John A Davis is faculty chair of Harvard Business School's executive education program, Families in Business.
When a family business goes global, by choice or by circumstance, the family could then face the further decision of whether or not to go public. Will this make the business easier to manage or will the family lose control? John A Davis explores …
In this highly competitive, and increasingly global world, more family companies are either being forced or are choosing to be a global player in their industries. While in some market niches a global business can operate largely out of one site, generally speaking, going global requires the business to extend its operations to several locations around the world.
Spread out geographically, operating across time zones and languages, and sometimes operating around the clock, global companies are in a different league of competition, requiring greater skills and resources to compete successfully. A global family business also requires something more from the family in business; this is especially true when the global family business is publicly traded.
Some family companies have economic models (demonstrated through their high gross margins) that allow them to remain private while operating globally. These firms fund their reinvestment and growth through their earnings and debt. Family-owned SC Johnson & Son, a private, multi-billion dollar consumer products company operating in nearly 70 countries, is an admirable example of this type – Samuel Johnson (pictured) successfully took the company public). In fact, private ownership has many benefits for a global company, and most family companies that can stay private while becoming global probably should.
But many family companies cannot adequately fund the operations of a large, international business without public money. Consider the family companies in the fashion industry that have taken this plunge as they became global: most of these firms would say that going global couldn't be done otherwise.
The global, public family business is an emerging type that we should understand as it requires fundamental adjustments for the family company, the ownership group, and the business-owning family.
The big decision
As we have seen in the previous article, going global is not always a choice. However, choice or not, it carries certain benefits and costs, and imposes certain standards on the family and business. The same can also be said for going public.
The decision of whether or not to go public would be clearer if it were easier to anticipate and articulate the major benefits and costs of the decision; easier to inform and educate the family (and especially the key family owners) about these factors; and easier to weigh these factors rationally to arrive at a clear and comfortable decision. Unfortunately, the costs and benefits are not always clear (and some obvious ones are not recognised). Also, the result will have status and power consequences for key decision-makers, which often makes it emotionally laden and difficult to fully discuss.
Added to these factors, the decision to go public often becomes pressured by tight timelines and by advisors who have significant self-interest in the family business going public. However, advisors know a lot more about this process than the family does as they have taken companies public many times, while a business family does it once in a lifetime.
Benefits and drawbacks
In going public, the business gains more capital for growth and all employees – family and non-family – can benefit from greater opportunities. The higher status of public firms can improve the visibility and reputation of the company and help it find better customers, suppliers, bankers, and employees.
The presence of public owners (and their representatives on the company's board) can help steer the company toward activities and practices that increase the company's profitability and value. It could very well be that public companies implement more professional management practices.
In a public company, family owners will see their wealth increase and have access to greater liquidity and a way to exit the ownership group. Conversely, the ownership group can shed owners who don't support the goals of the business. Diversifying the family's assets (by selling shares in the public family company and investing in other assets) allows family members to lower their investment risk and increases inheritance options within a family. Greater wealth and liquidity and the means to reconfigure the business family can strengthen family unity, increase the opportunities and resources available to family members, and improve family performance.
On the other hand, public ownership is suspected of distracting companies from long-term goals and investments, and ultimately of lowering the performance of the family business. The ultimate report card on public companies suggests that they are necessary to exploit certain market conditions but that they are inferior performers (on a number of dimensions) to their private counterparts. By going public, family control over the business is at least diluted; non-family board members join them at the board table and in some cases, the family is in the minority.
Experience shows that a family's identification with a publicly-traded business and its commitment to it is more likely to wane over time, resulting in the family eventually losing ownership control of it. This generally occurs because the business grows (in part because of the infusion of the public's money) beyond the abilities of family members to lead it, family involvement in the business decreases, and the family loses its business leadership roles. We don't yet know enough about the impact to a family of losing control of its business; both positive and negative examples abound.
We do know, however, that if their business goes public, the family business leaders, the family owners, and family members must treat the family business in a different way. Family owners, family board members, and business leaders must learn about the standards and regulations of the public market and respect the rights of public owners. Family owners can know more about what is happening in the business than the public owners do, but they cannot act on this information or manage the business for personal gain, as happened in Adelphia in the US and Parmalat in Italy. Benefits flowing to family members from the business need to be scrupulously monitored to ensure that public owners are treated fairly.
To improve the chances that the family owners will be disciplined in their holding of family company shares, and that sales of shares will be orderly and not threaten family control of the business, shareholders agreements are needed. The business family needs to strengthen its unity and develop pride in and stewardship of the business, to counter the ease of exit and the lure of liquidity. Family employees must step up to a higher level of professionalism in the business if they expect to keep up with the growing, financial performance oriented business, let alone lead it. This entire scenario cries out for strong governance of the business, ownership group, and family.
Becoming a global, public company is generally motivated by the desire to keep the family business strong and to achieve its potential, with little understanding of the benefits and costs or the requirements it will impose on the business family. A family should go in with its eyes wide open and prepared for its new existence. But it must be recognised that it isn't for all business families.
To successfully implement these competitive moves family employees, family owners, and other family members must step up to new requirements. The family must renew its commitments and efforts concerning governance, family education and family unity. This requires considerable time and effort, and the same commitment to invest in the family as in the business.
Some family businesses and business families would be better off if the business remained private and smaller, or was sold if that was necessary to keep the business healthy. But for those families that do make the commitment and investment, the rewards are many.