Family businesses in historic context

By David W. Wise

This year marks the 100th anniversary of the outbreak of the First World War, the most horrific war in human history up to that time. For four long years combatants dug in for indecisive trench warfare and industrialized slaughter that claimed 17 million lives. The optimism and faith in progress that had energized Western civilization before the war gave way to disillusionment and the "lost generation" afterward. Out of the rubble of World War I followed a second global war and then a third Cold one. To this day historians debate the causes. Yet this destruction was not the result of some iron law of history; it came about because of leaders' flawed planning and decision making.

Although we think of wars in terms of countries, in many ways the First World War was also a story of family business. Great families such as the Cadburys were split in terms of their view of the great war. Other powerful families, such as the Krupps, were very much a part of military history. And a number of the lead combatants were, realistically speaking, family businesses. Although France was a republic and England a constitutional monarchy, Germany, Austria-Hungary and Russia were family enterprises almost indistinguishable from the names Hohenzollern, Hapsburg and Romanov. In each of these countries the monarch held ultimate war powers. In each of the latter three countries, the monarch disdained legislatures—the national board of directors—and operated in an echo chamber of groupthink. As a direct consequence, none of these three great family dynasties survived the war.

Although family businesses on the domestic front operate on a much different plane than those on dynastic battlefields, some of the same lessons apply. A Deloitte study found that 28% of family businesses do not have boards, and a McKinsey study reported that even when they do, insiders on family boards outnumber outsiders almost 2 to 1. Numerous studies, some involving thousands of companies in North America, Europe and Asia, have generally concluded that companies in which the founder serves as CEO or as chairman with a non-family CEO create value, while those run by the eldest son or grandson of the founder falter. The same studies have found that there is generally a benefit, after the founder is gone, to having more separation between family involvement in both management and governance. Even savvy founders, given the entrepreneur's penchant for risk, would benefit from independent sounding boards. McKinsey concluded that strong boards and a longer-term portfolio management perspective were what distinguished the family companies with longevity from those that fall by the wayside.

One area in which family business boards rate themselves poorly is succession, a topic that can be extraordinarily sensitive. Here again, the parallels to 1914 stand out. Wilhelm II of Germany came to power suddenly at age 29 after his father reigned a mere 99 days. It is not surprising that Wilhelm II was ill prepared for the responsibility. The fact that Nicholas II of Russia had a sole male heir, a young prince who suffered hemophilia, rendered the royal family subject to dangerous influences. The chain reaction of decisions that led to mobilization and bloodshed began with assassination of Archduke Franz Ferdinand, heir to the Hapsburg throne in Vienna.

Almost all companies, large or small, start out as family enterprises. The three largest family businesses in the world—Wal-Mart, Ford and Samsung—illustrate the point. Nearly 80% of all new jobs are created by family-owned businesses and the start-up, which stands at the heart of the American Dream, is often established at the family dinner table and funded initially by "family and friends." The vitality of the American economy is very much tied up in these ventures. A board that brings some outside perspective and contributes a broader cross section of skills and talent can to help ensure the success of family firm. 
 

David W. Wise (davidwwise@outlook.com) spent 15 years in C-level positions in family and closely held companies. He is writing a book on diplomatic history.

Copyright 2014 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.

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November/December 2014

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