Steve Waichler is a director of Follett and president of the Waichler Family Council. John Ward is Wild Group professor of Family Business at IMD in Switzerland. www.johnlward.com
Employing family members can be fraught with problems, but, argue John Ward and Steve Waichler, if it's done with care and there is a good training and reward system in place, loyalty and commitment can strengthen your company and give it an edge
A successful entrepreneur was explaining the difficulties of making his enterprise a family business. He built his business rapidly by acquiring and turning-around companies and now he faced a challenge. In business, his mantra had always been: "Find the right person for the job." To which he added: "And that's rarely a family member." He believed particular skills and experience were required in each instance. It often required real accountability.
Nepotism was contrary to this vision. Many cautionary tales are told about nepotistic failure, but few stories are told about nepotism's role in sustaining success. People prefer colourful, tragic stories that portray a family's fall – and, indeed, there are many – to the more complex, often less dramatic tales of continuity and success. Despite conventional wisdom, nepotism often gives family businesses a competitive advantage.
Building on a business foundation
Early in the development of family businesses, their competitive advantage is often built on "sweat equity". Family members are known for working harder, longer, and for less immediate reward than others. They see value being built in the enterprise over time and know that ownership will be the deferred reward of their labours. Often the whole family sacrifices and contributes to this effort, whether or not they work in the business.
Discipline and long hours are often necessary to pay off debts and establish a business, but greater value can be built, retained and transmitted in a business than in almost any other way. All this remains true, even in mature businesses that are many generations old. Success, however, leads to the cautionary tale of nepotism: comfortable succeeding generations will squander the hard built equity of the past. This story is universally known, but long-lived family businesses tend to overturn this convention. In many of the most successful family enterprises, family successors have built ever-larger businesses on the foundation of the family's sweat equity. The positive role of the family successor in this process of capital preservation and growth is often misunderstood or ignored.
Building from a shared vision
As the number of family owners increases by generation, their direct involvement in the business tends to diminish. Simultaneously, as a business grows, professional managers tend to take on more responsibility for day to day operations. Over time businesses and families change scale in ways that impact on their needs and organisation.
Maintaining mutual understanding and goals becomes increasingly vital and challenging. Often, the two realms of ownership and business must develop separate strategies for continuity and growth. These strategies must remain mutually informed and compatible, and family successors often play a vital role in this process. The family ownership must be clear about its tolerance for risk, and its expectations for growth, returns and liquidity. Likewise, the business's capabilities, potential and capital requirements must be understood. Often, family successors embody this combination of ownership and business knowledge and lead this unification of strategic purpose.
The power of the family's vision should not be underestimated in the long-term creation and preservation of value in family businesses. The transmission of value is often a key ownership consideration, leading to lower levels of capital extraction and taxation. This can help build a competitive advantage for the business by maintaining stability of capital resources and providing a long-term opportunity to build market share and scale.
In addition to fostering stability, family successors can help to create a unified strategic purpose in times of change. Their presence often makes family businesses more nimble and responsive. At times, family branches must be pruned, or new business models created. In each case, a family successor can help assure clear communication and adjustments.
While clarity about entry is good, the most successful family companies also focus on creating a strong career development process for family members. Many long-lived family businesses provide family members with mentoring by professional managers. Potential family successors are systematically moved around within the business, giving them broad exposure to different responsibilities and operations. They undergo rigorous business training and also learn the culture.
Many of the best family businesses are nepotistic in this way, giving their family successors special opportunities to grow professionally. The best also assess performance objectively and rigorously, and provide advancement based on merit. Preparing leaders well is critical, and family businesses are adept at this. They often recognise that good leadership requires the preservation and transmission of idiosyncratic knowledge, both in the family and the business.
This information is developed from long experience and helps family businesses achieve many of their strategic advantages. Family leaders take the long-term view. They learn the ups and downs of their industries and how to manage business cycles. They maintain perspective, in good times and bad, and stay patient.
They can help persuade family owners to buy into appropriate levels of risk and investment. In addition, the combined history of the family and business often contains stories and words of wisdom that serve to transmit both ownership and business values. Many of the lessons learned come from daily experiences with family members, customers, vendors, partners, and employees.
In addition to their rigorous business training, many family successors receive an informal indoctrination throughout their lives. They hear stories at the dinner table, meet customers, visit trade shows, and learn the family's values through daily life. They meet people – partners and suppliers – and often begin building relationships and understanding early in life. They experience the emotional demands of a family business by observing their parents and other relatives, which can be as valuable as understanding the cycles of the business.
Reinforce competitive advantage
Leadership transitions can be especially challenging in family businesses. Often, the family and business mature rapidly, and finding the right successor can be difficult. The required skill-sets and competencies of leadership change and grow more rigorous with time. Many long-time, family CEOs feel they would be unqualified to get their jobs today. Current successors need more preparation, and by many measures family successors can seem unqualified. Yet they often remain the best person for the job. Not because of particular professional experience or competency, but rather because their presence can help maintain the competitive advantages of idiosyncratic knowledge that spans and relates the business and its ownership. This close – even nepotistic – tie is one of the critical elements underpinning the competitive advantages of many family businesses.
While it goes against conventional wisdom, many of the most successful families come to understand the positive side of nepotism. Even that highly successful entrepreneur, who was struggling with the issues of creating a family business, came instinctively to this same conclusion. Not all of his children came into the business, and only one of them – a daughter who worked hard – became a leader. Her preparation was rigorous and her high performance consistent. If this had not been true, her father was prepared to cash out or turn to professional managers. But he was also prepared to see if a family successor could develop into his challenging role.
Despite his business mantra he found that a family member was the right person for the rare role of leadership. Ultimately, he recognised that his daughter was the best person to assure the preservation of the idiosyncratic knowledge he had spent his lifetime acquiring for both the business and the family.