I recently met a woman—I’ll call her Gladys — who owns a substantial enterprise that employs several family members and loyal managers. She is extremely proud of her company’s stature in the community and its ability to provide jobs and contributions to philanthropic endeavors. The only problem? The business has been consistently unprofitable. She keeps it afloat by infusing her own money, to the tune of several hundred thousand dollars for each of the past four years.
“How long can you keep that up?” I asked as we sat at a local café. She shook her head and stared down into her empty cappuccino cup. “Not much longer,” she said with a sigh. “But things will turn around soon.”
Gladys, it turns out, is so overly identified with her business that she can’t bear to face the harsh reality of her situation. Markets have shifted, the competition is fierce and her company’s once-sought-after services have morphed into a “so what?” commodity. Instead of doing what’s necessary, she’d rather maintain a façade of smooth sailing to her team, with a “We’ll try harder next month” approach. She is more concerned with the safety and protection of her inner circle than with facing the hard business issues head-on. In the meantime, she is enabling a broken business model while depleting her personal bank account.
Obviously, her situation is unsustainable. A business can survive only if it is profitable and competitive, which at times can require unpleasant cost-cutting or people decisions. Business and ego entwined
We may cluck our tongues in disapproval over Gladys’s denial, but her situation is not so different from that of other family firms in which relationships, tradition or comfort are put above the best interests of the business.
It is no wonder that business owners develop a great deal of pride in closely self-identifying with their companies. Family businesses, after all, are the backbone of our economy, creating wealth, success and rags-to-riches stories that are so widely admired. In fact, the interconnectedness of business and ego is precisely the reason why many family businesses achieve success, creating the impetus to work harder, serve better and offer more flexibility and responsiveness to customers than their bureaucratic corporate brethren. A family business can provide a sense of purpose and meaning to the family.
However, as Gladys can readily attest, it’s tough to be objective in a family business environment, especially with all of those uncles and siblings mingled in among the management decisions. Ownership can easily slip into behaviors that might be considered as superfluous perks rather than business necessities. Slush funds, for instance, where boats, vacations, cars or other personal expenses run through the business books. Or the practice of maintaining healthy salaries for certain family members, whether or not they are effective or even active in the business. These examples are commonplace among privately held family enterprises.
Look. It’s your business, so who cares? You’re the one who put the sweat and tears into building it to what it is today, and it’s your prerogative to do with it as you see fit. However, be aware that a one-time decision that may have made sense in a particular circumstance can move from exception to tradition and then to entitlement. Soon enough, those non-essentials are so intertwined with the family part of the business that it is difficult to undo.
Making the tough call
Phil Clemens, chairman and CEO of the Clemens Family Corporation (where I am a senior vice president), used the phrase “Business Family” several years ago, while we were leading the family through a major transformation, as an alternative to “Family Business.” The company, a third-generation pork processing business with more than 200 shareholders and dozens of family members employed, was facing stagnating performance and management decision-making gridlock. Ultimately, we brought the family three choices: (1) Do nothing, and watch the decline continue while the enterprise value slowly erodes, risking the family’s hard-earned wealth; (2) Sell the business, collect the cash and avoid all the messy people decisions and relationship hardships; or (3) Make dramatic changes to the business structure in order to improve performance, even if such measures are unpopular with family members and cause some rifts.
The family shareholders unanimously decided to choose door number three, making the tough call for dramatic change. Executive leadership was consolidated. Several family members were let go, or re-positioned to more appropriate roles. The board was recast to form an independent entity with more outsiders, and then given teeth to do its job. Performance targets were established, and people were held accountable. It was an extremely difficult time for the family, especially those personally affected by the decisions, but they held firm and held it together.
Since then, business performance fundamentals have drastically improved, casting a long shadow over prior results. Operating income has grown at a rate ten times faster than it did in the previous decade, and the enterprise value has quintupled. Shareholders are quite pleased these days, as they watch their stock growth consistently beat the S&P 500.
Shifting from a “Family Business” to a “Business Family” may look subtle on paper, but the implications of the two diverging approaches are profound. Here’s the difference: A Family Business is driven by family loyalty and harmony as a primary goal, causing choices that often trump profitability and performance, even to the detriment of the business’s long-term viability (hello, Gladys?). A Business Family, on the other hand, recognizes performance and competitive profitability as the main things that will provide long-term sustainability, outweighing short-term family loyalty considerations, thus becoming the primary criteria for decision making—even if it is difficult. A business family understands that family harmony is not a goal; it is a byproduct. When the focus is on performance, the business generates cash, which in turn leads to dividends, distributions and growth in stock value, and these are what set the table for satisfied family members.
Every business will sooner or later reach a crossroads, when what used to work doesn’t work so well anymore. Whether driven by competitors, commoditization or shifts in the marketplace, the time will come when the belt must tighten, and leaders must decide: Are we going to continue as a Family Business, or will we be a Business Family? A Family Business may find it impossible to make tough decisions, even if they are in the best interests of the business. They will hold off as long as possible, because it is too uncomfortable. Unfortunately, soon it will be too late.
A Business Family, however, will stand firm on making the hard decisions, understanding that what is best for the business is ultimately best for the family.
James B. Wood (jwood@clemensfamilycorp.com) is senior vice president at the Clemens Family Corporation, a $700 million pork processor and real estate company. He has worked previously for Ernst & Young and Inc. magazine, and is author of The Next Level: Essential Strategies for Breakthrough Growth (Perseus Press).
Copyright 2013 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.