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Enterprise longevity vs. business survival

A recent article in The Practitioner -- an online publication of the Family Firm Institute, an organization for professionals who advise and study family enterprises -- pointed out the difference between "firm survival over time" (continuity of a family business through the years) and "longevity of a family enterprise" (a family's ability to create wealth and value over generations).

The Practitioner article -- by Pramodita Sharma, the Sanders Professor for Family Business at the University of Vermont's School of Business Administration and a visiting scholar at Babson College -- argued that family enterprise success can be defined in ways other than leadership transfer from one generation to the next. "Both the creative destruction of firms and pruning of the enterprising family are integral parts of longevity of an enterprising family ....," Sharma wrote. "Recent reviews of the research on succession, governance, professionalization and performance all point in the same direction -- that one size does not fit all and the overarching numbers of ‘success' are insufficient to capture the complexity and heterogeneity of family enterprises and their pathways to success."

Family Business Magazine's cover subjects for May/June 2014, the Power family, sold J.D. Power and Associates to McGraw-Hill in 2005. The Powers are now working together on investment and philanthropic ventures and have implemented family governance structures. Though they no longer run their company, the family is continuing what Sharma refers to as the "pursuit to create value and wealth over generations."

A legacy business that continues for 100 years or more is truly something to celebrate. But that's not the only road to family enterprise success. Today's researchers make a strong case that we must reorient our thinking.

The family as investors, not managers

How many times have you heard a family business owner say, "We have to sell our company because our kids aren't interested in running it"?

If the family is fielding lucrative offers for their business, the proceeds of a sale provide capital for next-generation members to embark on ventures more in line with their passions, and all family members feel good about the outcome, great. But if the family expresses any regret over having their company fall into someone else's hands, I often wonder if they ever considered an alternative to selling: engaging non-family managers to run the company while the family continues to own it.

Marc Puig, third-generation CEO of Puig, the Spanish prestige fragrance and high-end fashion house, recently told the Financial Times that he doesn't expect his family's fourth generation to run the business. "What we have said is that the next generation will most likely not work in the company," Puig told the FT. "They are groomed to become good shareholders and stewards of this project -- but not its managers." The company has a share of about 9% of the prestige-fragrance market, and its revenues are nearly €1.5 million, the FT article noted.

Over the years, Family Business Magazine has published several profiles of families who have taken the role of owner-investors rather than owner-managers of their legacy businesses. In these cases, the family must make an extra effort to engage the next generation so they remain committed to the company. But under the right circumstances, this strategy can foster family satisfaction and financial success.

Governance for the multifaceted family enterprise

At last month's Private Company Governance Summit, held in Washington, D.C., and presented by Family Business Magazine along with our sister publication, Directors & Boards, Steve Lytle, the former chairman of Columbia Distributing and director of The Agnew Company, a family business holding company, made some interesting points about family business governance.

Lytle, participating in a panel discussion entitled "The Effective Private Board," pointed out that many family enterprises are multifaceted. "When we have family ownership involved, we're really not talking about one business, usually," said Lytle. "There's usually kind of a portfolio of [assets] and roles and definitions.... We've got the family to consider, we've got owners to consider. And then we've got the business and the assets to consider."

Lytle said that family businesses should develop governance systems to address the interconnectedness of the various constituencies. "I think it's one thing to race right down and talk about the board," he said. "But we really need to think about the enterprise itself, and how we're governing the entire enterprise." A family enterprise system can include an operating board, an investment board, a foundation board, a family council and an ownership council, Lytle noted.

Most large family businesses have a diverse array of stakeholders, Lytle said. "There are family members that have emotional equity [but] don't have financial equity, and those that have financial equity and not as much emotional equity."

Lytle said that family business boards should consider four questions: "How's the cohesion of the enterprise? How's the clarity developing in the enterprise? How effective is communication in the enterprise? And how effective is education in the enterprise?"

The board can play an important role in building and maintaining cohesion among the family ownership group, Lytle said. On the issue of communication, he noted, "I think it's vital to recognize that when we're talking about communicating to family owners, we want to communicate in a way that speaks at the maturity level, at the sophistication, and at the literacy level of that family group." Regarding education, Lytle said, "I think boards in family enterprise can do an effective job of being part of the education cycle that really ramps up the literacy and sophistication" of family owners, so that they can function effectively as a shareholder group "and for the enterprise to continually grow and mature along the way."

High-yield investment

If you want your family business to last multiple generations and provide wealth to benefit all those future descendants, you must ensure your company is able to hold its own against global competitors. And to compete against the strongest companies in the world, your business needs every edge it can get.

At the second annual Private Company Governance Summit (PCGS) -- held in Washington, D.C., earlier this month and presented by Family Business Magazine along with our sister publication, Directors & Boards -- panelists with experience as directors, board chairs and CEOs of family companies discussed how an independent board can give you the advice you need to move forward with a strategic plan that points the way toward growth and competitive strength.

"I think good governance is not just the right thing to do, but it's a competitive imperative," said Lansing Crane, the sixth-generation former chairman and CEO of Crane & Co. and the chairman of four boards (two of which are family company boards).

"Think of having a board of seven to eight people working for you, putting in what is an average for most companies of 200 to 300 hours a year on your benefit," Crane said. "That's seven times 200 to 300 hours' worth of work from people who are really knowledgeable and committed to your company's success. That's what you're competing with, and that's what you have to have."

Stan Silverman, the former president and CEO of PQ Corporation, a chemicals and engineered glass materials company that was family-owned until 2005, and now a director and lead director on several boards, told PCGS attendees, "You want to hire people as directors that have great critical judgment and have the ability to speak their mind.... And if you do that, you're going to prevent a lot of mistakes from happening."

"As you think about your company and your future, I would ask you to have the courage to think about what you or the next generation or the next [management team] needs, and be able to put that guidance in place for them," said Anne Eiting Klamar, M.D., president and CEO of family-controlled Midmark Corporation. Klamar, who had been a practicing physician before taking over as leader of her family's company, said, "My board has really been my guiding light, my rock, through this journey."

Many family business owners are hesitant to form an independent board because they are afraid to share information with people outside the business and to relinquish autonomy. "You have to recognize the upside," Crane said. "Someone who's not willing to let go and give up autonomy is risking the enterprise. Because the world will consume you at the end of the day. And the flip side of that is, if you've got good people, you're going to succeed."

"I've come to realize through my board that, really, family business is about creating value for the shareholders," Klamar commented. "Once I shifted my framework to creating value, it was a lot easier to let go."

 

Room for improvement

In the forthcoming May/June 2014 issue of Family Business Magazine, Susan Schiffer Stautberg -- CEO, co-founder and co-chair of WomenCorporateDirectors (WCD), an organization for women who serve on corporate boards -- cites a study that found family business boards lag far behind their non-family counterparts in several important areas.

The study was conducted by Harvard Business School researchers Boris Groysberg and Deborah Bell in partnership with WCD and executive search firm Heidrick & Struggles. In 2012, the researchers surveyed more than 1,000 board members in 59 countries. About 80 of the companies represented (8% of the sample) were family-owned businesses.

The investigators' disturbing conclusion: "There was not one meaningful measure -- from missing skill sets to the effectiveness of succession practices to creating more diverse boards and workplaces -- on which FOB [family-owned business] boards outperformed non-FOB boards."

Here is some of their evidence:

• More than half (52%) of the family business directors, compared with 42% of the non-family business directors, said important skill sets or areas of expertise are missing or insufficiently represented on their boards. Missing skills included HR/talent management (lacking in 58% of family business boards, vs. only 20% of non-family business boards), succession planning (26% vs. 19%), strategy (23% vs. 14%), financial audit (19% vs. 10%), risk management (19% vs. 14%) and compensation (16% vs. 6%).

• Only 23% of the family business boards, compared with 50% of the non-family company boards, have a formal process to determine what combination of skills and attributes is required for the board and, therefore, for new directors. And only 29% of the family company directors said their board has an effective succession planning process for directors, while 38% of the non-family company directors reported having such a process.

• Succession is a significant area of concern. Just 41% of the family business boards, vs. 56% of their non-family counterparts, have an effective succession planning process, according to the directors. Nearly two-thirds (63%) of the family business directors, compared with 39% of the non-family company directors, said succession is not discussed regularly at the board level. And only 44% of the family business directors, vs. 54% of the non-family business directors, said the board has vetted at least one viable candidate who could immediately become the CEO if necessary.

• Family business directors were not happy with the human resources function at their comments. A mere 8% said their company is effective at attracting top talent (vs. 18% of non-family business directors). Only 9% (vs. 15%) reported effectiveness in hiring top talent. Just 9% (vs. 17%) said their company was effective in retaining talent. In the view of their directors also said just 11% of the family companies did a good job of developing talent (vs. 15%), rewarding talent (vs. 16%) and aligning the talent strategy with the business strategy (vs. 15%).

• Diversity is a serious problem. Less than one-third of the family business directors (compared with 49% of the non-family business directors) said director diversity was a board priority. And only 17% of family business board members, vs. 41% of non-family business directors, said their board had adopted measures that successfully advanced diversity on the board.

WCD's Stautberg will be discussing this survey in her remarks at the Private Company Governance Summit -- presented jointly by Family Business and Directors & Boards Magazines -- which begins tomorrow in Washington, D.C.

Governance is a continuing challenge for family businesses. Too many family companies lack a board altogether, or have a board in name only that rarely if ever meets. This study shows that family firms that have formed a board should not spend too much time on self-congratulation. In the minds of their directors, they still have a lot of work to do.

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