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The Coutts Family Business Awards Roundtable

Roundtable panel:
Lucy Armstrong, chief executive, The Alchemists (Northern) Limited
David Molian, lecturer, Bettany Centre for Entrepreneurial Performance and Economics
Edward Nicholson, managing partner, Mercator Partnership Limited
Chris Swaffin-Smith, principal, Family Business Reflections

Campden FB: 2008 wasn't the best year for business; in particular, how did family businesses fare?

ARMSTRONG: I think we need to distinguish between the impact of the recession and the impact of the credit crunch and my experience is that many family businesses were more prepared for the recession than their public counterparts. That's because there was less pressure from shareholders to deliver returns over the short term and therefore they were able to undertake cost-cutting or longer-term planning earlier. But I think the credit crunch has hit them significantly harder than many public companies. The banks' own internal needs mean they have deliberately targeted the mid market because they perceive them to be of higher risk. Here in the UK, FTSE 100 companies are unable to access the Bond markets, so they have gobbled up all the domestic credit that's available. With the banks desperate to rebuild their own balance sheets they are literally starving the middle market to death, irrespective of performance in the business.

SWAFFIN-SMITH: Some family businesses are struggling but those already in a strong financial position and well-run are actually managing to weather the storm because their competitors are going out of business. There will be some winners in this situation, simply because they competently batten down the hatches and increase market share as competitors fall by the wayside, even though the market might be declining.

Campden FB: Also, family businesses are less likely to be highly leveraged. Is this one of the reasons why they are in good stead?

MOLIAN: Now is a great time to be boring, if you're a business. The conservatism of family businesses - which has earned them some flak in the past - has actually stood them in very good stead. The Coutts judging panel knows - from seeing large numbers of balance sheets - that most family businesses are not particularly highly leveraged. They have cash reserves and the prudent ones are now very well placed.

NICHOLSON: The difficulty many of these businesses have is trying to plan for how long this downturn is going to last, because surviving 12-18 months is a very different challenge from surviving two to three years. In the unfortunate case that this is a much longer process, some businesses will find this quite challenging because they will need to re-invent themselves and re-structure their businesses. That will be unusual for them.

Campden FB: So what set this year's successful nominees apart in the present climate?

NICHOLSON: One of the strongest things that came out of this year's competition was family values - what they stand for and how the business really represents what the family stands for. In times like this, the strongest family value that a lot of the winners had was family unity. They are there to stick together and it isn't about short-term results. They are trying to work through it together, not always under the easiest of circumstances. What you sometimes have is the younger family members striving to out-perform the generation before and striving to put their mark on the business and create their independence. But in the strongest families, they are looking to the older generation (who have been through this kind of thing before) and seeking their advice. This is going to create even more unity within family businesses than anything else.

SWAFFIN-SMITH: Last year presented a good opportunity for family businesses to look back at their values and culture and see what impact these are actually having on their competitive advantage. Are they actually making as much use of these as they could in the way they market their products and services? Many family businesses are better than they think they are. The standout entries were able to account for themselves in 2008. They were able to become more clear why it is that people buy their services, why people come to them.

ARMSTRONG: One of the key things they did was to focus on human relationships. In a period of uncertainty, all you can rely on is the human attributes and the trust that comes from long standing relationships. This is where some of the ethos of the family company is potentially much stronger than a public company where everything is modelled and rationalised so much that they have removed the human element. Also, in a period of great uncertainty, you can model as much as you like but you don't know what the future is going to look like, so you have to rely on who you do business with - your suppliers, staff, customers, the community in which you operate - and that's what these family businesses did. The idea that business is rational is ludicrous. Hopefully this climate will get us back to understanding that businesses are just as packed full of human beings as every other human endeavour.

MOLIAN: The mood of the times has changed significantly. The recent cult of individualism has been replaced by a sense of "we are all in this together". Austerity is back. There is now a sense of local engagement and a bigger purpose than just being about making money. This is something that family businesses can leverage successfully. They need to learn to box at least at their weight, if not above their weight.

SWAFFIN-SMITH: In those companies that were successful in the award this year, there was always a strong indication of innovative activity. They might have the battened down but they were nevertheless still innovating, whether in terms of product or service or the way they related to their customers. That was something that the family had all ascribed to and was taking on board.

ARMSTRONG: Family businesses have an appreciation of the change we are going through at the moment. It's akin to being pregnant. When you stop being pregnant, you don't simply go back to being "not pregnant". There is a completely new life there. The idea that we will go back to where we were pre-credit crunch when this "gets sorted" is wholly fallacious and families understand that. When you make a major change, you enter a whole new journey. There is no going back.

Campden FB: Indeed, companies need to bear in mind their long-term goals. How were successful nominees dealing with succession in these troubling times?

NICHOLSON: The successful ones are more conscious of succession. They have good procedures. The family is conscious of getting the right skills and getting the right person for the job, so it's not just a question of a candidate's family or the age. It's more about the right person and the best that they kind find within the family. But sometimes you will find that you don't have the right person within the family - particularly in times like these, because you need particular skills. This also goes for the non-execs and advisors you pick.

Campden FB: So what's your advice on picking non-execs or advisors?

MOLIAN: Certainly for many entrepreneurial businesses, they should choose the ones for the business that they aspire to be, and not the business they currently are. This is an important step in maturing a business. And I think this was coming through with the successful candidates. You can begin to see a pattern emerging among the successful ones that makes you realise that these people have been on a considerable journey and they are aware of the fact that they are not at their destination yet - that this journey is continuing.

NICHOLSON: But as a general observation, I think many companies lack sufficiently independent non-executives. They seem very reluctant to take them on and I think they would benefit significantly from opening up their boards to external views.

Campden FB: In terms of governance then, how did the candidates demonstrate professionalism and maturity?

NICHOLSON: There still seems to be a tremendous amount of informality in family business governance. The ones that really stood out were the ones that clearly differentiated family meetings from board or operational meetings. We would like to see more companies think about how they are conducting the family discussions outside of the boardroom. The other thing that came out quite clearly was that those family business separating ownership succession from management succession find it easier to deal with the issues of bringing in non-family members. Those that can't see a difference find it more difficult to see where non-family members would play a role.

ARMSTRONG: Yes, the real issue is whether or not you understand that being a shareholder is a different role and responsibility from being a director and from being an employee. Whether you have "Family Councils" or "Board Meetings" or whatever, they are merely the mechanisms by which you live that separation. In my experience, longevity of the business is the key factor in people coming to terms with the separation of ownership from management.

Campden FB: Philanthropy and corporate giving is prized highly in your selection process. In a tough economic year, how did nominees show a commitment to the human side of business?

ARMSTRONG: The key word here is "passion". And we were interested to see whether or not a passion for philanthropy fitted in with the beliefs and values sets of the family that were lived out. And it's not just about money. Writing a cheque is a pain free thing to do. But getting a group of shareholders or employees to do something is quite a different human activity from simply writing cheques.

NICHOLSON: A lot of these companies could think more deeply about what they are doing and how they want to give something back. It can often be very difficult to give to charity systematically unless it is embedded in the culture. You need to think very carefully about how you are going to do it, because it makes a difference to a lot of people. It needs to be part of the DNA of the business and of the family. The two can be very cleverly intertwined. The traditional families typically are very modest about their giving. In times like these, families are still doing things for philanthropy, they are just very private about it.

Campden FB: How do you think this award is helping families? Especially in such economically turbulent times?

SWAFFIN-SMITH: In terms of the potential for bringing the family even closer together and also to celebrate their success, this award really quite something, and it was encouraging that this year we had a significant increase in nominees.

Campden FB: Just how rigorous is the judging process?

SWAFFIN-SMITH: The families have to answer around 25 criteria by way of an interview, and they are given every opportunity to add as much colour to the answer as they want. The Evaluation Committee looks at what the companies have said in each case. They are not looking at somebody's interpretation of what has been said. In terms of rigour, each company is required to supply three years of financials, which are independently reviewed by a financial professional. Companies are also invited to submit their corporate structures, family trees, business descriptions, evidence of constitutions, and other information that provide an understanding of the company. Ultimately, the Evaluation Committee sees a lot of material and there is a lot of rigour to the process.

NICHOLSON: Last year I visited a couple of businesses and had four hours with the whole family. In the judgement process of the award, companies that do not win are given the opportunity to get feedback to help them understand and they didn't  get through. In many ways it serves as a corporate health check.

Campden FB: So do you think family business is ready to weather the current economic storm?

NICHOLSON: The feedback we have given the nominees is that we are in a cycle that could last two or three years or more. Businesses clearly need to be very focused on how they are going to pass through it. What's evident is that they are all prepared for a storm, but it wasn't really quite clear what they were really doing about it.

SWAFFIN-SMITH: This is a sufficiently complicated economic environment, but having a tangible plan is more necessary than just saying "oh it's going to be difficult".

ARMSTRONG: I think one unfortunate consequence of the economic downturn is that many companies will be reluctant to use external advisors or take on non-execs. But it is actually the precise time when they ought to be, because this is when you need all the help you can get.

NICHOLSON: The things that apply to make a world-class company are the same that apply to a successful, surviving, developing family business. And one of the most important things is always the use of outside people, networking, listening to lots of people, not listening to one person's advice, but actually trying to work out what is best for you.

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