John L Ward is the Co-Director of the Center for Family Enterprises at Kellogg School of Management (USA) and the Wild Group Professor of Family Business at IMD (Switzerland). He serves on the boards of four family companies in Europe and the USA.
More and more studies are showing extra longevity for family controlled firms, despite a conspicuous lack of resources and vulnerabilities. Yet many find the goal to endure and preserve wealth a long haul requiring commitment and adaptability
It's rare for a business to last a long time. Surely, for business-owning families, a long life for their businesses is an overarching goal. More than not, families seem to put survival ahead of profit.
A strong argument could be made that dynamic market forces do, and should, push old institutions into extinction and replace them with more efficient and relevant enterprises. Society would, it seems, be better served. Creative destruction and its corollary, new venture entrepreneurship are widely promoted as central to economic welfare.
Efficiency and relevance are essential. But must they necessarily be at the cost of continuity? Long lasting enterprises may also provide some measure of stability to their communities and may also be effective through their organisational learning and investment in social networks.
So what does it take to ensure longevity in a family business?
My own research shows that only 13% of all once successful family firms continue in the same family for 50 years or more. Only 4% have experienced even modest ongoing growth through that time. Research by McKinsey & Company in 2002 revealed the following:
- S&P 500 from 1957-1997: 74 businesses survived;
- Forbes 100 from 1917-1987: 29 businesses survived;
- McKinsey 1000 from 1962-1988: 160 businesses survived.
Shell economist Arie de Geus found that only 40 large public companies in the world were as old as Shell (1890s). Meanwhile, Bala Chakravathy of IMD, the Swiss management school, finds only 25% of all firms grow continuously and profitably over a five-year period. Obviously, long life and ongoing growth are challenging, but there are hundreds of family firms that have managed to achieve both.
Barriers to success
Lack of ownership commitment, inability to change with the times, and the lack of financial resources to compete and survive seem fatal to continuity. All organisations are threatened by the inability to change but family businesses have particular vulnerabilities.
- Long tenured leaders may cling to rigid strategic paradigms.
- Limited family member experience outside of the family business may narrow perspectives.
- Paternalistic loyalty to employees lessens internal competition and new blood.
- Long personal relationships with customers and suppliers stifle rethinking the business's model.
- Powerful, entrenched traditions block efforts to change.
- Fear of failure after years of success deadens risk-taking.
A special, adaptable culture is required for family firms to invest in innovation for their future. For the most part, family firms don't take reckless risks. Typically they have less debt than the industry average. They don't usually tempt executives to bet the farm because, as owners, they have an extremely close bond to the business. Additionally, when recruiting outside management they would rarely use stock options as management incentives. Sensibility in decision-making is key.
Families can be tempted to sell the business when the going gets tough, either within the business or within the family. It is easy to justify diversifying one's personal wealth. Families often say holding on to the business isn't worth the family disharmony. There are always bidders and bankers at the door and the desire to stay the course during difficult times can wane. Families with a wish for continuity must have the devotion, commitment and emotional resilience to hold on to their enterprise.
Staying the course
The resilience and motivation to stay the course must be for both business and family reasons. Long-lasting family firms often have a strategic intent that they believe makes a difference in society; others feel a promise to the future; many emphasise their role as stewards; and others see the business as a living entity they are pledged to endure.
The owning family must also feel committed for family reasons. They need to be able to see the family business as a precious resource to the family's identity, and hold the belief that the business is the glue for family togetherness through future generations.
Adapt or die
To survive in an uncertain future requires that both the family and the business be adaptable. Long-lasting families enhance their adaptability in several ways.
- Family member association with the firm is truly voluntary.
- Family members have individual reservoirs of wealth to provide personal security.
- Family constitutions are amendable to changing times and generations.
Negative characteristics to business longevity would be the sense by earlier generation family members that all future family must be locked into their role of ownership, that the business has the obligation to hold the family together, and that only strict rules can regulate family member conduct. Management needs to be able to challenge the status quo and be motivated to implement continuous improvement .
New ideas and opportunities appear to those who are constantly looking. Long-lasting family firms are commonly more diversified and vertically integrated with multiple sensors in the market. Their management philosophy is shaped around the customer, not the shareholder.
Adaptability isn't a smooth, steady process. Family firms have the distinct advantage that they don't need to prove constant, steady growth, quarter-to-quarter or year-to-year. They can adjust their portfolio as befits the market. The family firms that live a long time do so by broadening their business focus and then refocusing their business. They have the flexibility to run their business this way – unlike listed companies they are not restricted by public shareholder expectations.
Sense and sensibility
The greatest risks to continuity are bad risk-taking and the lack of resources to sustain the business through hard times. Long-lasting family companies regulate themselves in several ways. They are conservative with debt – often completely self-funding – and pursue growth in a controlled manner. They are extremely sensitive to the company's reputation. They have leadership that doesn't seek personal external recognition, but instead draws satisfaction from the success of the business itself. Incentives for managers are less aggressive and more team-oriented.
For most family firms the overall goal is endurance – to preserve and enhance the wealth and the reputation of the business. Families in business see their company not as a seasonal plant, but as a full garden requiring commitment, adaptability and care.