The Emerging Muscle of Family Control

By Peter Davis

News of deep financial troubles at Wang Labs last summer touched off a wave of speculation over why the company, built by entrepreneur An Wang in the Sixties, lost its way in the Eighties. After the board of directors forced the resignation of Wang's son, Frederick, whom his father had installed as president only a few years earlier, a distinguished Harvard professor commented in the press: "The evidence of history is that big businesses can't be trusted to families."

For those of us in the family business field, this sweeping comment by Alfred Chandler Jr., the dean of business historians, reflects a general prejudice that lingers , despite evidence that many of the world's most successful businesses remain family operated or controlled.

In the United States, one thinks of such consistently high achievers as Wal-Mart, Johnson's Wax, Mars Incorporated, the Marriott Corporation, and the New York Times Company, to name a few. Elsewhere in this magazine you will find the results of a study conducted by the Pitcairn Group, which shows that family-controlled enterprises outperformed the overall market, as measured by Standard & Poor's 500 by a wide margin over the past 20 years.

While it is true that some family firms are slow to innovate, usually because they fail to set up institutional means of encouraging innovation, companies such as Wang aren't alone in making costly mistakes in strategy. In the computer field with its fast-moving technologies, even such giants as IBM and DEC have shown occasional lapses in vision.

Overseas, the example of West Germany is instructive. Of the 1000 largest firms in the world, a mere 30 are West German (the U.S. count is 353). The backbone of the West German economy consists of the thousands of midsized businesses, like BMW or Carl Zeiss, which specialize in value-added products, craftsmanship, and maintaining their leadership.

The hazards of running a family business must, of course, be taken seriously because they are real and, in some cases, acute. Family and business don't mix, argue the critics of family-runfirms, so the best that can be hoped for is short-term success. The very notion of a family business suggests favoritism — in its extreme form, nepotism — which seems at odds with the American way.

Years ago, in a famous Harvard Business Review article, Harry Levinson proposed a radical cure for what ails the family business: Get the family out of the operation of the business, he wrote, and turn it over as quickly as possible to professional managers. Levinson, a psychologist turned management consultant, seems to have been balked in his dealings with family firms by strong-minded founders who stood in the way of change.

Professor Chandler's classic studies of such companies as General Motors and E. I. du Pont de Nemours show how they grew beyond the power of families to control, requiring a new, multi-divisional form of organization. But the separation of ownership from professional management in this century and the rise of large corporate bureaucracies with unresponsive leaders has opened its own Pandora's Box. The waves of mergers, takeovers, and leveraged buyouts; the rampant "paper entrepreneurialism" of recent years, are all signs that American business has strayed too far from its roots.

We may be entering a decade in which smaller, independent companies will be able to find and exploit product niches more efficiently than larger enterprises. We may be entering a decade when family management, offering continuity and high-touch service, will give firms an edge in winning customers. We are seeing a new respect for corporate culture, values, and tradition. Allare important qualities that family businesses bring to the table.

Some family firms still, no doubt, cling to their quirky, anachronistic ways; their well-known tendency to procrastinate. But a new generation, proud of its families' accomplishments and eager to see the firm grow, is moving into positions of leadership. America's entrepreneurial ideal has been dusted off and refurbished. Sons and daughters seem more eager to share their experiences with others and, in turn, to learn from others.

In the past few years a whole new field has sprung up to help family businesses manage their future growth and avoid some of the pitfalls. At least 40 universities across the country now offer courses, seminars, or special institutes on family enterprise, among them Harvard, Yale, Tulane, Loyola, Wharton, and the University of Southern California. Scholars are preparing case materials that were until recently in short supply because of the highly secretive nature of closely held firms. For the first time, a systematic body of knowledge is taking shape that will enable us to better understand the regularities, the unique "laws," governing the normal course of such enterprises.

For example, numerous case studies show how firms have drawn up rules that define effective boundaries between family and business, preventing the workings of one from spilling over and interfering with the workings of the other. Yet boundaries do not have to be unbreachable walls. Family values and traditions are the glue that holds a family business together. They provide the basis for the company's culture, its mission, and leadership style.

Research on stages in the psychological development of men and women is coming together with similar work on the stages of development in organizations. The results cast new light on such issues as the optimal time for succession and the natural conflicts that arise when the cycles of development of family and business get out of sync. Case studies also illuminate some of the intensely emotional "triangles" that tend to form in family businesses. The most common one involves a wife and her husband's "baby" (the business he founded), in a competition for the man's time and affection. (Other triangles explain why in-laws are always the ones that get blamed for mistakes!)

Companies can also benefit from the growing literature on running a family business: on managing for the long run, on building a franchise in a niche, on diversifying a firm's investments and spreading risk. Unlike public companies, which expect stockholders to balance their own investments and risks, the family business owner is responsible for protecting his firm's future through investing in other assets such as real estate and stocks and bonds. To be successful, he needs expert advice on portfolio management that is geared to a family firm.

This column will deal with many of these issues in the months ahead. We will pass on some of the research findings and case study results, along with observations and insights (both my own and those of many others) that may help families increase profits while continuing to profit from their family relationships.

Today, the family business is alive and well. It doesn't need treatment, but it could perhaps use more enlightenment. The birth of a national family business magazine is another welcome sign of its health and resurgence.

The assumption here is that business can be, is, a deeply enriching activity for families. Families in business together almost invariably work harder. To keep the family in the business, and the business in the family, they also need to work smarter.

—P.D.

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