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Success in family business

Joachim Schwass is Director, The IMD – Lombard Odier Darier Hentsch & Cie Family Business Center.

Mariano Puig, Chairman of Corporacion Puig, talks about the development of family business in Spain and the criteria for success

Joachim Schwass (JS): You have kindly agreed to be interviewed for this issue, which focuses on family businesses in Spain. You have an outstanding track record as a specialist uniquely qualified to speak authoritatively about this: you are a successful family business entrepreneur, you have co-founded the first Spanish association of family businesses (Instituto de la Empresa Familiar) and you have chaired the European Group of Family Enterprises (GEEF). What is your view on the overall importance of family business in the world?

Mariano Puig (MP): Much has been said and written about this, but I would like to highlight the following points: family businesses, particularly today, stand out for their long-term view overall, which separates them favourably from the often extreme short-termism that dictates public corporations. Family businesses represent the backbone of society as they meaningfully express and transmit the values and the culture of family. I will never forget a conference I attended over 30 years ago in New York City where the then Chairman of Procter & Gamble told the 400 or so employees present in the room: "We are all a great family."

To me, this just did not sound right. In good family businesses, the true meaning of the word "family" comes out visibly every day. The active family members are present and play a role in management; the inactive family members contribute by being ambassadors. The family represents an anchor in a world of uncertainty.

JS: Is the long-term approach always a good approach?

MP: Building for the long-term is a meaningful, good approach. But long-term can also be an excuse for inefficiencies. Clearly, a long-term view and approach must go hand-in-hand with professionalisation at all levels within the family business.

JS: Today, Spain takes a leading position internationally in building family business knowledge and competence effectively on many levels throughout the country. How was this started?

MP: In the late 1980s, several Spanish family business owners became aware of the emerging field of research on family businesses. We created a small task force and discussed how to learn from others and especially help on succession issues. Additionally, the economic system did not consider the importance of family businesses on a macro-economic level. We then decided to launch the Instituto de la Empresa Familiar (IEF), bringing together 100 of the most important Spanish family businesses.

The objectives were to show the importance of family businesses and to help family businesses become better at what they were doing. We enlisted academic help to research best practices and to educate family businesses about their specific challenges. The idea was to provide the broadest possible benefit of this knowledge throughout the country.

Therefore sub-chapters were formed in all regions of Spain. Over 700 family businesses are part of this group. They benefit from specialists from inside and outside the country who share the latest and most advanced knowledge. Round-table events focus on experience sharing. Through the initiatives of the IEF, today a total of 12 academic chairs exist at regional universities, researching and teaching family business to young students.

This has led to a very interesting phenomenon in the employment market: historically, university graduates favoured the larger multinational corporations for their first job. Today, family businesses have such a strong and positive image in society, that family companies have no problem in attracting the best and most competent university graduates!

On the political side, we demonstrated the damaging influence of inheritance taxes on the continuity of the business. We often spoke of families owning a business being "paper rich but money poor"! Inheritance tax on business assets can be very counter-productive for a national economy: if a payment of taxes requires a company to be sold, often to a multinational corporation, frequently this leads to a loss of employment and even transfer of production capacity to other countries. Today, the situation is much healthier for Spanish family businesses: families in business have a long-term perspective on investments since they do not have to fear excessive inheritance taxes if the family wants to continue to own and manage the business for at least another 10 years following a succession event.

Over 70% of the Spanish gross national product is generated by family businesses; they have a stronger balance sheet and a healthier capital structure now. In fact, Spain has experienced stronger growth in the last decade than most other countries of the European Community, and family businesses play a great role.
 
JS: What is the role of GEEF in this context?

MP: GEEF, the European Group of Family Enterprises, is a complementary organisation to FBN. While the FBN concentrates on educational activities around the world and has an independent non-commercial approach, GEEF's role is to sensitise the European authorities to the specific legal and fiscal needs of family businesses.

Traditionally, the governments ignored the existence of family businesses as a separate identity, the usual business categories having been either the small- and medium-sized corporations (SMEs) or the large, public corporation. I have had the honour to be the Chairman of GEEF for five and a half years. During that period we undertook several benchmark studies that demonstrated the huge importance of family businesses to the national economies of the EC member states. In  2000, the European Commissioner of Enterprise Policy went on record for the first time to talk about the significance of creating a healthy environment for family businesses.

Personally, I found it a very challenging and gratifying experience to defend family businesses on the highest levels of governments. I met many interesting people and stepped down on 1 July 2002, handing over to our German colleagues, and now hold the Honorary Presidency.

JS:  Let us talk about your experience as a family business member.

MP: My brothers and I have experienced two succession processes: one with our father and the second with our children. Our father, the founder of the business had built a small perfume business in Spain. After my chemistry studies, I joined the business together with my three brothers. Our father told us that we should stay and work together as this would be our strength. And that is what we did within the framework of functional separations: brothers one and two worked in the perfume business, brother three in diversification and brother four in institutional relations for the group. This has worked very well for the family and the business.

But as we moved into the second succession with our children, namely 13 cousins plus four brothers of the second generation (17 shareholders in total), the model had to be changed and adapted to the new circumstances. Our approach to this next generation was to start planning very early and not to see succession as an event but as a process. In fact, it took us almost 10 years and we are still working on certain aspects of it today. It is like a video cassette: you start, stop for a while, then start sometime later, possibly having to rewind to an earlier part and then continue until you start it up later again.

Our starting point was to invite the third generation to produce their own vision for the family business. We, the older generation, gave the next generation the assignment to produce a concept of where they would see the family business in ten years. They did this very effectively and submitted a strategic development plan, which – after some discussions and modifications – we all jointly underwrote. The strength of this approach is very simply that the next generation is able to develop their own entrepreneurial approach and that they are hugely motivated to make it a success.

JS: Another element of the generational transition was the staging of a formal event as a sign of celebration.

MP: We wanted to show and tell all stakeholders around the family business that a new era starts with the third generation coming in. We invited employees, clients, suppliers and many more to a formal hand over event from one generation to the next. This told not only the others but also ourselves that a change had taken place.

JS: With the next generation taking operational control, what was the role of the outgoing generation?

MP: My work focused essentially on designing and implementing a new governance structure that regognised the need for more professionalization on all levels. This is a sensitive issue as it is about handling power. With ownership increasingly spread among a larger number of family members, equitable representation is essential.

On the other hand, entrepreneurial competence must also have a place on the board, as well as neutral non-family representation. We have worked for four years on finding the structure that is right both for the family and the business. We also have an effective nomination committee in place that is made up of both family and a majority of non-family members.

JS: As the family size increases from one generation to the next, the needs of a family often tend to differ more markedly from the needs of the business. How do you address this structural diversity?

MP: The family is driven by a more egalitarian culture, whereas business is cold, rational and selective. Communication is vital to bridge these differences.

We now have a family office that is run by a full time non-family team. We have a quarterly newsletter for our 17 family shareholders and other family members. At least twice a year, we have family meetings with all family members including in-laws. Again, we take the approach to communication very seriously and have institutionalised it as much as possible.

JS: What are the lessons you draw from your involvement with family businesses over such a long time?

MP: Families must understand that things change and that they must anticipate and plan for these changes. And that takes time – often a lot of time. There is a transition in the life of active family business members: you move from operational activities to governance structures. Planning, thinking, communicating, listening and being logical – these are the ingredients for a successful family business.

In general, I am confident of the future of family businesses around the world. Just recently, I returned from China where I had the opportunity to meet government members who showed a strong interest in family businesses, which they are developing more and more, and they invited me to chair a round-table discussion on how to support the creation and growth of family businesses. This is a hopeful sign for family businesses everywhere.

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