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Tradition, trends and the modern family business

News : Family Business Network

Family businesses can often be thought of as solid and staid, not taking many risks and tied to age-old and sometimes outdated traditions. Not so, argues Albert Jan Thomassen – family businesses today are modern, proactive, diverse and up for new challenges.

Albert Jan Thomassen is chairman of the FBN 18th Summit Programme Committee.

Companies have always put a lot of value on traditions. They represent culture, "the way we do things here". For many family businesses, traditions also explain part of their business success. But probably the most important value of traditions is knowing when to break one of them. That is just one of the many things modern family businesses do proactively. What other trends are family businesses setting?

Renewing succession
The traditional view on succession is that leadership and ownership is passed to the next generation in parallel. Nowadays, the majority of business-owning families choose to have two different processes. Leadership succession is based on merit and follows the needs of the business. Succession takes place when the business is ready, not when the successee is ready. Ownership succession is seen as a different process that is driven by the willingness of the senior generation to let go and hand over control as well as tax and financial motives. Ownership is inevitably connected with control. Executing control is easy when the owners also manage the business. An increasing number of families enter stages where non-family management or minority owners are running the business. Not only does this call for good governance structures, but it also increases the responsibilities of owners.

Modern family businesses take ownership succession a step further. Next to equality or inheritance principles, some also use merit as a criteria to pass on ownership and control. They dare to give those owners who are qualified more control or representative power than other owners. Succession is about the "qualified manager" and the "qualified owner".

Business renewal
Clear business strategies that create shareholder value are the talk of the decade. Equity and hedge funds dare to challenge boards of listed companies. Some executive boards decide to change strategies, reorganise many times over to keep up and increase shareholder value. It is an approach that works well for some forms of enterprise but not for others. Reorganisations, often driven by a change in top management or a new CEO, are a way to remain flexible and "new".

Family firms tend to adopt different ways to renew their business. Some have chosen niches in which to operate and innovate. Others renew contrary to market developments, acting anti-cyclicly. And some are unconventional in the way that they renew their business contrary to the common practice in their industry.

Take the example of an eighth generation industrial painting company. They are one of the largest family businesses in their industry. The ninth generation entered the firm a few years ago and started a whole new line of business. The daughter – the first female successor in the history – developed a new coating technique to have more maintenance-free window frames, walls, etc, reducing the use of paint and the painting work instead of increasing it. For the company, this has resulted in a whole new business next to the original company.

This example illustrates that this family business innovates beyond their core business: industrial painting. But they stick to another strength: maintenance of buildings. As Professor John Ward explains in his book Unconventional Wisdom, family firms tend to reduce  downward risk without losing their entrepreneurial drive in renewing the business.

What do modern family businesses do to renew their business? Partly they do what they have always done, such as maintaining a long-term focus and experimenting with new products in new markets. But they have also found ways to attract and keep non-family talent that contributes to the entrepreneurial drive of the family and to the tacit knowledge within the company. They actively involve non-family executives in strategic decisions. And they know that reorganisations are for exceptional circumstances and not as a means to renew the business.

Leadership diversity
Leading the business is only part of the leadership question in a family business. Next to the business leader there is the governance leader and the family leader. In an owner-managed family business those leadership roles are often combined in one person. In more extended families and larger companies, the leadership roles are spread among family and non-family members.

A few trends emerge in family firms. First, gender becomes less of an issue. Primogeniture or male successions as selection principles are replaced by selection based on merit. The best is selected, male or female.

Second, invisible leaders, often seen in the family and in governance, become more visible. Take, for example, the invisible leadership role that wives often have in the family. Children, other family members and the male family members recognise and respect their role towards each other and towards others in their social and business networks.

Third is the trend to leave the management of the company to non-family executives. If there is no family CEO, there is a family member as the governance leader, often the chairman of the board. If there is a family CEO, then often the governance leader is a non-family member. So, the family remains actively involved in important strategic decisions in the company by either fulfilling an executive or governance leadership role.

Fourth, there is the tendency towards team leadership. In the past multiple family members entered business simply because that was decided by the father. He had two sons, so they both had to enter the business. Nowadays, team leadership is a much more conscious choice. Siblings and cousins decide to jointly fulfil leadership roles because they know they are complementary and that there is a fit. Another reason for doing this relates to the last trend to be mentioned here, which is that taking up leadership responsibilities, is  more balanced with family life.

Take the case of a third generation brother and sister. They have chosen to be co-CEOs, allowing them both to work part-time and balance the responsibility for the company with raising their children. Another example is a fourth generation female successor. She built her career to become the next CEO. When she became a mother of three children she decided that she still wanted to take over the leadership responsibility, but not as the next CEO. Instead, she became the chairman of the board, allowing her to raise her children. A non-family CEO is now responsible for leading the business.

Beyond the business
Modern family businesses no longer have just a company in which all assets are invested. They have diversified their risks and generated wealth available for other purposes, such as investments and philanthropy. They separate those other activities from the company (eg, by establishing a family office or a foundation). They also recognise that you need to not only run the company, but also the other interests in a professional manner. That is why family offices are set up, why there are family meetings, education of family members, and the like.

But above all, modern family businesses realise that there is no healthy business if there is no healthy family. A "business first" approach may be good for the business in the short-run, but it erodes the family as a responsible owner with the qualities to lead. A "family first" approach has too often demonstrated that the business will not remain successful.

Balancing family and business means that families invest as much in family cohesion, education and passing on values to the next generation. They know that activities beyond the business, such as joint investments, philanthropy and social entrepreneurship, are good ways to be a modern family business focused on long-term commitment and continuity.

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