Family businesses account for 70% of global GDP and 60% of global employment, according to a recent study by business school INSEAD. They are a key driver of global business and growth, so their sustained long-term value creation is important for the global economy as a whole.
However, the long-term success of family businesses is not guaranteed and it is certainly not an easy task. Many complexities are involved when ownership, management, and family roles overlap, and there are fewer clear distinctions between them.
A Chinese proverb says that “wealth will not pass three generations”. The first generation builds wealth, the second manages it and the third generation destroys it. The challenge often arises when the next generation takes over from the original founder, who had made personal investments in the business, while the next generation tends to have less of an emotional connection.
However, the founders and the generations that succeed them also have obligations to fulfill in order to ensure a harmonious succession for future generations. Unfortunately, they are not always available or willing to engage, leading to friction, conflict and a lack of engagement from the next generation. A long-term partnership requires both parties to be motivated from the start. That being said, there are cases where family businesses have successfully overcome this challenge. Japan's Hoshi Ryokan is an example of longevity. Operating a traditional Japanese guesthouse-style hotel with hot spring baths, the company was founded in 718 and has spanned 46 generations. This demonstrates that with regulated processes, proper governance and risk management, family businesses can reign supreme successfully for generations.
In this article, we will share some insights from consultants in the COMATCH network on how family businesses can fit into their business strategy and operations to ensure their longevity and prosperity.
FAMILY AND COMPANY ARE COMPLEMENTARY ASSETS
The long-term value of family businesses is driven by Performance (business) and Platform (family). Balancing the two drivers is key, as is looking at strategies from a long-term perspective. Performance optimization is crucial for survival as it generates income and dividends, while the platform must have the right configuration and be adapted to the needs of the family.
Sometimes success will come from the fact that the two pillars overlap in various ways, and sometimes it's best to keep them separate. It is important to remember that one of the key characteristics of a family business is that it is a business with "heart and brain combined" as opposed to a business purely focused on shareholder value, as an institutionalized business.
THE IMPORTANCE OF FAMILY OWNERSHIP, MANAGEMENT AND ROLES
The family should consider whether their business could benefit from a new owner, such as outside investors, such as private equity and large corporations. Some key questions are whether sufficient capital is available, whether significant future investments are needed, whether the new owner has more experience, and whether a family member has already expressed an interest in running the business. .
It's not easy for a family to bring outside investors on board or sell the whole business, but a different ownership setup can help because the family has access to capital, know-how make valuable, global market access and diverse leadership prospects.
Families must also be prepared for external attempts to take over and ensure that their ownership structure can meet these challenges. The family owners of French luxury brand Hermès learned a hard lesson when luxury and fashion conglomerate LVMH, led and controlled by Bernard Arnault, launched an attempted takeover of Hermès. Although they own 70% of the shares of more than 70 family members, they could have lost the business entirely if they had not created a holding company that would have the first right to buy family shares. This is the mechanism they created so that minority shareholders cannot cede to non-family investors, protecting them from LVMH and other potential attackers in the future.
The question of management is important because the family must decide who will run the business, thus determining whether the CEO is a family member or an outside talent. Selecting the best candidate should be a formal process, but the issue is often fraught with conflict due to personal expectations, lack of intergenerational communication, and unclear plans for success.
In Asia, communication between generations is generally less direct compared to Western cultures. When combined with an inherent respect for seniority, open discussions and potential disagreements tend not to surface, so issues can remain unresolved for a long time. In the next 5 to 10 years, many Asian family businesses will have to go through succession but their paths are less clear, despite the fact that the younger generations are increasingly speaking out and demanding clearer answers about the future.
Taking your time and developing an appropriate process, with expert help if possible, can help minimize conflict and guide the family through the decision. The key virtues here are patience, inclusiveness and transparency.
When Danish family business LEGO struggled to transform its business to suit its environment, the family decided to appoint an external CEO. Jorgen Vig Knudstorp, a former McKinsey consultant, joined the LEGO Group's strategy team and led the company's stellar turnaround. He regained his pole position as the family took on board-level roles.
Successful family businesses are characterized by certain distinctive traits:
Establish a clear vision of what the family –
and the company – brings to the world (goal)
Why it matters to stakeholders (financial impact)
Who will do it (leadership)
How the family will do it (organization &execution)
When they do (time balance)
It is a careful and curated balance of past, present and future.
LEGO said their “ultimate goal is to inspire and develop children to think creatively, reason systematically and unlock their potential to shape their own future – experiencing the infinite human possibilities”.
Family business strategy requires creating and defining distinct clarity at the core, defining and agreeing on a shared future vision among family members (often across multiple generations with diverse perspectives and motivations), and relentless leadership and execution of future global strategy.
FAMILY BUSINESSES SHOULD BE UP TO CONSTANT CHANGE IN A LONG TERM VIEW
Leadership in the 21st century will be influenced by constant change. The next generation of family leaders will need to deal effectively with multiple demanding global challenges, ranging from geopolitical volatility, technological disruption, economic and political uncertainty, the rise of new challengers like China, and evolving demographic.
Implications for next-generation family business leaders include learning to view challenges from both a short and long-term perspective, building resilience and character, maintaining perspective horizontal (industry) and vertical (business), balance global perspectives and local knowledge and develop strong leadership strategies.
Successful family business leaders develop and employ six strategic skills and important personal traits that will help them lead with clarity in turbulent times:
GOAL: Clarity of thought and a clear personal vision to lead the company and pursue this goal with unwavering focus.
RESILIENCE: A strong character and the ability to recover quickly from difficulties are also essential to manage the tumultuous changes of the company and to stay one step ahead.
NETWORKS: Crucial in family businesses, as a strong network of leaders will enable a leader to deliver relevant messages and effect change.
LONG-TERM OUTLOOK: Family business owners also need to take a long-term view to look beyond quick returns, empowering them to think and plan strategically to unlock lasting business value. Family businesses themselves are particularly conducive to this.
ADAPTATION AND AGILITY: Innovation is now becoming a health factor in businesses and family business owners must integrate disruption management into their strategies. This is not always easy as people want to maintain harmony and peace within the family, as is often the case in Asian cultures.
PEOPLE AND CULTURE: Last but not least, it is also important for a family business leader to be guided by their culture, ethics, values and beliefs, as this will create authenticity – something that is heavily overlooked in building brand and strategic management.
The success of next generation family business leaders will be defined by their ability and willingness to lead a powerful transformational agenda within their organizations:be bold, daring and different.
