Study of large family companies yields some surprising findings

By Barbara Spector

Tax and advisory firm Ernst & Young has been gradually releasing findings from its survey of the world’s largest family businesses, conducted in partnership with Kennesaw State University’s Cox Family Enterprise Center. The first wave of data has received much attention from the media (including Family Business Magazine; see my “From the Editor” column in FB, March/April 2015). The executive summary from the study, recently made available, includes some surprising revelations.

For example, 70% of the survey respondents said they are “strongly considering” or “considering” a woman as the next CEO of their family business. The companies examined have an average of five women in C-suite positions and four being groomed for top leadership posts. In more than half the companies (55%), at least one woman serves on the board. “Our survey participants are far ahead of the curve in gender parity in leadership,” the executive summary notes.

Those statistics are particularly noteworthy given the diversity of cultures represented in the study. The researchers drew their sample from a database of the largest family firms in the top 21 global markets. An independent research firm conducted telephone interviews with senior family members active in the business. Responses from 25 family businesses in each of the 21 markets were incorporated into the report.

Board composition

Nearly all (90%) of the companies polled have boards, with an average of eight voting members serving on the business board of directors. The vast majority of respondents (87%) reported that their board is doing a good or outstanding job. This finding is not terribly shocking, given that the companies represented were among the largest in their nations.

What is surprising, however, is the composition of these boards. Although having independent directors is considered to be a best governance practice in the U.S., the companies in the E&Y/Kennesaw study have a majority of insiders on their boards.

Nearly half the boards are made up exclusively of family members, and in only 28% is the number of non-family members greater than or equal to the number of family members serving on the boards.

Carrie Hall, who leads Ernst & Young’s family business practice in the Americas, says she did not expect the high percentage of inside board members. “It’s inconsistent with what I’m seeing as I work with family businesses in the U.S.,” she says. “I’m witnessing a movement to having more diversity and fewer family members.” The survey participants from emerging economies skew the survey results, she notes. In emerging-market companies, 95% of the boards are family-only, compared with 78% of the boards in developed economies.

Survey participants said their board meets face-to-face an average of six times a year. This is impractical in regions like the U.S., where boards include independent directors from across the nation and even around the world. However, notes Joseph Astrachan, who holds the Wells Fargo Eminent Scholar Chair of Family Business at Kennesaw State, what is known as a “weekly board meeting” in some companies is really akin to a management meeting. “You have that one patriarch who likes to hold court once a week, and they call it a board meeting,” Astrachan says with a laugh.

The family owners of these companies convene frequently, too. Nearly all (90%) of respondents said they have regular family or shareholder meetings to discuss business issues, and 70% have regular family meetings to discuss family issues.

In companies with employment policies, family members must work an average of three years outside the family firm before being eligible to join. Interestingly, only 56% of the survey participants have a mission statement, and a mere 13% have a family constitution.

Succession: A ‘perpetual process’

The families who participated in the study may not have created family documents, but they are taking care to be proactive about succession. More than 87% have identified who is responsible for succession; 44% said their board had this responsibility. Others cited as having succession responsibility included the owners, the family council and the CEO.

“I feel that those companies that are putting the board in that role are really making the right decision,” Astrachan says. The board, he notes, has the clout and the gravitas not only to vet the choice of the successor, but also to suggest to the current CEO that it is time to retire.

One main conclusion of the study is that the world’s largest family companies view succession as a process. “It should not be a one-time event, or even something that you pick up every so many years,” Hall says. “It needs to be a perpetual process, revisited as things change -- whether it’s within the family, within the business or externally -- and really viewed as a continuous exercise.”

“It’s important that it’s an ongoing discussion,” Astrachan adds. “Not just an ongoing discussion about who takes over next, but also when they take over, and when the current leader leaves.”

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