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Succession, social responsibility and success

Sabine Klein is a Research Fellow at INSEAD Fontainebleau, teaching family business at the University of Trier, and an associate with The Family Business Consulting Group, Marietta, GA, USA.

Justin Craig is a Postgraduate Research Fellow in the Department of Entrepreneurship and Family Business and an Associate of the Australian Centre for Family Business at Bond University in Australia.

Ken Moores is the founding and current Research Director of the Australian Centre for Family Business, Bond University, Australia.

Drew Mendoza is Managing Principal of The Family Business Conulsting Group, Inc and Family Enterprise Publisers.

Grant Gordon is Director General, IFB(UK).

The FBN conference presented many opportunities for delegates to learn about issues affecting family businesses

The FBN conference presented many sessions for delegates to take advantage of and learn from. Below are highlights from several of the "parallel sessions" presented over the course of main conference, which offered a number of interesting live cases and studies by family members and experts in the field of family business.
 
The Family Business House
Values are abstract concepts that are stable over time and situations. The Ten Commandments or the constitution of states are well known examples of value sets that are common guidelines. Once formed, values, shaped by upbringing, education, copying our parents and peer group mates, and sometimes by dramatic experiences such as failure, death, illness etc, guide our personal actions and decisions, whether we know our values explicitly or not.

As values are such a powerful element in every person's life, guiding as they do our decisions in business and family settings, it is very helpful to know your own values as well as those of your family, your partners and your friends. The problem is it is uncomfortable for us to simply ask, "What are your three most important values?" let alone be capable of quickly answering this question ourselves. Values are there, yes, but to find out what exactly the values are that are there it needs some work. The way in research to find out about people's values is in-depth interviews, recorded and written, and then analysed by document analysis. Why do we need such a complicated way? Values are abstract constructs, which are not too easy to define on one hand; on the other hand, values are something everybody knows he or she should have and there are a lot of "social correct answers" that might come up instead of the real values. The interview technique makes sure we find out about a person's own values and not about those this person believes are important to have.

If you want to find out about your own values and the values of your family, the less complicated more practical way to start this discussion in your family is the following: You start asking yourself and your family questions like the following:

- Is there anything I am prepared to die for?
- Where do I want to be in 20 years time and with whom do I want to be?
- As a family, do we want to do something together?
- If yes, what would we like to do together?
- How do we want to do what we want to do?

The process of value definition: Often, families find it helpful to turn to outside help for two common reasons. First, most families have never experienced the process of defining and clearly articulating their values before. Second, each family member is part of the system and it is tremendously helpful when you can discuss content without also being in charge of the process; simply put, to be a full-participant of the content, you shouldn't also serve as facilitator. A competent and independent facilitator with family business expertise should lead all family members to concentrate on communicating content effectively rather than being distracted by controlling personalities, people, meeting logistics, fair process assurance and note taking. After you find out about the values of yourself and your family you will be aware of their role guiding your family through the succession process and utilizing this process for a strategic renewal of your family
business.

Succession, strategy and values: Succession is the final test for a family business. Succession and strategic renewal processes are alike and, more importantly, critically linked. Both require or lead to an unfreezing-moving-freezing pattern, and both are built on values. In its hot phase, where things come to its climate and change takes place, the succession process starts with a trigger event such as loss of an important customer, illness or death of the entrepreneur, but also a fight of siblings concerning the business' private use. This is followed by the disengagement where old truths are no longer felt to be valid and a new one does not exit yet. A phase of exploration of choices follows which ends in a choice. To go through this process in a constructive way, successful business-owning families rely on shared values to arrive at values-based decisions which will endure for years to come. In comparing this process with the one of strategic renewal it becomes obvious that the succession process opens a strategic window for a renewal.

Strategic renewal means change: To change relevant issues and habits within an organization is a tough job. While succession takes place inevitably, in the worst case driven by the biological clock, strategic renewal does not necessarily have to happen. To avoid strategic renewal often means to keep the peace within the organization, even if the price for peace is zero growth or even worse, economical failure. If an organization wants to grow it has to check its strategy and change it if necessary. While during stable periods this kind of basic change is hard to archive during the succession phase change takes place anyway, this is why we speak about the strategic window for renewal during the succession period.

Benefiting from this strategic window: In order to benefit from this strategic window, we have to concentrate on strategy before we can cope with the structure of the business and the family. Many succession discussions start with structural questions such as "What will the ownership structure look like in the next generation?", "What legal form should our company have?", "What are the tax considerations of the decisions we're about to make?" They do not consider that before you can decide on structural questions, on how to organise what you want to do, you have to decide what exactly you want to do. After knowing the values of your family, the family needs a shared vision. This vision defines what you want to do together, what family you want to become over the next decade and on what you focus. It incorporates also the "how" to realise the aims, eg the Heraeus-family, a large family business in Germany with more than 150 shareholders, defined very clearly that they want to fulfil the high environmental standards required in Germany wherever in the world they produce.

The Family Business House©:  The value definition process is the foundation of your family business house upon which you'll place the family's shared vision. What would you like to do together and how would you like to do it? The vision for the family business is built on that. Knowing your vision you ask yourself, who are your actual and potential clients? Remember, client definition might change over time with the change of markets, change of habits of customers or change of products, but the values of the owning family – the foundation upon which we've built our business – mostly remain unchanged. Values only change through dramatic incidents such as death of a partner, economic failure or terminal illness. But because values are so critical for the whole process it is important to review your family's values from time to time.

When you know your (potential) clients you look at the market potential, your competitors and your family business' resources available to access those markets. There might be resources which are specific to your family business. This could be the way you finance your business, this could be knowledge you have accumulated in your family over generations, and this could be your family's and your business' reputation in the business world. If these resources are bound to your family business and more than that, if they are hard or impossible to copy by competitors and at the same time relevant to your clients, they should become a central part of your strategy. So, now you have a strategy based on your specific resources, your competitors' strength and weaknesses and above all, based on the needs of your clients. At this point of the process structure comes up on the table. This strategy needs structure to become reality. Based on your strategy you decide on the ownership structure, that is best to realize your strategy. The ownership structure incorporates the legal form, which gives your family business the frame it needs, as well as the governance structure that helps you to direct, to control and to account for the sustainability of your family business. The ownership structure should also address questions like dividend policy, financing growth and putting in place instruments to control the input of the family's business for every owner's personal owner strategy.

Deriving from the ownership structure, some questions of the leadership structure are already addressed, such as who is in charge of selecting the management team etc. Other questions still have to be answered – whether, for example, you should involve non-family members, under what condition you will allow family members to enter the board and what qualification is required. All the difficult questions that seemed so hard to answer before you had gone through the Family Business House© process are now a logical outcome of this process. And there you are with your unique Family Business House!
–Sabine Klein

Corporate governance, family values and social responsibility
Social responsibility is one of the many activities of corporate governance, but little is known about social responsibility, family values, social responsiveness, and economic performance relationships in family firms. The "Corporate Governance, Family Values and Social Responsibility" workshop addressed how corporate governance can be used to share family values to multiple stakeholders in a growing family business. Family owned businesses can benefit from properly understanding how strong corporate governance supports social responsibility and leads to stronger businesses. Members of two generations of Australia's Dennis Family Corporation shared their experiences and gave examples of the corporate social performance initiatives that they have, and are continuing to develop, and how these initiatives are benefiting their organisation.

The Dennis Family Corporation (DFC) encompasses civil engineering, residential land development, three home building companies, and development and investment of commercial property in Australia, New Zealand and, more recently in China. There are currently five family members on the nine-member board.

The core essence of the organisation is "Welcome to our Family" and the values that the family stand by to reinforce this essence are honesty and integrity, quality, passion, caring, and vision. DFC has a stated policy of remaining private and continuing to grow the business for future generations. To that end they have worked at establishing a sustainable structure to ensure the future of the corporation. The DFC board work together to fulfil their stated mission: "To build a long-term, sustainable and profitable business for the benefit of current and future generations".

With the assistance of consultants and by benchmarking themselves against successful family businesses, over the past five years the Dennis family have introduced a 'copy book' example of professional corporate governance to their second-generation family business. The family are conscious that they have a role to play as corporate citizens and although the company has been professionalised to include outside executive directors, family members are involved at all levels to ensure that the family principles are adhered to.

DFC is a comparatively young family business. As they professionalised their business, they were aware that they had to retain their 'familiness'. They are not dissimilar to their corporate equivalents in their need to balance good corporate citizenship with addressing the issues of a wide variety of stakeholders. By introducing the corporate governance initiatives they have set in place a sound framework that can keep corporate social responsibility on the family and business agenda for current and future generations.

One of the problems that faced the Dennis family as they moved from a totally controlled and managed family business to a totally owned and professionally managed family business, was to ensure that all stakeholders continued to share the family's vision. Senior management is responsible for delivering the strategy for 0-3 years. The range of board sub-committees that meet regularly and are attended by at least two family members, ensure continuity and consistency with strategy and the family's vision. The project control groups (PCG) have been established to guide the direction of specific projects or developments. Two family members are also represented on each PCG. Family members are not responsible for the delivery of objectives of the board sub-committees and PCGs, and participate in order to ensure strategy is followed and the family's knowledge and expertise is passed on. Finally, work groups also operate for specific requirements, eg IT, policy and procedures, strategic planning, again with two family members on each. In addition, bi-monthly staff communication meetings are held which are attended by all staff. This enables staff to keep abreast of the company's performance and allows for the flow of information across the organisation. The system of reporting used at the Dennis Family Corporation is strict. The lines of reporting are both vertical and horizontal: vertically through the work groups, PCGs, sub committees and board; horizontally within the discipline (ie land development, home building or marketing).

Grant Dennis, Executive Chairman of DFC, said, "We went through numerous challenging periods in setting up these structures, but basically two challenges had to be overcome: the family understanding the changes that the family business was going through and what the implications were, and management going through the changes that the family business was going through and what the implications were for them."

Once the corporate governance structures were in place, external directors were appointed to the board. Prior to that, consultants acted in an advisory capacity. Prospective directors quickly realised the benefit of the hard work that the family had done and that many of the difficult issues had been addressed. The result was that the values that the family stand for were easily identified and the strong community focus was an incentive for quality board members to join the family group.

"The way that we have structured the business now, there is not the family influence on the family business that there was previously," said Dennis. "So when we appoint candidates at a board level, they join a business that is commercially managed. When we sit around the boardroom table we discuss strategic operational business issues, not family issues. Our governance initiatives ensure that at every level of the organisation, the family's values are understood."
–Justin Craig, Ken Moores and The Dennis Family

When good boards don't work
Family business governance centres on the relationships among three interests: management, family owners and independent directors. All come together, of course, in the boardroom. Though still not the norm  – only about 15% of all family firms have three or more independent directors – more and more family firms heed the advice of family business consultants and advisors to assure the active participation of independent directors in the governance process. There are countries in Europe where laws may require the presence of non-family members on a board, although often these laws refer to only the very largest of privately held firms in addition, of course, to publicly traded firms.

Most discussion of family business governance concentrates on the relationships between family and management and between family and independent directors.  But the board-management relationship is equally important. While independent directors are known to be a great source of strength for the business' CEO and management, sometimes that relationship, especially with the CEO, is problematic.

A family business board works best when management and independent board members share a spirit of trust and mutual respect. Trust and respect begin with full and open disclosure of all essential information by management. Trust and respect are enhanced when the independent directors honestly put their personal assumptions and biases on the table while offering advice. Commonly, independent directors with no personal family business experience carry stereotypical assumptions about how family businesses work.

When board meetings are anticipated with a sense of adventure for shared learning by both management and directors, the board is working optimally. Then CEOs and managers anticipate and welcome new ideas, and independent directors thrive on brainstorming and teamwork.  An assumption of partnership and collaboration prevails.

Some of the best designed boards do not always operate this well. In our observation, boards that are otherwise well constructed and well intentioned still may not, in some circumstances, function optimally. In one situation, independent directors, frustrated by little change and minimal response within the company, are met with an equally frustrated management team. The CEO, or management, may view the board more as an adversary than as a partner.  Management may resist or at best cope with board input. Sometimes the CEO may concede issues rather than seek win-win solutions. 

In the different scenario, the independent directors alone are frustrated with the relationship. Unaffected by the board's contributions and insights, management does not recognise the board as a partner in business. They simply go through the motions of having a board without taking it seriously.

When boards are not working, tensions grow. Independent board members, on one side, argue that management lacks discipline and real accountability, and management, on the other, maintains that it is looking out for the long-term, intrinsic value of the company, and complains that the independent board members just don't understand this, or perhaps any, family business.

"We're not in the quarterly earning-per-share game," management insists.  "That's a cover-up," the independent directors snap back. The conflict spirals, with owner-managers believing the independent directors "don't understand us" and the independent directors feeling the owner-managers "don't respect us."

The key dimension: The CEO is often the key to the success or lack of success of a family business board. Many other factors can enhance the success of a board -- such as outside directors' understanding family business dynamics or family shareholders educated about the role of a board. However, we note it is the CEO and her or his philosophy of management which most profoundly influences a board's ability to function optimally.

When boards work well, we find that the board members individually and collectively respect the CEO as a leader focused on the process of management and dedicated to continuous improvement. CEOs with successful boards are characterised by openness, a devotion to learning, and enthusiasm about receiving feedback. Their need for control is less, perhaps in part because they aren't fostering conflicting constituent camps in the business (eg, management vs shareholders or shareholders vs shareholders) and because they really see all of the members of the business system pulling together for the common good. They view the board as a partner and a source of learning, and they look for ways for themselves and the rest of the management team to absorb and take advantage of the board's ideas and contributions.

Furthermore, CEOs who worked for public companies before starting or acquiring their businesses tended to have more successful boards than other founding CEOs. As a result of having absorbed the discipline necessary in public companies and having gained confidence from these earlier successes, they seem to respect the input from their boards more than other CEOs do. In other words, founding or acquiring CEOs who have had non-family business leadership experience (but not necessarily at the CEO level) seem more able than other entrepreneurs to turn their interaction with their boards into a collaborative model.

Still other factors influence a CEO's relationship with the board. For example, second and subsequent generation CEOs seem more able to work effectively with boards, at least in part because their psychological need for control is not as great as that of the founding generation.

On the other hand, when family owners are at odds with one another, no matter what the style of the CEO, the divisiveness of the family can be detrimental to board performance.

In some companies, the board works more effectively because the roles of CEO and chairman are separate. The chairman can focus on the process of board meetings. When the CEO and the chairman are the same person, there is less accountability at the CEO level as the CEO often avoids direct, critical feedback to him or herself.

Family Readiness
: For a board to be fully effective, the board's mission and the jobs of directors must be understood and accepted by shareholders, management and independent directors alike. Writing down the roles the shareholders expect of the directors is very valuable. Specifically, families tend to be ready to consider independent directors once they are prepared to accept advice and criticism, strategic planning processes of some kind are in place, and when owning family members generally want the same things. It is also important that the CEO's personality accommodate effective board performance, rather than be dictatorial or not open to input.

We have discovered that board success is fluid.  It shifts and floats depending on the many variables we have described: the generation of the business, business size, the CEO's personality and many others. But we believe that with continued, conscious attention to all the factors that make a board successful, including an understanding that progress may be made even when it's not easily visible, a business-owning family can enjoy the many benefits of a good board that works. Most importantly, a family business can be successful to the extent that it has achieved consensus on how success is defined and measured, and then holds itself accountable for achieving success. A board with independent directors can be invaluable in that process.
–Drew Mendoza in collaboration with The Family Business Consulting Group International

The Finnish case studies
The FBN Conference presented a unique opportunity for seven UK family firms and members of the Institute for Family Business who were at Helsinki for this special occasion to learn from the gathered family business owners and in particular the Finnish family companies. Over the 48 hours of the conference we were able to experience what a powerful forum FBN is for sharing experiences and knowledge.

As a forerunner to hearing the families themselves speak, local businesswoman Maarit Toivanen-Koivisto pointed out that one of the potential strengths of family business is the inner passion of their leaders who see the business as their life work. Supporting this assertion we heard from a procession of Finnish family business leaders who showed how their families managed to exercise responsible risk taking combined with entrepreneurial flair. The President of Nokia showed a genuine sense of humility and absence of arrogance in distinct contrast to the leaders of some large organisations in other countries. With trust, teamwork and high achievement being other values that Nokia  espouses, surely this company has something in common with many successful family businesses?

The case studies on large Finnish family companies, chaired by Professor John Davis, opened the doors to three leading players in their respective industries who had each been through transformational change of late. Hot on the heels of strong growth for their beer brands, the Hartwall company which had earlier become publicly quoted to fund an acquisition programme, refocused shareholder goals towards growth in market capitalisation. This culminated in a decision to merge the business with a global player in the beer industry and British leader in beer Scottish & Newcastle (S&N). Underpinned by the success story of their Russian affiliate Baltic Beverages, the company negotiated, on behalf of the family shareholders, a partnership with S&N turning down bigger cash offers.

With Fazer, a traditional Nordic conglomerate operating in the confectionery, baking and catering sectors, there has also been some re-focusing of the business portfolio into areas where they can achieve the status of regional market leader. We also gained insight into a well-established governance structure that includes an elected family council with well-defined responsibilities. The hospitality of this family on the opening evening of the conference will be remembered for many years to come.

Another large Finnish family company, Ahlstrom, had radically refocused their business strategy over a relatively short two-year period, emerging with an industrial manufacturing and trading company concentrating on the abrasives market, where they are now global leaders. The family outlined their goal to list the trading entity on the public markets in the not too distant future. At the same time the Ahlstrom family have set up a capital fund pooling other family assets earmarked for other new investment projects.

In the case studies of medium-sized Finnish family businesses, led by Professor John Ward, we gained some other valuable insights into the approach of firms in this country and the importance of social responsibility and family values in general. The Tulikivi company was highlighted as a business pushing the frontiers in terms of family and corporate governance. This family made the decision to appoint a non-family representative and person well trusted by all family members as Chairman of the Family Council. We heard the testimonial of Mr Hirvonen who gave us an overview of his role, touching on how Tulikivi's Family Council operates and his role as moderator for the family.

In the case of the Oras family company, whose business sector is water management systems, this case is a shining example of a company with a highly focused strategy skillfully implemented. We saw how they also attach strong importance to working on a day-to-day basis within the spirit of their family values. To ensure they abide by these beliefs, the firm constantly reviews the implementation of the values, even at employee forum level, thereby driving the values to all levels and parts of the company. The board also takes responsibility for keeping an eye on whether the company is living up to the family values and it monitors their implementation.

From the standpoint of the UK family companies visiting Finland we came away with the impression of a nation of family business entrepreneurs confident of their destiny, moving steadfastly to secure and build family wealth, and not shirking transformational change to their businesses where markets dictated. At the same time we sensed the deep commitment to family stewardship, underpinned by strong values and a deep sense of social responsibility. The combination of these values makes this nation, notwithstanding its small population, a shining example of achievement for family business all over the world.

We certainly all made new friends and acquaintances among the owners of the Finnish firms that we met and we left Helsinki spoiled by the hospitality of the people. We can now look back and appreciate the great privilege that we were afforded by being given a glimpse inside these family companies and by being able to take away a host of lessons that we can apply at home.
–Grant Gordon

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