and processes to enhance management, governance and family development; and increased sophistication in dealing with strategic, financial and other interrelated business issues, as well as developing skills and perspective to more effectively build productive family relations.
In the process, we've seen both management and ownership become more team-oriented. The pace of strategic evolution, driven by technological innovation, continues to accelerate, shifting management's focus from consistency and control to innovation and continued improvement. Many family firms embraced more sophisticated financial management and, while maintaining the traditional family bias toward respect for risk, inched farther out on the limb of leverage.
The wave of MBAs gushing out of universities washed over family businesses, and both family and non-family managers are now expected to achieve higher levels of professionalism. Women have become more recognized and involved in a greater variety of roles at higher levels in family businesses, serving not only as top managers, but also in governance roles—as directors or even board chairs, and as initiators and leaders of family councils. Boards of directors have become more formalized and more likely to involve independent directors. Professional service providers have become more sensitive to the unique challenges of sustaining success across generations.
The downside of ‘professionalism'
Until recently, these trends played themselves out in a relatively benign economic environment. Despite a mild recession in the early 1990s and bursting of the technology bubble in the early 2000s, times seemed good for family businesses. With roll-ups, leveraged buyouts and vast oceans of private equity buttressed by the massive use of debt to finance purchases of businesses at ever higher multiples of EBITDA, and with capital gains rates at historic lows, selling the family business increasingly became a consideration when viewing the future.
With increasing “professionalism” in family business management and “financialization” of owners' goals, the traditional values and practices that characterized family businesses potentially had been eroding. The value of “relationships” with suppliers, customers and employees seemed to be diminishing in many industries previously dominated by family businesses. The business-owning family's long-term view seemed to be shortening. As family members were replaced in management and on boards by non-family professionals, classic values like loyalty, pride, sacrifice and stewardship may have been diminished.
And then, though we seemingly had forgotten that good times couldn't continue forever, problems surfaced in the housing industry, the credit market, the banking industry and the job market. While the problems had been building for years, the worldwide reversal in economic fortunes seemed suddenly upon us. Family businesses have been sucked into the maelstrom along with every other organization. The opportunity to sell family businesses at absurd multiples was suddenly gone. Easy credit disappeared as well. Relations with suppliers and customers became more challenging. Industries full of family firms, like car dealers and homebuilders, were slammed hardest of all.
Painful economic upheaval, however, serves important purposes. One of those purposes is to help us regain appreciation for core values and discipline, and to reestablish our sense of perspective.
While the financial value of family businesses has diminished, recognition of their value as societal institutions is on the upswing. The disconnect between management and ownership at publicly traded institutions has become abundantly clear and generally differentiated from family firms, which are perceived as more caring, less risky and more responsible.
While challenged in their own ways when pressure mounts (for example, to provide jobs for relatives who can't find other employment), family businesses may respond to economic challenge differently. Stronger cultures allow family businesses to exemplify sharing the burden, finding opportunities to identify savings and other ways to improve business, strengthening the team and opportunistically acquiring new talent, new assets and new customers.
Speech offers wise advice
Most important, tough times provide the opportunity for family businesses to remember and reaffirm their fundamental core values. Indeed, a recent speech exemplified how family businesses can respond in this economic climate.
The speaker asked his audience to eschew “greed” and “irresponsibility.” He said that “hard choices” would have to be made but urged focus on “hope over fear” and “unity of purpose over conflict and discord.” He called on his listeners to “reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift ⦠passed from generation to -generation.”
He reminded his listeners: “greatness is never given. It must be earned” and that what we accomplish together is “bigger than the sum of our individual ambitions.”
He listed “those values upon which our success depends—hard work, honesty, courage and fair play, tolerance, curiosity and loyalty.” In “a new era of responsibility,” he emphasized our “duties to ourselves.”
These words could have been shared with the owners or employees of any family business. They represent the traditional perspective of family firms reemerging in the current economy. The words, of course, were President Barack Obama's, spoken at his inauguration. In essence, he was treating the United States of America as our family enterprise writ large.
Like every family business leader in these trying times, he sought to preserve the good, apply the proven lessons and values learned over generations and prepare a better future for ourselves and our children. These are lessons that family businesses learn anew in every business cycle. FB
Craig E. Aronoff, Ph.D. (aronoff@efamilybusiness.com) is co-founder and principal of The Family Business Consulting Group Inc., a former president of the Family Firm Institute and winner of its Beckhard Award for contributions to family business practice. He is professor emeritus of family business at Kennesaw State University, where he founded and developed the Cox Family Enterprise Center.
Using and abusing family business research
Anecdotal evidence should be taken with a grain of salt. Family rules and structures need built-in flexibility.
By Joseph H. Astrachan
It is with great admiration that I contribute this article to the anniversary issue of Family Business Magazine. My career in family business began with a study of a family company in 1983, and since that time I have devoted my life to the development of the field. Here are my reflections on the evolution of the science of family business.
The central task of family business management is growing and developing family and business simultaneously. In so doing one must help family and business build upon one another while reducing the forces that lead each to erode the other. The core task of research should be to promote real understanding that leads to actionable information. We are now beginning to see research that gives advice based on what works.
In the early days of family business understanding, we had little more than theory to rely on. Scholars and consultants were generating ideas primarily from limited explorations of only a few family companies. While the ideas and frameworks gave leaders ways to think about their businesses, it was not clear whether what was being suggested was right. “Best practices” research is similar in that practices of successful companies are purportedly relevant for all family businesses. Most such research is not conducted in a rigorous manner and does not specify the conditions under which the “best practices” work. A lack of rigor in research can have profoundly negative results when applied; among other drawbacks, it gives false comfort and allows leaders to avoid deeper challenges.
One of the ideas, or “best practices,” promulgated early in the history of the family business field—and still quite popular today—can be summed up as “Run your family like a family and run your business like a business.” These notions promoted a separation of family and business, developing inflexible rules and structures, and the idea that non-family businesses provide a good model for the management of family companies. To date, there is scant research support for the separationist view and growing support for an integrative view.
Perhaps one of the most frequent recommendations is that one should have a plan for succession of management and ownership. Currently, there has been no research that supports this idea. There is a simple reason for this lack of research support: If you love working with your family, it does not matter how badly the company performs; you will still want to work with your family and be an owner of the business. Conversely, if you cannot stand being around your family, it does not matter how much money the company is making; you will still want “out.” Some recent research suggests the more bonded family members are to one another and the company, the better the company performs and the longer the family business survives. There is some evidence to suggest that family businesses that have active boards, convene family meetings and conduct strategic planning experience more positive successions.
Another common recommendation is that in order to develop successors and family employees, to benefit corporate performance and to ease family relations, family members should spend three or more years working for others before returning to the family company. Again, to date, there is no research yet supporting this commonsense proposal. Other research on family dynamics suggests that children should form adult relationships with their parents, and to the extent that being away from the family business achieves this, then perhaps the idea is valid. However, research on adult development as well as studies of father-son relations in family business suggest that a close relationship between parents and children is heavily age-dependent and not necessarily affected by experiences away from family. For example, offspring in their 20s and 30s are more apt to be willing to learn from parents, whereas next-generation members in their late 30s and 40s are less likely to learn and more likely to have a relationship characterized by conflict with their parents. I suggest that the important issue here is that parents and children should continually work on their relationships, whether in the business or not.
Popular ideas for successor selection hold that (1) strategic planning should come first, followed by (2) a careful review of the talents, experiences and abilities needed by the future leader who will implement the plan, then (3) an examination of the current candidates to create a development plan, and (4) when the needed attributes have been achieved, succession can occur. No research has been conducted on this notion. A contrary view is that for most family firms the future is too difficult to predict; therefore, a leader must be someone who can align stakeholders and motivate people to action.
Many consultants recommend that the senior generation should choose the successor. Again, no research supports this idea. It may be that those who have to live with the decision should have a primary role, as it is their trust and commitment that will be needed to ensure future family business success.
There is also no research on the use of “bridge” leaders—non-family managers who will lead the company and train future successors—but there have been some studies of non-family leaders in general. They suggest that non-family leaders must view caring for and managing family as a critical role, and that the hiring process should be carefully designed to ensure they have this quality. Non-family leaders who take the attitude of “if the family will leave me alone I will make them a ton of money” generally have a very negative experience.
Family structures must be flexible
Family constitutions or protocols—a collection of family “laws” that govern relations between family and business—are thought to be valuable in ensuring family harmony and business success. The research here is mixed. Studies of fair process and related issues indicate that creating policies that not all family members subscribe to may be counterproductive. Widespread family involvement and transparency in policy creation is a key. It appears that family commitment to the business is a better indicator of performance and longevity than policies, and that commitment is built through transparency, education, communication and involvement.
Many commentators implore families to develop rigid structures to manage family business relations. Family councils, family assemblies, committees and the like are often proposed. While some research shows the importance of family meetings, research from the organization theory school suggests that rigid structures can lead to catastrophic failure. It is likely a good idea that when implementing such suggestions, family business leaders make sure the structures have appropriate flexibility to adapt to changing conditions. Research on complex systems shows that organizations, be they family or business, must be able to change quickly in order to survive. The ability to rapidly evolve is, of course, enhanced by communication; commitment; and deep, strong, healthy family relationships.
Boards of directors are widely seen as important for organizational survival. Research supports this idea. However, in private family business rigorous studies linking outsiders on the board to business success have yet to be conducted. For public companies, there has been some clear research showing that approximately two outsiders for every family member is a near-ideal ratio for company performance. In private companies the critical factor may be having board members from whom the CEO will willingly take direction. This view comes from the idea that boards should have a primary role of holding senior leaders accountable. Others have suggested that the board's primary role is to help shape strategy. Conclusive research has yet to be conducted.
Let me conclude by suggesting that family business leaders should take a skeptical view of suggestions not supported by research. It is unfortunate that much of the research conducted on family business over the last 25 or so years is largely inaccessible to the layperson. Nonetheless, the truly professional family business leader is well advised to either wade through what is available or seek the counsel of those familiar with the body of scholarship. Thankfully the field of family business research has come a long way in a short time. It needs to be nurtured and supported financially and through participation in ongoing studies. Everyone should be concerned, as family business is at the heart of our collective future prosperity and social stability.
Joseph H. Astrachan, Ph.D., is executive director of the Cox Family Enterprise Center and Wachovia Chair of Family Business at the Coles College of Business, Kennesaw State University. He is a former editor of Family Business Review and research chair at Loyola University Chicago Family Business Center (Joe_Astrachan@coles2.kennesaw.edu).
A look back and ahead
The family business world today is better informed and more connected than it was 20 years ago.
By David Bork
I can vividly remember hearing my grandfather proclaim, “Things aren't the way they used to be!” and thinking that sounded strange. Now it really sounds strange when I say those same words to myself. Even so, it is just as true today as when I first heard it! Looking back 20 years to when Milton Rock first published Family Business, or even 40 years to when I first began serving family enterprises, is an interesting exercise. So many things have changed, and yet others remain constant.
In the late 1970s, I began to speak to international audiences. Often I would be the first person the audience had heard attempt to explain and codify the dynamics of family business. It wasn't very long before family business in Europe, Asia and Africa called to engage me to help them. That was a challenge for me, a native-born American who had never lived abroad. I had to find a way to bridge my lack of understanding of other cultures. I created the concept of “cultural coach,” selecting a person in the foreign business with whom I could privately vet my ideas so the things I proposed would respect and support the culture in which I was working.
It was the more progressive international businesses that sought assistance, and I was in a position to bring them the latest in “family business methodology,” thus enabling them to bypass many of the evolutionary stages family businesses in North America have experienced. Today there is a global family business network, and family firms that work together are having a profound impact. Spanish family firms, for example, were successful in changing onerous national tax structures that were an impediment to family business continuity.
A new focus
In 1968, when I began working with family businesses, there were only a handful of professionals serving family business. It was the beginning of a new field of endeavor, and the few professionals who were out there did a lot of pioneering, educating and learning. In 1989, the Family Firm Institute had about 350 members. Families in business seemed to intuitively know that things could be better in many ways, but in those days they just didn't know what “better” meant. In the early days, laypeople and even business school deans thought “family business” meant mom-and-pop, unprofessional, unimportant, struggling businesses, and that the people working in them needed sympathy.
Family Business Magazine played a big role in educating the public about options that were available for improving both the business of the business and the business of the family. That deceptively simple differentiation was an important milestone in the evolution of professionalizing family business, and it gave a new focus to the work.
Clear understanding of this concept continues to be of utmost importance. The business of the family business is to generate profits, and the criterion for entrance must be competence. (This led to creation of family employment policies and clarity about many business structures. See www.davidbork.com/articles/familybusiness.pdf.)
The business of the family, on the other hand, is to raise responsible adults who have high self-esteem and can function independently. Acceptance in the family must be unconditional. Today, when family businesses are having difficulty, there is a good chance that the problems are grounded in some kind of confusion about task of family and task of business.
Little by little, family business owners became more informed. Today, instead of calling for help, as they did 20 or 40 years ago, they self-diagnose their problems and prescribe such solutions as a family council, a protocol for decision making and family employment policies. They have some ideas about what needs to be done.
Syms, the 50-year-old family-controlled clothing retailer, has trademarked this slogan: “An educated consumer is our best customer.” In a similar vein, family businesses have become better educated about family business matters, and so they ask better, more in-depth questions when they discuss their concerns or when they seek help. Today FFI has nearly 1,500 members, differentiated into five major categories (family business adviser, family wealth adviser, family business consultant, family wealth consultant, educator/researcher and student). There are now more than 150 university-based family business forums with a variety of formats, and many business schools offer courses in family business and entrepreneurship. It is a different, more informed family business world today. Today there are more women in charge of family businesses, and more daughters being groomed as successors.
The passion that entrepreneurs bring to their businesses has not changed, but it seems that there are more and more young, highly successful entrepreneurs, many of whom learned to love the challenges of business by listening to their ancestors speak of the delights and challenges of being in business.
An example is Jimmy John Liataud, creator of Jimmy John's Gourmet Sandwich shops. Jimmy John's grandfather created a safety products company in the 1920s. He passed this on to his several sons and daughters who continued to run the business together for many years. Jimmy John's father left that business to become a very successful entrepreneur, as did others in the second generation. His son, Jimmy John, also struck out on his own. Initially his father gave him a financial boost, and when Gourmet Sandwiches took off, Jimmy John purchased his father's interest. This is not the model we most commonly think of as family business but the roots, values and motivation are clearly grounded in family enterprise.
Today there are more than 850 Jimmy John locations, and the founder is giving large contributions to the college that would not admit him after high school! The stories of Jimmy John's persistence and willingness to work hard are legendary, and exemplify something that will never change: Persistence and hard work will never go out of style. Dig around in a viable family business and you will find these qualities.
Communication is paramount
There are many who place a great deal of emphasis on establishing protocols, rules of engagement or a family constitution, and I am among this group, but I want to emphasize that none of these structures can substitute for clear, constructive communications within the family. One can craft an elegant business solution, but the keys to implementation are always locked up in the family psychology and in the family dynamics.
Family members do not have to always agree, but they must be able to effectively discuss the challenges and concerns they collectively face, and move them to resolution. Family members must continually cultivate mutually satisfying relationships within the family. It is an ever-evolving, never-completed process that is in itself the essence—the true meaning of family business.
The importance of having a buy-sell agreement has not changed; if anything, a buy-sell is more important than ever because in the past quarter-century we have become a more litigious society. Having a buy-sell is an excellent indicator of how “progressed” the owners are in their understanding of family enterprise. If you have one, you have probably gone through extensive discussions of what is important, clarified your family values and created a family employment policy; you may even have a family constitution. Conversely, if your family business does not have a buy-sell agreement, then it is quite likely you don't have many of the other structures that will help assure continuity of the business. Think of this as a diagnostic tool, a measure of where you are.
Over the past year, economics have had a profound impact on how families are thinking about money and their business. They must be far more cautious and prudent in their financial planning. I think that in the long run, this will actually work to the advantage of family business. That is one of the best elements of family enterprise: the ability to take the long view on matters rather than be rated only on the performance of your business during the past quarter, as is the case for public companies. I know of one very substantial business that in the early 1990s created a policy requiring all family members to put half of their individual net back into a cash reserve called the “Rainy Day Fund.” Well, the rainy day did come. They were able to sustain their business because they had adopted a prudent, careful policy regarding their money.
One must ask, “Are family businesses better off today than they were 20 years ago?” The only answer is a resounding “Yes!” And we can be certain that as the fundamental principles of family business become more universally understood and implemented, we will see over time a change in attitudes about being in a family business. Less and less will people roll their eyes when hearing that someone works in a family business. More often we will hear the response, “Oh, that is wonderful to be able to work in harmony with those you love!” Optima futura!
David Bork (www.davidbork.com), founder of the Aspen Family Business Group, has been advising family enterprises since 1968.
Growing beyond: Governance and the economic family
Families who develop ways to manage the tension between the emotionaland the economic can create great opportunites for all members.
By Fredda Herz Brown
During a recent presentation on sustainability in the family enterprise, I was discussing the role of family governance. A young woman in the audience raised her hand and asked: “I hear everyone using the term ‘governance' and then ‘family governance.' What does governance mean, and where did the term come from? I don't get it. Should I know something more?”
I realized how important these very good questions are to the essence of understanding families who share assets together. Understanding what governance means and how it evolved as an important concept for families is part of the story of family enterprise consulting as a growing field.
For me, the term governance brings to mind the idea of government. It is a way an organization of any kind controls its actions. It is a system of guidelines and protocols that manage the often competing and interrelated interests of various constituent groups. It also provides a set of processes that enable families to determine a sense of direction, make decisions and communicate shared values, mission and vision to the various stakeholders. At the same time, governance provides the family with a tool that helps them not only to recognize their own particular family dynamics, but also to manage them.
Help for the evolving family
I remember when the field began more than 20 years ago, the entity of focus was a family business that was passing primarily from the first—maybe the second —generation to the next one. It was necessary to provide a roadmap for these transitions. A fairly elegant model, known as the “three-circle model,” provided this by delineating the constituency groups and the structures necessary to capture the voices of each. The model showed three interlocking circles, one representing the family, one the business and one ownership. It demonstrated that each member of the family could wear several “hats.” In this model it was important to keep the boundaries of each group clearly defined. In fact, the emphasis was in not letting the family “destroy” the business, since the usual life span of the family business was considered to be three generations. As a family therapist in my profession of origin, I was not too happy with this way of viewing things.
However, the model did help to address succession by pointing out the potential for differing agendas and the need to focus on the three circles of interest when doing succession planning. What the model did not provide was a way to consider the family's evolution. What would happen, for example, in succeeding generations, when the three circles tend to pull apart? It became clear to me and others that we needed to address what was likely to be a larger, more diverse family group; perhaps the original legacy business and perhaps not.
Without building a portfolio of assets and evolving their economic base over time, a family is unlikely to be able to maintain, no less grow, their wealth to provide opportunities to the ever-expanding membership. They must make decisions as both an economic and an emotional unit over succeeding generations.
I began to search for ways to think and speak about what it takes to grow these economic, social, political, intellectual and emotional assets. It also became important to define a way to capture how families could make appropriate decisions about their asset development and deployment. My own interest in family governance grew out of these needs. Family governance answers the question, How does a family organize itself to balance the tensions and complexities of being emotionally and economically connected to one another? That is, how do they manage the “business” of being together as a family in an economic way? Governance is the family's way to provide structures and processes that allow them to address such concerns.
The emphasis here is on the family, not the assets they have created. While they are important and may need their own governance, assets are secondary to what the family defines. Governance begins with a family's vision and mission, its raison d'être for where it wants to go. This sense of purpose(s) provides a roadmap—a set of structures and processes that permit the family to comfortably make decisions over time as needed to ensure its survival as an economic unit. While there may be some common basic principles of governance, most families quickly realize that governance captures each family's uniqueness as it strains to manage the tensions of being together and yet separate.
The family as an economic unit
Eight years ago, I helped two brothers and their father go beyond a two-generation succession of a large distribution company. The younger brother, Justin, had gone into the business straight from college and had moved up in the sales side, eventually rising to president of the firm. His older brother, Jamie, had joined after working as a lawyer in the financial industry. Jamie was a man of many ideas and quickly developed other avenues for the family to make money. He expanded the family's real estate holdings and quietly developed several businesses that were adjuncts to the original business. A third and youngest brother was a physician; while he never intended to come into the business, he was invested in it as something that belonged to the family and wanted to support it; his father felt the same way.
Whenever Jamie and Justin met, the discussion centered on succession in the legacy business. Jamie felt unrecognized; he believed his efforts were critical to the family's long-term success. Justin understood his brother's concern, but other than promoting him from vice president to executive vice president of the company, he could not see any way to satisfy his brother's desire for recognition. In addition, Justin himself felt that he was not being recognized for his contribution in taking the company into a new league of six-figure revenues.
Because of the strong feelings of being unrecognized on both brothers' parts and because of the likelihood that this would spur a continued fight for the voting shares, I felt compelled to get these intelligent and well-meaning young men to stretch their thinking beyond the usual view of themselves as the owners of this highly successful business. I wanted them to view themselves as a family that was bound together economically and to see that to continue to grow in that manner would demand a view of themselves into the future—farther than they typically would look.
We met four times over three months. They first painted a picture of the future as they saw it and defined a mission for continued work together as a family. They talked animatedly about the businesses they had built together and their shared excitement about the new ventures. They began to establish principles to guide how they wanted to continue to develop and share assets. They defined their work as a family—their purpose—as being in five areas: their businesses, their liquid investments, their real estate holdings, their philanthropy and their staying connected as a family. They wanted to continue all these activities together and to begin involving their spouses and children. To define themselves as the stewards and builders of the assets, they wanted the ownership of the assets to be held in a family trust.
Once they had reached agreement on remaining an economic family and had defined the parameters, they were less focused on titles. With less emphasis on the legacy business and more on growing an economy for the family, Jamie jumped into his work on investments and real estate and grew the family's fortunes, beginning with the development of a family office.
The brothers then began to discuss how decisions could be made regarding their portfolio of entities. We established a task force to consider how family members could get their voices heard and how to educate the next generation to deal with the complexity of their activities. The task force recommended the establishment of a family assembly that would meet yearly for fun and education. This group would elect a board consisting of four outside, independent directors and three family members chosen for their competence and contribution to the areas of the family's efforts.
The details, including selection criteria, terms for participation and governance structure, were contained in a document called the family constitution, which was ratified by the full family at the first family assembly meeting. They have been working through implementation of the plan very thoughtfully, modifying it as needed.
As the life cycle shifts, every family must deal with how to remain separate as well as connected. In another client family who had sold their legacy business, one of the seven families in two family branches was interested in going out on its own; the other six families wanted to remain together as an economic unit. They wanted to invest together, building their investment and real estate portfolios as well as developing leadership opportunities for the next generations. They experimented by forming a family task force and ultimately developed a system of representative governance.
Managing complexities
Governance structures are not just for families whose assets and holdings are complicated. Any family that has one asset often has two, and just being an economic family involves complexities. While sharing an economy provides challenges and opportunities, I have found that families who can surmount the challenges by devising ways to make decisions, develop stewardship and manage the tension between the emotional and the economic can create greater opportunities for all their family members.
It is exciting to assist families in figuring out what they might want to do together and to take their fate in their own hands rather than managing the waves of family needs and strategic business imperatives as they surface. Families are not only intrigued by the notion but also excited about the prospects.
Fredda Herz Brown, Ph.D., is a principal in Relative Solutions LLC, a consulting firm to economic families, those who share assets (www.relative-solutions.com).
Reminiscences of a pioneer in family business education
Business owners provided the impetus for the creation of the Austin Family Business Program at Oregon State University, one of the first academic institutions to provide outreach to family firms.
By Patricia A. Frishkoff
In 1985, M. Lynn Spruill, the newly hired dean of the College of Business at Oregon State University, hosted focus groups to explore how OSU might best serve the business community. One of four research universities in Oregon, OSU is uniquely rural, a fact that posed logistical difficulties for business owners who sought access to university faculty and the information they had to offer. Harnessing his entrepreneurial talents, Dean Spruill sought to establish a niche.
“Family business”—suggested by Joan Austin—caught Spruill's interest. She is co-owner, with her husband, Ken, of a large dental equipment manufacturing company in Newberg, Ore., which the couple had started to harness Ken's tinkering into a lasting job. Ken and Joan, who had recently attended a family business seminar offered by consultants Dr. Léon and Katy Danco, realized that there were new challenges and opportunities when a family was tightly woven with a business. My proposal of “small business” had come closest to what the Austins had suggested, although we quickly learned that equating small business and family business was erroneous.
The Austins provided a small amount of seed money. My duties as director of the program were as an overload to my responsibilities as a professor of accounting.
Spruill wasn't quite sure what “family business” meant. I hadn't previously considered the topic, although I had been raised on a family farm, lost following a farm accident. As the program developed under my directorship, I became acutely aware of the passion that my family background had instilled in me.
Program development on the fly
Googling “business” + “family” today generates 154 million hits. In 1985, research meant reading in hard copy and networking in person. Family Business Review and Family Business Magazine didn't exist. The Family Firm Institute (a professional association primarily of advisers) wouldn't be launched until 1986. Only one other—urban—university, the University of Pennsylvania's Wharton School, was advertising family business seminars, presented to a restricted audience. Because we were a rural institution, we were forced to develop a new type of program. We foresaw two service modes: outreach to business owners and classes for students. We anticipated that on-campus expertise could create competitive advantages for the university.
We launched the program in June 1986 with a three-day conference, on campus. We urged clusters of family members to attend together. Dean Spruill was the opening keynoter. The featured “name” speaker was Dr. John Ward, a pioneer academic and practitioner; he discussed his research and gave advice for family business succession. We asked participants to preregister for breakout sessions. Although a majority said they preferred the session on “estate taxes,” the small-room presentation on “getting along with children” was overfilled!
Our outreach activities included long and short events, throughout the state and beyond, and online. Take-away value was enhanced by privacy; seats in close proximity (elbow to elbow); advice from other business owners; comfort in the commonality of issues; and hands-on, applied learning. Talent, Ore., and Tangent, Ore., were two of dozens of communities in the state where we taught workshops, often in family business facilities.
Since the majority of American employees work for family businesses, we concluded that most students would eventually work for, or with, family enterprises. We launched an advanced-level class, team-taught, to provide a range of expertise including financial analysis and organizational behavior, with a family business context. The course culminated with evaluation of an actual family business. Lacking textbooks as such (the first actual text had not yet been released), we developed real-life (disguised) cases. Business owners opened their facilities for tours and for honest conversations about decisions and family relationships.
We brought business owners into the classroom. L.W. “Bill” Lane Jr., former editor and co-owner of Sunset, offered to lecture, meet with students and even read term papers. Subsequently, he endowed a Distinguished Lecture Series. We received funding for nine family business scholarships and the A.E. Coleman Chair in Family Business, established in 1999. I was eager to innovate. I retain fond memories of teaching, via satellite, from OSU to both the University of Oregon and Portland State University (and sad thoughts of teaching from an upstate New York community college via satellite, when my father was in hospice). In 2000, via the Internet, students and business owners “visited” Torrini, in Florence, Italy, the world's oldest manufacturer of jewelry, owned by the same family since 1369.
Other centers emerge
Other family business educational centers emerged in the 1980s. Growth accelerated with expanded awareness of family business as an academic and practice field. Those centers, thankfully, began to reach family businesses worldwide. FFI now lists 168 educational centers. Each new set of program founders grappled with identifying clientele, building structure and governance, defining curricular elements and gaps, and funding. Program survival, in my view, requires a “champion”—and long-term funding.
I created the now often-replicated family business awards. This opportunity for recognition afforded a unique platform from which families might discover the merits of documenting their history, core values and successful approaches; and a venue for learning best practices of other companies. As I have preached, celebrating a family business is a desirable process in itself, award winner or not.
The awards provided exposure, added contacts to our database and created an event relevant to the whole family. I recall three young boys who came up to me, carrying a large plaque, to ask, “Did you see what we won?” Awards are displayed in offices, on marketing materials, even on YouTube. According to winners, the winning qualities serve as continuing guidelines for decisions.
Lessons from experience
Most major decisions in family business stem from the overlap of business employment, ownership and family:
⢠Who will lead the business next, and how will the transition occur?
⢠Who will own the business next? How and when will change of ownership take place?
⢠How will we ensure family harmony during the -process?
Each concern must be addressed, and they recur. One second-generation business owner complained, “I had a clear vision and a complete plan, and then my grandson was born.”
The field has expanded in many ways. Here are some examples:
⢠The complexity of family business organizations, the structure of family enterprises, the families themselves and the environment in which they operate (tax laws and other considerations) has increased considerably. During earlier educational sessions, for example, more focus was on parent-child and sibling relationships. Now cousin consortia and related governance are in vogue.
⢠Over the span of the business leader's life, he or she must undergo a transition of outlook: from entrepreneur, to owner-manager, to shared leadership with the future successor, and then to letting go. One owner-manager publicly explained why it was time to relinquish decision making to his son, and then he started to cry. Overcoming resistance to loss of control remains a huge challenge for founders.
⢠The importance of family wealth management, alongside family business management, has been evident in education and in consulting practices, and in the FFI certification process.
⢠Varied leadership roles for family members, other than as an employee in business operations, include service on the board of directors, on the family council or in family philanthropy. Succession by younger leaders may necessitate a new position for the founder; one firm created the position of “ambassador.”
⢠Training for the next generation includes university courses and degrees and customized camps. One company established a junior board of directors, led by the non-family CFO, where, among other duties, the heir-apparent teenagers track indicators of performance.
⢠Multiple perspectives are being considered. One business, for example, was looking at expansion into another state, led by a sibling. The family considered the cost of the new business location, and also the loss to family members of missing Sunday dinner with Grandma.
⢠Participation of women in family businesses has expanded from subordinate roles to those in leadership. We studied a 26th-generation Italian wine family, Antinori, in which, for the first time, the successors are female.
⢠In marketing the family business, leaders must decide whether it should be identified as family-owned; if so, how; and whether family members should star in the advertising. For Columbia Sportswear in Oregon, “tough mother” Gert Boyle is the icon in the firm's advertising. For our family business class, I asked why she held this role; she responded, “Because I'm the cheapest.”
Taking pride in the legacy
I have remained active in our family consulting and speaking business with my husband, and in the field, since my retirement from OSU in 2002. I had cautioned founders not to meddle after retirement, and have followed my own advice. As it does for any founder, leaving an enduring legacy generates pride. My passion was rekindled when I heard that OSU, with its rural roots and family business expertise, recently was granted funds to extend its “Ties to the Land” project for intergenerational planning to a nationwide audience.
Patricia A. Frishkoff, the founding director of Oregon State University's Austin Family Business Program, now provides consulting and speaking with her husband, Paul, through their Oregon-based consulting practice, Leadership in Family Enterprise (www.patandpaul.com).
Hope springs eternal
Decades of research have not stopped families from going into business with unrealistic assumptions.
By Kenneth Kaye
The invitation to reflect on how our field has changed over 20 years stumped me, at first. In an age of mind-boggling technological and geopolitical change, we tend to forget that there are timeless constants in human life. Written history going back at least 3,000 years shows that family members are no more likely to change the ways they enter into business relationships than couples are to change the ways they fall in love, marry or make babies: largely irrationally.
Experienced consultants' warnings are no more likely to stop family members going into business for the wrong reasons, or with unrealistic assumptions, than humans are to eliminate war, knavery or population explosions. We old-timers may have learned to see sooner and more efficiently when to apply the eye-opening exercises of family therapy and individual psychological counseling. But I'm not sure we've become better at shortening the learning curve for newcomers to the field.
It's my impression that those of us who have been preaching mental health to family firms for years are less certain about general principles than when we had few cases under our belts. I suspect most of us preach fewer dogmatic dos and don'ts than we did 20 years ago to guide a founder when hiring a son or daughter, or contemplating the transfer of ownership, or giving the in-laws votes on a family council.
Participants in the annual conference on Psycho-dynamics of Family Business, for example, discuss cases more in terms of a process of discovering the unique intervention that may help a particular family system at a particular stage, than a checklist of factors thought to be healthy vs. risky. Kim Schneider Malek says the Schneider Consulting Group now uses the “three circle” distinctions among ownership, family and management sectors more as a tool for discovering with clients how to frame the different roles in each unique family system than as a matter of bringing education to them.
In an early column in this magazine, I asserted that resolving family conflict was critically different from settling disputes between unrelated parties. I now see that what sociologists call “incompatible narratives” between nations or communities can similarly trap relatives into hopelessly rigid positions, even when they long for familial closeness. Like warring religious groups or cultures anywhere in the world, they can't compromise without giving up deeply held beliefs about their characters, histories and moral justifications.
Take the case of a son who needs more money and desires more authority than his father is prepared to cede. The son's arguments are based on promises he believes were made to him and rewards denied to him over many years. Unwilling to negotiate win/win outcomes based on present circumstances, shared goals and compromises, his father gets defensive about the past and recites his own tale of disappointment going back to the son's dismal performance since middle school. With such incompatible narratives, the son will never convince Dad to acknowledge having cheated him. We have a “that's my story and I'm sticking to it” situation. Each demands a win/lose outcome, to vindicate past wrongs. Rarely will they achieve anything but lose/lose unless, perhaps, we learn to adapt versions of the lengthy reconciliation processes that succeeded in South Africa and Northern Ireland.
In short, I can't say whether we in the family business dynamics field are more effective dispensers of conflict-reducing medicine than we were 20 years ago. I know we're not as effective as we hope to be. Human beings change only a little, and slowly. Fortunately, the consequences of small changes in individual behavior can make a significant difference to the success of a team, so it sometimes requires only modest individual changes (and the desire for a shared narrative) to produce gradual systemic progress.
Hope springs eternal, and family members will continue to enter into business partnerships as long as there are people on our planet. If rational judgment plays a role in their determination to take on these known challenges, so does a hefty dose of denial.
Kenneth Kaye, Ph.D., blogs on family business dynamics at www.kaye.com/blog.
Ruling vs. governing: On the dialectics of governance
Conventional family business wisdom says that later-generation companies need structures and policies. But some family enterprises function most smoothly under a single leader.
By Ivan Lansberg
In the late 1960s, John Petersen (a pseudonym) and his brothers inherited a modest pharmaceutical business from their father. Today, it is a multibillion-dollar global company, in great measure thanks to John's relentless entrepreneurial drive. Although he is the middle brother, John emerged as the lead partner after demonstrating time and again that they would all be better off financially letting him drive the strategy and implementation of the fundamental decisions. Now, with 15 adult cousins in the third generation, the Petersen family has built an elaborate governance structure that includes an independent board of directors, shareholder and family assemblies, a family council, a family office and a philanthropic foundation.
While John retains his undisputed leadership as the head of the family enterprise, the brothers, the cousins and their spouses all participate actively in the governance structure. Right from the start, John understood and supported the need for governance architecture. Today, however, he faces a new dilemma. The structure has empowered the family to make choices that at times challenge John's priorities and wishes. In these instances, he expects a certain degree of deference and occasionally balks at the idea of sharing authority with those who haven't yet quite “earned it.”
The way John sees it, he's built the business and made everyone wealthy and, when opinions are not in alignment, his judgment should predominate. Yet he also understands that when he exerts his influence arbitrarily, he perpetuates a reliance on him that may well compromise the maturation of the governance process and ultimately the continuity of the enterprise.
Paradoxically, things would be easier if John weren't such an effective leader. His track record of making the right calls is impressive indeed. Sometimes he wonders whether it was in fact a good idea to support the development of a structure. As he asked me in a recent conversation, “Have I been hoisted on my own petard by encouraging such bureaucracy?' Particularly, he wonders how to act while the family is in the thick of a generational transition. As he put it succinctly, “When should I rule and when should I govern?”
Systems aren't panaceas
When family enterprises evolve into a partnership of siblings or a network of cousin shareholders in subsequent generations, developing mechanisms for sustaining continuity in ownership becomes a fundamental challenge. Much of the writing in the field (including my own) suggests that the remedy for ownership complexity is governance—mainly the structures and policies that allow for rational decision making among multiple owners who must learn to articulate, prioritize and coordinate their shared objectives.
However, experience over the past 20 years has taught me that while structural solutions are often the correct intervention with families transitioning to complexity, they are no panaceas. Indeed, there are certain assumptions about the attitudes and behaviors needed from shareholders to make these structures work that are simply not present (or even possible) in many family enterprises. For example, just as democratic societies require an educated and engaged citizenry, effective governance structures call for shareholders who are interested, and willing and able to govern themselves. But even well-designed and effective governance structures staffed with “enlightened” owners have embedded costs; they are expensive to maintain, time-consuming and labor-intensive—often fatiguing or even burning out the very shareholders they aim to unite.
Moreover, the notion that structure is always the remedy for complexity is simply not supported by the evidence. I have in fact witnessed many complex business families (even some with hundreds of cousin shareholders) that are held together effectively not through an elaborate governance structure, but through the sheer charisma and force of personality of a single leader. These systems violate my own original prescription about the need for structure as the appropriate response to complexity. Indeed, in several cultures around the world, including many Latin American and Middle Eastern countries, family business shareholders often do not behave in accordance with the assumptions underlying the model of “enlightened stewardship.” There, individuals and shareholders mistrust “systems” but latch on tightly to “personalities”—that is, to an individual whom they trust to take care of them.
Autocracies' drawbacks
Needless to say, while effective under certain conditions, relying on a charismatic leader to coalesce a complex group of shareholders can be (and often is) risky. While this solution to the governance conundrum can buy a family enterprise several decades of stability, it ultimately can sow the seeds of its own destruction. Single leaders can be narcissistic, autocratic and destructive. They often threaten continuity by acting in secrecy, brokering private deals with stakeholders that can compromise the trust of the group.
Systems held together though an individual are particularly vulnerable when the leader's physical and mental capacities begin to wane in late adulthood. As the tragic story of C.F. Seabrook (of Seabrook Farms) and of countless others suggest, an arbitrary family enterprise ruler can trample over the dreams of the next generation and squander the promise of continuity. And so the age-old debate between centralized personal authority vs. participative enlightened governance, immortalized in the writings of philosophers like Hobbs and Rousseau (and beautifully articulated in Dostoevsky's Great Inquisitor), is very much alive and well in the microcosm of family enterprises.
An analysis of the history of family companies that have been around for many generations suggests that these organizations often experience a back-and-forth between periods when the shareholders are integrated through structures (participating actively in assemblies, councils and boards) and periods of minimal structure in which a single leader emerges, consolidates authority and holds the system together. This history also suggests that the transition periods between governing through structure and those in which a leader predominates can be particularly precarious for family companies. This is because, if the emergent (or the outgoing) leader refrains (or, worse, abdicates) from leading while the structure itself is not fully functioning and empowered, no one is making the decisions. The system degenerates into a state of rudderless inertia in which fundamental strategic and operational choices go unattended.
Why and how do these swings between integration through structure or through a leader occur? Under what conditions is one solution for integration more effective than the other? What role does the cultural context play in ensuring the viability of one form of integration or the other? What are the leadership behaviors needed to move the system from one mode to the other? What can families do to manage the downside risks associated with these transitions? These are the questions that preoccupy much of my current thinking on the complexities of sustaining complex family enterprises across generations. How families sustain the integration and commitment of their shareholders over time is very significant, since many family companies here in the U.S. and around the world are transitioning to more complex ownership forms involving siblings and cousins.
A lifelong, evolving process
My sobering conclusion is that no solution is perfect or eternal. Quite the contrary, there are dialectics associated with “governing” (integration through structure) and with “ruling” (integration through a leader) that must be anticipated and managed. Governance must be approached as a lifelong process rather than as an engineering problem for which there is a lasting “silver bullet” solution. The reality is that families (like their businesses) are continually evolving. Owners and their descendants age, some die, new ones are born, some marry and some divorce, some stay local and many move away. Every effective solution to the governance and integration of owners is but a temporary equilibrium that buys the proprietary family periods of stability in the long-term journey across generations. Inoculating families to this reality and getting them ready for the inevitable periods of transition is critical.
In a way, the challenges associated with the transitions from ruling to governing have been well documented in our field. They typically involve helping departing leaders like John Petersen to honor their commitment to the future and channel their considerable influence through the governance structures that involve their heirs. These leaders must model the patience, restraint and social skills needed to work constructively in organizational arrangements that require building consensus. It is in no small measure a test of their forbearance and capacity to mentor. This transition also requires that the next generation have the empathy to work constructively with the departing leader and the maturity and skills to collaborate with each other within the architecture of governance.
The movement from governing to ruling is less well understood. It requires that the owners recognize that the structures that may have served them well for many years might need to be simplified, streamlined and, in some cases, eliminated