Added family values

John Ward is Wild Group professor of Family Business at IMD in Switzerland and professor of family enterprises at Kellogg School of Management. www.johnlward.com

A survey of around 500 family businesses has confirmed some previous observations – including the core goals of continuity and financial success. The research has also revealed some resistance to change, including the role of outsiders, writes John Ward

After 18 years, the IMD Leading the Family Business program now has more than 1,000 alumni from around 500 companies. We have collected information on each of these companies. While the sample is not representative of all family firms, big and small, the world over, it is likely to be an excellent picture of the readers of Families in Business.

The conclusion from the results of both studies – the IMD experience and the financial performance of the world's largest 1,000 companies study – is that family firms are successful and might even be more successful considering and embracing conventional best practices for families in business.

A total of 25% of the 500 companies were founded in the most recent wave of entrepreneurship from 1975 until now; 31% were founded during the post World War II business formation boom era; 25% were founded in the first half of the past century; and 19% are centurions.

But tracing the generations of involvement and the stage of ownership evolution tells even more about the challenges and needs of a family. As expected, the most prevalent successions or transitions are from a first generation founder to a second generation partnership (18%) and from a second generation sibling team to a third generation set of cousins (19%) and retaining the large cousin ownership model as the business passes from the third to fourth generation (8%). But many family businesses have one or more generations where the ownership size structure does not change. About 45% of all businesses follow a consistent growing family, growing ownership path, but more than 32%, at least once, do not expand the ownership group from one generation to another.

Most importantly the critical issue of family business success can be clearly seen. Fully 73% of all self-described family businesses must address the challenge of a small partnership of individually significant owners, in the present or in the emerging generation, working well together as a team. And secondly, 53% must learn how to organise and keep engaged a large group of relatively small shareholders.

Those two issues are the core success requirements in all countries, or in any industry. A final observation on continuity: the rule of thumb that roughly half of all family firms pass successfully from one generation to the next is approximately correct. The IMD data provides information on two further questions about succession and continuity. First, 7% of the firms have a female family member as CEO/managing director. And, looking to the future, 18% expect that the next CEO of their firm will be a woman. Recently data has been collected on the prevalence of non-family CEOs (about 21% of the time) and non-family chairmen (about 11% of the time).

Secondly, despite everyone knowing how important proper succession planning is, still too few do it. Only 18% of the 500 companies say they have a formal succession plan in place, 35% say they have an informal plan, and 47% admit to none. On the other hand, older firms have learned the lesson, at least many of them. Around 29% of firms over 100 years old have a formal succession plan and only 26% report none.

Continuity is one core goal of the family business universe. Good financial success is the other. There's a great debate on whether family firms are more profitable than non-family firms. The differences of opinion centre on the definition of "family business" – whether founder controlled firms are considered family firms and how much of the shares the family needs to vote to act with control.

Those who include founder controlled firms and accept only a few percent of the voting shares as effective control show the superior performance of family firms. Those who exclude founder firms have different results.

Financial data on the 500 IMD participating companies has not been collected. But to address the performance question, the 1,000 largest publicly listed companies in the world were examined in a separate study. And the definition of "family controlled" was more rigorous than any other study known: the family controls at least 20% of the voting equity; there is more than one family owner; and second or later generation family members are involved.

A total of 79 of the 1,000 firms are deemed as family controlled businesses, about 8%. It is interesting to note that 60% of the world's largest family firms have headquarters in Europe, 25% in North America, and 15% in Asia.

The family controlled firms are substantially more profitable – with returns on invested capital more than 30% higher. They are also, on average, larger in revenues but less than half the assets.

Ownership and vision
From the beginning some data was collected on the participants' experience about ownership and expectations into the future. For example, 31% of them have had a family shareholder redemption sometime during their history. With that likelihood, all family firms should have well developed and well understood shareholder exit and liquidity policies in place.

Secondly, maybe partly because of the frequent severance experience, 39% of the families kept all their company's ownership in the hands of only everyday family operating managers. In addition, 20% of the companies are publicly listed and 22% have non-family partners in at least one of their enterprises.

The third and final insight of ownership is about the participants' expectations of whether the family will remain controlled by their families into the next generation. The questions asked were: Would you like the family business to pass on to the next generation? And, do you think it will do so?

Understandably, given the group, only 5% said it is best not to continue another generation; and 57% said definitely "yes," while 38% said "maybe." Of those who wished it to continue another generation, slightly more than two-thirds thought that vision would be realised. But nearly one-third had some doubts. Perhaps their doubts will motivate more planning effort and those who are certain won't be too complacent.

Business governance
An effective business board of directors with independent directors is one of the most oft proclaimed prescriptions to help assure business and family successful continuity. The data gives some insights into the experience of the relatively large companies with caring owners in the data.

Surprisingly, active recruitment and engagement of independent directors is lacking for most, even sophisticated, family firms. Only 33% have the three or more independent directors on the board as is so widely recommended.

Family governance
Along with the recommendation for effective, independent boards, the other fundamental usually considered "best practice" is to develop a family constitution or at least a set of policies that clearly regulate family-business relations. The data provides the opportunity to look at common practice here, too. Approximately 35% of the businesses have a family employment policy, while 20% feel they have a fairly complete family constitution. 33% hold regular family meetings.

Finally, previous Families in Business articles have also encouraged establishing the family enterprise organisations of a family office and a family philanthropic foundation to help connect and serve the business owning family. Of the companies surveyed, 33% have a family foundation or charitable fund and 12% have some form of a family office.

Family businesses perform well and most aspire to generational continuity. The key issues and opportunities to do so were examined from the experiences of the 500 families surveyed at IMD over the past 18 years. Hopefully, knowing the facts will provide reinforcement for some and encouragement for others.