Jozef Lievens is the managing director of the Belgian Family Business Institute and an attorney with Eubelius lawyers.
Barbara Murray is Consultant Editor of Families in Business magazine.
Steel cord maker Bekaert has undergone a structural revolution in recent years as it has expanded into a global company and it was the family that initiated the change
Radical revolutions happen infrequently in family businesses. When they do, it is usually because people in the system finally accept that major change is needed, urgently, to prevent obsolescence or breakdown of the system. In family businesses, it means change of the highest order: changing the governance structures that hold the system together to make them adapt to the emerging new order. Nobody undertakes change of this magnitude without compelling reasons, for it is a journey that requires strong leadership to guide the people affected through the change, gaining their support for the new model and managing the dynamics between those who stand to lose and those who stand to gain from the change.
Just two years ago, Belgium-based metal coaters and transformers Bekaert was what it had been for 120 years: a traditional family-owned production company making various steel wires and steel cord for radial tyres. Bekaert has grown from a small manufacturing and trading company, founded by Leo Leander Bekaert in 1880, into a global group with its head office in Belgium. Starting in Western Europe, the group moved into North America and Latin America, and has been expanding rapidly in Asia in recent years.
Much of the growth has been built on steel cord used for radial tyre reinforcement. Bekaert now has 96 production centres in 29 countries and an extensive network of sales offices and agencies. In 2001 the consolidated companies, joint ventures and associates generated sales in excess of €2.8 billion and employed 17,461 people. It is also world leader in the production of Advanced Materials.
Two years ago, the revolution at Bekaert began. It was started by members of the Bekaert family who found themselves in the midst of a painful generational transition period in which they were challenged to transform the governance of the family business if they wanted to achieve this goal of strategic renewal. The revolution took place in all the key areas of the family business system, affecting employees, family owners, and the business itself. They found and appointed the best non-family Chairman of the Board they could find, created an effectively functioning Board of Directors in which external heavyweights are active, and structured the family interests within a Dutch Stichting Administratiekantoor (stock administration trust).
Families in business that find themselves faced with the prospect of a governance revolution often know what the right thing to do is, but they find it difficult to lead the change from within. Those in leadership roles have an uphill struggle dealing with the demands of different stakeholders and can become burnt out by the process.
At Bekaert, leading the change process involved family members initiating the change process and taking the process so far, then passing the baton to their external chairman. A risky proposition? Most definitely so, from the perspective of the family and for the Chairman, too. Many high-profile executives are cautious about working with family businesses because they fear family interference with strategic plans and policies. Conversely, family businesses are naturally sceptical about ceding control or influence of their legacy to non-family board members who see the world in a different way.
So, how did the Bekaert family arrive at this juncture? How did they make their choices? How did they attract world-class non-family members to their board? How did they convince the family shareholders to support a new model that redefined the family's role in the business, and to prune their family shareholder tree?
To answer these questions, some background information is needed about the business family. Established in 1880, the first two generations of controlling owners were exemplary entrepreneurs, founding and building up to market leadership internationally in the core business of barbed wire and related wire products. Then the third generation came to power, creating a consortium of cousins. For a time Jean-Charles Velge held the positions of Chairman of the Board and CEO. He was very heavily involved in the activities of the steel cord division (used in radial tyres) in the 1990s and led further international expansion of the company.
The success of the steel cord division brought the company massive success, accompanied by its flip side: the organisational challenges that accompany growth on a global scale. Simultaneously, the entry of third generation cousins brought additional challenges on the family and ownership sides of the business. Conflicts erupted among family members on the board who were grappling with managing the growth of the business.
Francois de Visscher, a family director and a family member describes this: "The children of the second generation siblings and those who had married into the family received their training on the Board of Directors and in the company. That created strong competitive pressures, making some the winners and others the losers. This led to the losers leaving the company and ultimately some of them even sold off their shares."
This split within the family was the trigger for the radical revolution led by family members who remained as owners of the business. Galvanised by a wish to ensure continuity of the business with Bekaert family involvement, and open to alternative models of family entrepreneurship, they began to explore their options, focusing on a system of governance that would allow the business to achieve its full potential.
Leading the revolution
A series of major decisions were taken by the family, as de Visscher explains: "Firstly, the family established strict rules for those of the fourth generation who aspired to a career in the company: an MBA degree, knowledge of four languages and five years' experience outside the family firm." De Visscher says that family owners of the business also faced some tough choices: "The exit of two partial family branches was also the occasion for reorganising the shareholders' structure by means of the Dutch vehicle of a stichting administratiekantoor, the Dutch version of a stock administration trust. Also, third generation leader Jean-Charles Velge was succeeded by an external CEO."
Having witnessed the painful exit of some family shareholders, it was evident that ownership rules locking-in family members, forcing them to conform with a capital strategy, actually achieved the opposite effect. People wanted out – or at least the freedom to decide for themselves whether to stay or leave.
De Visscher explains that the restructuring of the Board of Directors caused a bit of a shake-up at first: "With the third generation, the family relations were thoroughly shaken up. Before there was no real structure. Now we have a stichting administratiekantoor that organises the shareholding body at the level of the family. Over 40% of the shares, which are held by the family, were put into this. The administratiekantoor has a Board of Directors with 16 members. They represent eight family shareholder blocks. We organise these branches according to shareholder blocks. Each family block with a certain number of shares is entitled to name directors for the board of the administratiekantoor."
Having experienced a shake-up and a shake-out, the remaining family owners knew that creating a long-term family commitment to their ongoing investment would require a common desire for being part of the new order, based on sharing a common vision of the future, and structures of family governance that everyone could trust.
De Visscher explains how this came about: "The administratiekantoor was chosen and developed to serve as a family council and family office. A type of family holding company, the stichting administratiekantoor, creates a secure environment for the family shareholders. We wanted to create patient capital, and we knew that to do this we had to cultivate "the family effect" – respecting the needs of family owners and providing flexible options for exit. But even more important is to keep the business attractive for family investors so that they will want to be part of the long-term future growth."
Passing the baton
How could a traditional engineering company be made attractive to family shareholders, who had recently seen a bloodletting, and to outside investors as well? "For us, the big challenge was to renew a business that was active in a cyclical old line sector," explains de Visscher. "The margins generated by some of the traditional production of wire were too low. This put great pressure on the family. At a certain point the family had to ask itself: What are we doing? Where do we want to go?
"As a family we had already sat for a century in this business, but we were no longer earning adequate returns. We then took the strategic decisions, which imposed themselves. We had to bring in outside help to drive the business into a renewal process. We knew that was the right thing to do, we just needed the right person to lead the process."
Without doubt, making the decision to appoint a world-class non-family Chairman of the Board was a turning point for the family, for it symbolised the family's redefinition of family control of the enterprise. It also proved their commitment to a system of governance that emphasises shareholder value and secure, sustainable and profitable growth of the business as the central mission of the business and of the investors.
As de Visscher describes it: "For us in the fourth generation it was important to look for a leader outside the company and the family. At present the fourth generation includes over 60 family shareholders. We are currently preparing the entry of the fifth generation, which together with the fourth will number 200 family members."
These major strategic revolutions were made possible largely by the appointment of an external Chairman of the Board. The choice fell on Baron Paul Buysse, a man who had built up his impressive track record primarily in the UK. Buysse spent a large part of his professional career in London, heading companies such as Ford, British Leyland, Tenneco and BTR, and he was also responsible for selling the British crown jewel, Rolls Royce.
In 1998 he took over the leadership of Vickers, which he successfully restructured. This group, with 38,000 employees, achieved a turnover of roughly €3 billion and is one of the world's most successful engineering concerns. For the reorganisation of Vickers, Buysse received unstinting praise in the Financial Times and the Wall Street Journal. These achievements prompted the Bekaert family to contact Buysse and ask him to become the Chairman of the Board at Bekaert.
"We held long talks about it," says Buysse. "My heart was still in London, and as a result of the Rolls Royce deal I received scores of offers. But I was impressed by how professionally the discussions were conducted with the members of the family. Moreover, it became clear that Bekaert is not just a small Belgian company, but a very internationally-oriented group. So we reached an agreement. And I can only say that the family has taken courageous decisions. First, they put the management in other hands, and now the chairmanship of the Board of Directors as well."
Buysse's leadership made possible the strategic renewal of Bekaert. "A family member wouldn't have been able to convince the other members that we needed to change our direction in order to save the company," says de Visscher. "The strategic change could only come by hiring someone like Buysse. An outsider can get this message across. In the last three years, we've evolved from a producer of wire and related products to a worldwide global leader in material transformation and coating technology. Can there be a more radical change? This is for me the fundamental lesson of our story."
However, the family had to pave the way for this appointment. "We decided, with the family out in front, to seek a chairman from outside the family," explains de Visscher. "That was a good move, because in our generation it was difficult to find the next leader. No logical candidate presented him or herself. What helped us in this is the strong relationship between the family branches. As cousins, we are very close. This is in part due to the fact that in the second generation, the generation of my grandparents, there were three marriages between two families: the Bekaert family and the Velge
Buysse agrees that the decision to hire him was a significant step in the company's future and the shareholders needed to accept it for it to work. "This decision was also an important signal for non-family shareholders. Their first reaction was that they felt comfortable with the new situation."
Buysse's job is to ensure the business is seen as an attractive investment for family and non-family shareholders. This means overcoming the unhelpful stereotype held by many that family ownership is not a positive asset. He appears to have achieved this in a remarkably short period of time. Buysse feels it came about due to several reasons.
One reason was the family's commitment to their future by ceding much of the control of the business to non-family professionals. "Not only do the family shareholders feel good, but the institutional investors also grew more interested in what Bekaert is doing," says Buysse. "Not that they immediately began to buy in massive amounts, but they said, 'If the family takes such a step, then we are more than interested. After all, we now see an enterprise which is run according to international standards and which takes its socio-economic obligations seriously'.
"There is no more exclusive sentimental talk like, 'We love this company because my father or grandfather founded it'. Professional, neutral and objective criteria now also apply. For the institutional investors, the helicopter view on strategy and the external management and chairmanship were important. For me personally, the stable shareholding body was one of the decisive elements for taking on the job of Chairman."
A second element was Buysese's rethink of family ownership using a definition that takes away the family label and therefore the link with the unattractive legacy-stereotype: "It remains a family firm, but you can better describe Bekaert today as a company with a reference shareholder; ie, the family. That is precisely what happens when you evolve to a fourth, fifth generation. There arises a reference shareholdership because the distance between family and company is greater. According to the principles of corporate governance, of which I'm a fervent advocate, that's just fine."
Regardless of the label, Buysse is clear about how he conducts shareholder communication: "I communicate with my principal shareholders in the same way as with the others. It's illegal to give one shareholder preferential treatment over another. How you conduct the dialogue with the shareholders and explain to them what you are doing is of vital importance. After all, for the strategic revolution that is under way this stability among the shareholders is crucial."
Entrepreneurial family firms
Buysse is emphatic that family businesses have a built-in comfort zone that can take the edge off competitiveness: "The quick implementation of strategy and entrepreneurship are important for creating shareholder value. In some family firms I don't see evidence of that entrepreneurship. The notion of shareholder value is not self-evident for the management in family firms. The last three years I have spoken with scores of external managers in family companies. What always strikes me is that they operate in more comfortable circumstances than if they had to work under the pressure of the stock markets.
"When I was the head of Vickers, my most important shareholder had 3.7%. When he wanted to buy up to 3.9%, the alarm bell would sound because there would be the fear of a hostile offer from outside the group. I would not say that a manager in a family firm works in a comfortable environment, but there is a different type of control, with other benchmarks."
Through this transition, Bekaert has evolved from a company with a cyclical and traditional product portfolio into a world-class player, manufacturing products with high added value. The transition at Bekaert has taken place on many levels and has been a challenge in all areas. What is notable about this case is the family's ability to lead the revolution to the extent of redefining its mission and its raison d'etre. It then recognised the need – and had the courage – to pass the baton to another type of leader who could take the system forward for the future.