In today's globalised world, taking the family business global is unavoidable if the family wants to stay together as owners. François de Visscher and Jane Simms assess the challenges and opportunities that confront families who are faced with this decision
When family businesses expand beyond their national borders, the very fabric that made them successful can be torn apart by the forces of globalisation.
While the majority of family-owned companies wish to avoid this at all costs, remaining local is not a viable option once the business and the family reach a certain size. As Joachim Schwass, professor of family business at Switzerland-based business school IMD, puts it: "If families want to stay together as owners, they need to grow the company, which, at some point, means going global. It might also mean diversifying into other, possibly unrelated, business activities, so that ultimately a family business becomes 'a family in business'."
What's more, as business generally becomes increasingly global, family firms are more likely to remain successful and competitive if they adopt a proactive rather than a reactive approach to international expansion.
The "push and pull" effect
Most family businesses tend to react haphazardly to some sort of "pull" effect, says Schwass. The car industry is a good example: when it went global, many of its family-owned suppliers had to run to catch up or risk losing lucrative business.
At the other end of the spectrum is News Corporation, the global news, sports and entertainment company headed by Rupert Murdoch, which, according to Schwass, has adopted a future-oriented "push" strategy towards globalisation.
The family relinquished Australian citizenship for US citizenship and relocated both itself and the corporate headquarters to the US in order to exploit the more profitable growth opportunities there.
But while Murdoch's three elder children have all been involved at an executive level in the business at some point, only one remains so.
James (pictured) recently became chairman and chief executive of News Corp's European and Asian operations and is popularly regarded as the heir apparent. The fact that Lachlan and Elisabeth have withdrawn from the business to do their own thing (although Lachlan still sits on the board) shows that even the biggest, most successful and most international family businesses may not be not immune to the conflicts between family members that characterise so many of them.
And while globalisation is "a fabulous opportunity" for family members to try to resolve such conflicts, Schwass believes being able to realise that opportunity depends on overcoming a number of significant new challenges. "If they all pull in the same direction they all get a bigger share of a bigger pie," he says.
Not least of these challenges is the threat to the family's patient capital. "Patient capital" is the equity that the family is willing to invest to ensure the continuation of its tradition and heritage within the business. The threat comes from the greater disparity between different family members' liquidity needs as they move to different countries, and from the weaker family cohesiveness that derives from distance and cultural differences.
As a result, some family members may be averse to what they see as "risky" new foreign investments and, at worst, feel so remote from the business that they want to sell out – and this can come at a time when the business most needs patient capital to achieve its long-term growth.
Amy Braden, managing director and head of the family wealth centre at JP Morgan Private Bank, points out that while going global affects all aspects of doing business – including competition, currency, financing, suppliers, tax, regulation, markets and employees – these new challenges are compounded in family firms by the need to carefully manage family investor relations.
"If family members don't have a global outlook or understand the demands of running a global business, it compromises the chances of that business competing on a global stage," she says. When contemplating international expansion it becomes more important than ever to secure the engagement of the different family members, she adds, explaining that a fundamental building block of this engagement is addressing the family shareholders' tax and liquidity parity.
"Family businesses should not underestimate the very serious tax consequences of international expansion of the shareholder base," warns Braden. "The company headquarters may be located in a low- or no-inheritance tax jurisdiction, and the leaders of the business need to be aware of and plan for the fact that some family shareholders may be living in high-tax jurisdictions. Unless they address this discrepancy, it could cause serious liquidity issues."
Fortunately, there is a plethora of advice, financial resources and engineering solutions available to help today's global family businesses resolve financial, structural and family governance problems.
Growing the family abroad
But in many cases, running a successful international business involves harnessing the latent power in what might be an already global family. While the business might sometimes outgrow the family, the converse can also happen. A global family with a very local business is just as likely to withdraw its patient capital as a local family that feels remote from an increasingly global business.
In many cases, a local business no longer holds the interests of its more sophisticated, worldly shareholders, who feel a cultural mismatch between themselves and the business.
And if the Annual World Wealth Report from Merrill Lynch and Cap Gemini is anything to go by, wealthy families are becoming increasingly multi-jurisdictional. The 2007 report shows that, overall, 28% of high net worth individuals have homes in foreign countries, 19% have children living abroad and 37% have offshore assets. European families are even more international in their outlook: 46% of them own homes in foreign countries and 27% have children living abroad. The figures for Middle Eastern families are even higher – 80% and 45% respectively.
"Wealthy families are increasingly giving their children opportunities to travel and to study and settle in different countries," says Braden. "This gives them the an international mindset and an ease working with different nationalities and cultures, which is increasingly important in business."
Indeed, some family businesses are adopting this international approach to the upbringing and development of the next generation as a strategic imperative. Schwass cites Italian family firms Zegna, a clothing company, and pasta firm Barilla as examples.
"In Italy, senior generations have traditionally had a problem learning different languages, which has restricted their global ambitions," he explains. "So they have been very proactive in ensuring the younger generations are linguistically competent by employing foreign nannies for their children or sending them abroad to be educated."
Spanish family businesses adopted a similar approach once they were liberated from national restrictions in the post-Franco era, while Swedish media group Bonnier actively encourages its family members to live on different continents. "It's all part of making them feel comfortable with the idea that the world is a smaller place," says Schwass.
But the family businesses that are most successful in ensuring that the firm and the family grow globally in tandem are those that continue to educate the family shareholders about the business.
Schwass says: "They keep them engaged in the business through a proactive educational approach that is designed to connect them with the company's roots and achievements and convey the sense that they are part of something unique and special even though they may not be actively involved."
This is the approach adopted by Crane, the US-based paper firm established over 200 years ago and still owned by the Crane family, as part of its drive to foster family identity and connectedness as it becomes increasingly global.
Once a year, family shareholders come from around the world to a two-to-three-day event where business information is made available to them in what recently retired chairman and CEO Lansing Crane calls "a meaningful way". This includes reminding them of the family's heritage and values through sharing pictures and stories of current and past generations and tours of the company and its museum.
Rather than dwelling on the centrifugal forces that can destroy the patient capital and inhibit global business growth and family cohesiveness, Crane, like other successfully expanding family businesses, is focusing on the opportunities that a well-managed global shareholder group can present.
These businesses are finding that cultural differences can enrich the family's ideas, spark creativity and renew the entrepreneurial spirit, provided the entire family is open to learning about the various global markets and cultures where it invests. The family relationships must be trusting and have well-developed communication tools, to allow family members at home to listen to the experiences and ideas of far-flung relatives.
They must also be open to suggestions based on the expatriate members' impressions and experiences, which might have an impact on the business and require changes in the way foreign divisions operate.
Having family members located around the world also creates opportunities for the family to reconnect with the business as it spreads across the globe.
For instance, one shareholder of a European company living in New York City, who does not work for the family business, enjoys visiting the company's offices in New York, as well as Boston and Houston when he travels there. His visits to the US subsidiaries reinforce his attachment to the business and the family, which strengthens the family effect. His contacts, through his own professional work, have also been an asset to the family and the business back in his home country.
Family members in foreign lands
The involvement of family members living abroad can strengthen the integration of the business in the foreign community. Promoting involvement of family members on overseas boards or other business activities reinforces the tie of the business with its local community.
The "pioneer" family members can also carve out a deeper presence for the business by seeking board memberships in international subsidiaries. For example, in one US family business, a family member living in Colombia sits on the board of the family business's Colombian subsidiary. He plays a key role in the relationship with the family's partners in Colombia.
All this helps to turn family members into owners of the business, rather than what Lansing Crane calls "investors". "Having confident family members committed to the business adds great strength and value," he says.
But global expansion always stretches the management talent in a business and usually requires the appointment of new outside executives with international experience and expertise. This can be an uncomfortable departure for family businesses that have traditionally had a strong contingent of family members on the board.
"We decided that the only family members who could sit on our board would be those of sufficient calibre to sit on the board of any business," says Crane. "That required some difficult adjustment in people's mindsets and took us three years to achieve. But once people saw the value of the outside perspective and judgement that new external recruits brought to the business, they were much more accepting."
Crane doesn't discourage family members from becoming involved in the business, but believes that they must compete for roles on an equal basis with external candidates. Currently, just five family members work in the company, two fewer than during Crane's 12-year tenure as chairman and CEO. "The family can't provide all the talent a successful global business needs," he says.
Today's families have many tools available to them – from family councils and family offices to international shareholders – to manage both global families and global businesses. And when they are managed properly, they grow symbiotically, keeping disparate family members connected and creating new opportunities for both sides.
The trick is working out how to make family and business indispensable to each other in a more dynamic global business environment.