Running A Family Business?

We have a lot of experience in dealing with family businesses. They have particular needs and stresses, many of which are outside the usual ambit of businesses consultancy.

Family businesses account for some 80% of companies worldwide. They employed an estimated 11.9 million people in the UK in 2014, equivalent to 47% of all private sector employment. In the US, according to the Bureau of Census, about 90 per cent of businesses are family owned or controlled. These businesses account for half of US employment and half the Gross National Product.

However, according to the Family Business Institute, only 30% of these organizations last into a second generation and only 12% last to a third. Only 3% last to the fourth generation or beyond. Joseph Fan, of the Chinese University of Hong Kong, tracked 214 family run firms in Taiwan, Hong Kong and Singapore and discovered their values dropped by an average of almost 60% in the eight years following a change in CEO.

Is it possible to run a family business as effectively as a corporate? Many UK owner managers I have come across in my career are often scathing of the waste they perceive in “big business”. In most cases, they could learn valuable lessons. Here are some of the obvious ones I have come across.

Leadership vs Management

In many cases, a business has been started by one or more entrepreneurial family members and, having struggled to bring their dream to fruition, he or she feels entitled to enjoy the fruits of their labour. This often includes bestowing jobs on favoured family members and arranging their affairs so they work less and get paid more. There are always reasons why this has to happen and, of course, no-one would begrudge the architect of the enterprise their little pleasures when that same person has seen fit to employ them. The price for candour is often a prompt return to the real world via unemployment.

So an individual’s family fiefdom becomes enshrined in the structure and hierarchy of the business. This may not, in itself be entirely a bad thing. The skills needed to forge ahead in a start-up are not the same as those required to manage and grow a steady state mature organisation. Similarly, there may be technical or cultural innovations which are more familiar to the newer generation. Often, a patriarch or matriarch will help their offspring to attain higher education levels than they themselves could reach, or direct them towards specialist vocational training to help them take the business to a higher level. By no means all family businesses are badly run, but many – if not most – could be run better.

The main problems occur around the exit and transition of the “Leader”. Sometimes this process is driven by the financial and tax considerations. It is often more affordable for a founder to stay on the payroll as an alternative to a pension, as the business could not afford the drain on capital which an annuity would entail. In many cases the historical drain on cash flow which would have been needed for an adequate pension was beyond the means of the company. It seems fairer in many cases to keep a founder as Chair of the company on a salary as he or she then has, “skin in the game” and shares the risk as well as the reward. Sometimes, a founder will pass on their controlling shares and dividend rights, in a move comparable to “King Lear”, intended to hand off responsibilities, while maintaining an income even if profits fall.

This lack of foresight is not just resource based. Often, an individual with entrepreneurial and leadership qualities is lacking in management skills and vice versa. They may be incapable of recognising this skills gap, or undervalue the skills themselves. This can lead to a “one man band” mentality, where only procedural tasks are delegated, so there are no economies of scale or synergy. Such “one man bands” can grow pretty large, think Agnelli or Hearst, but by surrounding themselves with “yes men” and crushing initiative and autonomy in management they are always on the verge of crashing out when the “leader” either loses his touch, grows old or infirm or dies. I remember a friend of mine joining Mirror Group Newspapers many years ago and being told he would have to collect his car park pass from Robert Maxwell personally. When Maxwell died, the business had to be acquired, as the spinning plates crashed to the floor.

Transition Planning

One characteristic of family businesses I regularly encounter is what I call “empty chair syndrome”. A founder creates a hierarchy where management decisions are fed up the chain. Managers are not given autonomy, or are afraid to exercise what initiative they possess because such decisions are “second guessed” by the “Leader”. There is no, “horizontal” communication, whereby departmental managers of equal rank can agree and implement action plans without recourse to the CEO. This means as soon as the CEO’s chair is empty, the result is corporate paralysis.

Worse still, anyone who manages to insert themselves into the empty chair following the exit of the Founder is imbued with his or her spirit and instantly given the power to decide strategy and implementation on a whim. A lack of debate and analysis is considered to be a beneficial feature of this arrangement, as no bothersome research and business case preparation is required.

Succession planning for such entities is particularly difficult, because no culture of responsibility has been fostered. A son or daughter, still grieving from recent bereavement, has often taken the reigns of the family business only to find massive holes in the finances and both customers and staff, particularly the good ones, rapidly evacuating the sinking ship. They can do nothing but watch and be blamed by the family for not being a patch on the old man as the whole edifice crumbles. They are then not only held responsible for their own declining fortunes, but for those of their assorted friends and relatives.

Corporate Governance

Lack of corporate governance is another issue plaguing family firms, and not just SMEs. The most striking to me is in the area of employment and can be summed up in one phrase, “what are the chances the best person for this job just happens to be your child?”

I have met numerous CEOs of family businesses who are scornful of investing in marketing, IT or new machinery, yet think nothing of employing an unqualified and inexperienced family member in a mission critical role. The risk of not being able to find enough work for a new machine pales into insignificance when confronted by the damage which can be caused by incompetent offspring.

Accompanying this is an almost wilful scorn for such procedures as recruitment by CV and interview, Organisation Charts, Business Plans, Job Descriptions, Performance appraisals and, in many cases, common courtesy and politeness. Common excuses for these failings include, “we are all family here”, “I haven’t got time for all this new age nonsense” and “all this admin and paperwork might work for a big business, but it is a waste of effort for us.” As the old adage goes, “If you think working with professionals is expensive, try working with amateurs.”

Risk Management

The other main area, where family businesses fail when compared to the ideal of joint stock or publicly quoted entities, is in risk / reward analysis. I have seen projects given the green light because a family member is interested I them, or because it will get them off the CEOs back, or even because it will give them enough rope to hang themselves!

By the same token, if you are a manager on a salary and you have to make a decision as to whether to borrow the money to green light an investment, or alternatively retain the funds in reserves, the chances are you will make a reasoned judgment. Consider how much more precarious the balance if the alternatives are a new lathe or a new car?

Summary

If you are a successful, entrepreneurial leader and founder and you want to provide for your family’s future, then try building an efficient, well run business, with talented individuals as employees and let your beneficiaries squabble over the dividends, or better still the interest.

If you have just been part of a transition, or have inherited a family business, you have a measure of sympathy. The only solution is to make sure any underlying strength of the business is not compromised by its leadership, or lack thereof. Growth, Profit and Investment are the only ways in which future generations can benefit from your legacy.