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What the financial crisis means for family business education

Does the current financial crisis have an impact on educational programmes for families in business? Before attempting to find an answer to this question, you need to first look at the traditional educational offerings for family businesses.

Family business seminars made their appearance some 25 years ago, and since then have evolved into focusing on two main target groups. The first includes local family businesses that are served by business schools and universities that cater to the local community. These schools often establish long-term relationships with the attending families.

The second target group includes larger, internationally active family businesses that are served by a handful of globally active business schools. The educational offering for each of these target groups varies greatly. The locally oriented offering has a longitudinal objective of accompanying families through the various challenges faced over one or even two generations, and their services shift between education and consultation.

The internationally oriented offering attempts a comprehensive and compact transmission of knowledge, which typically triggers a transformational desire by the owning families. This often creates a subsequent demand for specialised consulting services as the families begin adjusting or creating governance structures as well as ownership and succession strategies.

Skills required by educators and key objectives for family businesses

Whether local or international, educating families in business equates to both an art and a science. Family businesses deal with interconnected family, ownership and business issues. Academics specialising in this field require multidisciplinary knowledge that is both broad and deep. Most academics struggle with this concept. After all, don't academics typically focus on one clearly defined discipline and know it as profoundly as possible? Yes, but in real life, families in business are not content with gaining deep knowledge about how one part of their business functions. This only means that they must then involve different academics for the other parts of their business. Instead, what they require is an integrated approach that is not only rigorously researched but also relevant in practice.

Family business educators are confronted with an audience that has first-hand experience with the issues and dilemmas of running a family business. As a result, they must have an in-depth understanding of families, ownership and business management. And they must be able to establish linkages between each of these and know how they effectively function in practice. Additionally, a typical family business class brings together a truly heterogeneous constituency: family members aged anywhere from 17 to 90, incoming and outgoing generations, past, current and future owners, passive and active owners, diverse interests, skills, educations and activities. The only homogenous part is the history they share as a family in business and, ideally, the interest and intention to somehow perpetuate the business as a community of owners.

Family business education is indeed a complex, multidisciplinary science. But it is also an art as it requires an ability to connect with each family on its own terms and help them discover different perspectives and more effective mechanisms, tools and ways to move forward.

A typical objective for family business seminars is to help address the following questions for families:

• Where are we now as a family in business?

• What are we good at?

• What are we not good at?

• Where can we go from here?

The educational curriculum, therefore, first focuses on providing families with a structured understanding of family business as a system. Frameworks such as the three-circle model and the evolutionary stages model build the foundation for a more rational perspective. Distinct governance structures for family, ownership and business underline the need for an integrated, systematic approach.

The second part of the curriculum explores how families utilise strategies, from an owner's perspective, to effectively drive business development and growth. At this particular level, families are confronted with, often basic, financially driven concerns, such as the links between growth, risk, profits and dividend payouts, which are mathematically driven trade-offs.

Finally, the curriculum includes a benchmarking component where participants gain practical and relevant insights into governance structures, ownership and business strategies from other family business cases. Generational transition constitutes an important element of the curriculum.

Family business education seminars need to first help families better understand their own internal structures and resources before exploring the most effective strategies.

How the financial crisis has impacted families in business

The global financial crisis has impacted families in business on three levels: the business, the ownership and the family.

With few exceptions, and still many unknowns, most businesses have experienced revenue losses. Entire factories – often dependent on export business – have been shut down. Workers have been laid off or asked to reduce working hours. Profitability has suffered and most businesses have
experienced financial losses to varying degrees.

On the ownership level, many families are facing liquidity issues just when they are most in need of new financial resources to prevent their suffering businesses from failing. Families who have borrowed funds to drive strong business growth may be facing increasing pressure from their lenders. Overall, the net worth of many families – from business and other investments – has been substantially reduced. In addition, individual family members who have experienced difficulties with their personal investments may be forced to liquidate part or all of their family shareholdings.

On the family level, intergenerational discussions and conflicts often arise around the level of overall risk taking. The younger generation, which lacks experience with periods of extreme upheaval, destruction, shortages and recessions, is often shocked by the realisation that growth is not the only but rather only one of several possible economic paradigms.

How will this impact family business education?

The financial crisis is a wake-up call to educators to revisit the academic curriculum developed for family business. Family business educators will need to reassess the need to incorporate basic finance into the curriculum. Family members – active as owners and managers – must be sufficiently financially literate to be able to adequately understand
balance sheets and profit and loss statements.

The following reflections on each dimension of a family business – family, ownership and business – should be considered by family business programme directors hereon in:

Families: A learning and discussion platform on the merits, viability and limitations of a growth paradigm should be incorporated. The key objective would be to help a younger generation better appreciate the macro risks that typically are not sufficiently and appropriately evaluated. Educational reference points and benchmarks may be provided by studying countries that have been ravaged by wars and crises, as well as industries that have been subject to extreme cycles, eg, the shipping industry.

Ownership: A learning and discussion platform is required on the tradeoffs between preservation and growth of family wealth. More longitudinal and comparative studies of diverse family businesses are required to effectively transmit the real and long-term cost-benefits of a wealth preservation strategy compared to a growth strategy and how families decide on possible combinations.

Business: There must be a clearer focus on the use of financial leverage and scenarios that include extreme worst-case possibilities, ie, financial system failures or break-downs.

The current financial crisis has created uncertainties that owning families, especially the younger generation, had not considered sufficiently or at all in terms of a realistic
possibility.

The academic community now faces the challenge of helping families in business to better understand these risk related issues and to reflect on how to be better prepared in the future.

 

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