Craig E Aronoff holds the Dinos Eminent Scholar Distinguished Chair of Private Enterprise and is the founder of the Cox Family Enterprise Center at Kennesaw State University in Marietta, Georgia, USA. He is also co-founder and principal of the Family Business Consulting Group Inc. Drew S Mendoza is managing principal of The Family Business Consulting Group Inc.
When the 1990s economic boom in the US ended, it forced families with their own businesses to focus on their core values, core competencies and to count their blessings – a good way to weather the tough economy
About five years ago we were working with a large fifth generation family business. A sophisticated manufacturer, the company had thrived over the previous generation. Headquartered in a mid-sized industrial US city, the business and its owning family played an important role in its community.
Members of the successor generation were motivated, bright and enjoying business success at high tech, 'go-go' companies located in more glamorous cities in warmer climates. The companies they worked for were publicly-traded and offered seemingly gilt-edged stock options. Their leaders were profiled in business magazines for their cutting edge management philosophies and cutting edge products and services. They were unexcited about the prospect of returning to their family's business.
The 'new' economy
As the 1990s techno-boom reached its peak, US family businesses seemed to pale in comparison to the opportunities offered by exciting dotcom start-ups and hyper-charged stock market high fliers. Even solidly performing family businesses lagged the wealth creating capacity of venture capital or even stock market investing, often changing the perspectives of family owners towards their primary asset. Should we continue to invest in our family business when better returns seem available elsewhere? Perhaps we should sell our old-economy family business and invest in new-economy companies with greater growth potential (as was the Bronfman's unfortunate strategy in selling Seagrams and investing in Vivendi). Talented younger people often asked, "Do I really want to commit my career to the family business when such exciting alternative opportunities are available?"
The booming 1990s were not necessarily the best of times for family firms. But of course, it is not the 90s anymore. With the new millennium, the bubble burst. We were rapidly forced to relearn the hard truths of economic and political realities.
Contrary to the hype, there was no new economy. The old rules still applied. The law of supply and demand turned out to be just as relevant to technology and the stocks of technology companies as it is to any other industry. The almost decade-long US economic boom finally ended. Young people learned the meaning of recession. Double digit annual stock market gains reversed their course. Alternative investments became difficult to identify. Exciting entry-level jobs became hard to find, even for graduates of prestigious business schools.
The World Trade Center fell to worldwide shock and horror. But for Americans, the event brought an unprecedented sense of vulnerability to the threats and risks that exist in the world. Americans' exuberant, optimistic, confident – and perhaps naïve – attitudes about the world and our place in it were further deflated.
And to add yet one more insult to our psycho-economic injuries, we learned that some of the fantastic successes of the 1990s were achieved not by brilliant management, finance and innovation, but by plain old lying and cheating. Kenneth Lay at Enron and Al Dunlap at Sunbeam, rather than being the stuff of leadership paragons, were the beneficiaries of crooked measuring sticks, slight-of-hand finance and other deceptions. Arthur Andersen crashed and burned. Even General Electric and Citicorp were called into question.
Homo econimus Americanus – post-dotcom-bubble; post-1990s-economic boom; post-9/11; post-new-economy; post-Enron, Worldcom, Adelphia, Tyco, et al – is a much chastened being. Comfortable attitudes and perceptions, particularly for younger people, about wealth building, financial security, career development, physical safety, trust of business leaders and institutions and the need to be on guard against those who mean harm, suffered from the repeated blows of the realities of world events.
But for those families fortunate enough to own and manage their own enterprises, these difficult national and world trends and events often led to thoughtful reconsideration. Bad times can drive families to focus on their core values, core competencies and indeed to count their blessings, and thus, often can be good for family businesses.
Withstanding the challenge
As has traditionally been the case, family businesses are often better positioned than other businesses to withstand periods of economic challenge. With their aversion to debt, family businesses have stronger balance sheets and are exposed to less financial risk. Less pressure to expand, lower cost of capital and more attention to cost control, all characteristics of US family businesses confirmed by recent research, place family businesses on a better footing to weather the tough economy.
Similarly, the misdeeds of high profile, publicly-traded large businesses has created an opportunity for family businesses to shine. A recent Newsweek article pointed out that "large parts of the population feel that… business interests are no longer aligned with societal interests." The article by Klaus Schwab, president of the World Economic Forum, maintained "responsible management should appreciate the likely long-term payoff of contributing to the construction of stronger societies." He also pointed out that "business attractiveness requires a change in the short-term mind-set of many investors" and "corporate integrity means that business should be governed not only by rules but by values".
Family businesses count among their strengths responsiveness to their relationships with all stakeholders, long-term investment horizons and strong cultures in which performance is driven and judged by deeply entrenched values. Thus, family businesses are already responsive to the imperatives Klaus identifies. Recent surveys in the US have shown that while trust of big business leaders has crumbled, trust of small business leaders remains strong. Increasingly family businesses, including giants like Ford Motor and SC Johnson, take advantage of that trust and distinguish themselves from other businesses by stressing family in their advertising.
From strength to strength
It is not just the public, however, whose attitudes toward family business have improved relative to their views of other businesses. More importantly, the stock of family businesses has strengthened relative to the broader market in the eyes of their owners. Business-owning families in the US have become more thoughtful about their own assets. They more appreciate the control they enjoy over their own destinies. A recent survey showed more than 60% of family business owners are very optimistic about their company's prospects, a much more positive mindset than the population's view of the economy as a whole. Young people again have reassessed what is attractive in a place to work and in a career and they are voting for their own family businesses with their feet.
At business-owning families' meetings throughout the US, discussions about values, wealth and life goals are leading to conclusions that support rededication to family businesses. These conclusions are often reached specifically because business challenges call for sacrifice, renewed commitment and more focused efforts to assure family business survival and success. Family owners increasingly appreciate the advantages of strategies offering slower and steadier growth and manageable risk. The value of a going concern is taken more seriously as is the irreplacability of experience, knowledge, patient capital, relationships and reputations that have been built over generations. We now hear even more family business owners focusing on their role as stewards, sustaining and building opportunities for future generations.
US family business owners remain realistic about the challenges endemic to the institution. The increasingly famous problems of Chicago's Pritzker family (Hyatt Hotels, Marmon Group) remind everyone that despite great wealth and business success, pressures mount as generation succeeds generation. Indeed, while the general use of business consultants has been reduced as businesses aggressively control costs, our impression is that the demand for family business consulting in the US continues to increase.
Perhaps most importantly, in our university classrooms, our research and our consulting experience, we find that the younger generation is increasingly appreciative of and excited by the opportunities afforded by their relation to their family business. The young people referenced at the beginning of this essay have happily returned to their own family's business and are moving steadily into positions of greater responsibility.
In the US, tough economic times have again revealed family business resilience. Bad times are indeed good for family business.