John Ward is principle of the Family Business Consulting Group. www.efamilybusiness.com
As a business family moves through the progressive stages of transition, there are the associated challenges of each stage to confront. None more so than when the family has exceeded the cousin collaboration. But don't lose the family bond, writes John Ward
Much of the theory and literature of the family business field is built on the stages of ownership model. Families in business evolve from a controlling owner stage to a sibling partnership stage to a cousin collaboration. The time through the stages is marked by very challenging generational transitions and each stage calls for fundamentally different ways of thinking. For example, entrepreneurs don't often understand the way of partnerships, and co-equal partners usually don't understand the messiness of democracy.
In addition to coping with the generational frictions as a family prepares for these different realities, for many business families the basic orientation to the issues changes. Families in the controlling owner stage tend to put the needs of the business first, with the primary instinct to assure business survival. Once they reach the sibling partnership families typically overreact, shifting to a 'family first' mutuality to keep the vulnerable partnership together at almost all costs. In the next stage, the cousin collaboration, families, again in overreaction, re-emphasise the priority of business logic and try to run the company 'as if public'. The combination of generational revolution and reactionary evolution make achieving successful cousin ownership indeed a proud, and rare, accomplishment.
These cousin families then ask, "What next"? Is there another stage – a stage when the systems stabilise for generations to come? Another way of asking the question is, how do things work when the family is large?
The resolution of these questions, our studies tell us, is the enterprising family model. This model, a portfolio of family interests and entities, governed by an investment or holding company board and by a well-developed family council, was highlighted in an earlier article, The Ultimate Vision for Continuity' (Families in Business Sept/Oct 2003). The enterprising family has found a way to bind the family together with a family first spirit for its many family activities (ie, family philanthropy, family education and family office services), yet also run the business completely professionally.
It all makes sense as the family comes to learn that a successful business fuels the family's vision for itself. Once families overcome the challenges of this latter stage development they can create a sustainable model for many generations to come.
During most generations of most successful family businesses, there is one person – a gifted, natural leader – who takes responsibility and charge. This 'patriarch' person unselfishly assures business growth and family harmony. Their talented leadership skills inspire company management and comfort the large family. But after such a person there is often a difficult succession period.
Great leaders, though, are rare. Assuming that a family can produce such a person every 25 years – coincidentally, just as the previous great leader leaves the role – is too much to expect. Instead, the family develops a sustainable system of leadership so as not to depend on miraculously well-timed family heroes? Then there is a reliable progression of family members to serve as company board chairmen and others to serve as family council heads. Succession to a great leader isn't the challenge; developing a system that doesn't depend on uniquely timed and qualified individuals is the challenge.
A large business-owning family requires many family hands to make it work. For the most part these people are volunteers (or their honorariums are more token than significant). They have busy personal lives. Family meetings and family committees are usually emotionally demanding. Families rarely show great appreciation for one another as the view is that: you volunteered to be a leader and have the status of position, so why should you need to be thanked? It often seems family members who contribute actively are more typically criticised or assumed than appreciated.
Many who do help to lead the business do so from a duty of stewardship – and that can wear thin after a while.
It's also natural to expect that the most committed and enthusiastic family members will all over-volunteer. Compounding the likelihood that many will therefore burn out at the same time is the reality that families don't feel they can ever turn down volunteers. Consequently, committees or task forces are too large, and no one is deferred to contribute later when there will be future needs.
The sum affect is, commonly, family member apathy toward participation and a lack of family contributors in certain times. Successful families must learn to motivate their volunteers and also carefully pace the levels of involvement so people don't 'burn out' or 'take a time out' at the same time. Families also need to learn to accept and rely on paid non-family staff support to the family governing roles.
Linking owners and members
As families get large, share ownership can become distributed unequally due to the varying size of different branches. Also more in-laws play more roles, usually without direct share ownership. Consequently, shareholder voting and per capita family member voting become very different.
The challenge becomes which votes are taken on which issues? Commonly families vote per capita for philanthropic and family council decisions and vote per share for business governance decisions. Votes on family office matters are more controversial.
The other challenge is how to assure effective coordination between the owners' views of family concerns and needs and the family assembly's views. Some families have a representative of the family council on the business board and vice versa. In other cases the two chairs work informally as a partnership.
As families become cousin collaborations they are usually still marked by two tendencies: to see the family as two generations and to see the family as branches reflecting the second generation family lines. When the family evolves into the fourth generation and later, both generations and branches become archaic concepts. The ages of generations begin to overlap. Branches become more diluted as first cousins are often as different from each other in their interests and views as first cousins are from second cousins.
The enterprising family defines itself as one family with age bands defining respective needs and opportunities. For example, next generation ownership education programs and team building are for all those between 16 and 25, or the council of elders is all those members from 65 to 75.
Young families see the greatest need as being to prepare family members for management and board positions for the business. Older, larger families recognise that ownership education is more important. They articulate what roles and responsibilities owners have, and owners' meetings become important events to make ownership decisions and to build relationships with company management and board members.
The non-management family owners become a very significant voice in company vision and philosophies. The profession of ownership becomes the family's most critical business competence.
Large families have very diverse values and personalities. Family members can live all over the world and be of different nationalities and cultures. It is highly likely that some family members won't see eye-to-eye with each other and individual wealth and spending habits will vary. These increasing differences conflict with an early stage family's bond around some particularly strong values that are often enforced firmly.
But by the fourth or fifth generations, some individuals will have misbehaved and others not performed. Old, larger families don't let themselves be disturbed by such circumstances. Such acceptance helps all family members feel more comfortable in the family.
Rather than focus on differences, as early stage families do, older families focus on similarities and tolerate differences. This tolerance can, however, reduce the intimacy and appeal of the family. Successful families, therefore, redouble their efforts to create positive norms and social bonds among the core of the family.
As, percentage-wise, fewer family are employed in the business and others are really not overly interested in the business, the family's philanthropy becomes more central to the family's identity and engagement. When the family's foundation was developing, strong focus areas were chosen that reflected the founders' interests and values. The family becomes even more competent on those focuses and builds a bureaucracy to help support that work.
But for philanthropy to continue to serve as a glue in later generations, future generations will need to be able to feel that they are shaping philanthropic strategy. They will become more committed and proud if they can add a focus area and express their own passions. Consequently, the family appreciates that its impact must evolve through time and generations.
This change threatens, for some, the original founders' beliefs. Sometimes the early donors laid the groundwork to welcome and to facilitate such adaptation, but often not. The reconciling insight is to concentrate the respect for earlier generations on the spirit of giving and the importance of competence in giving, then the actual areas donated to can reflect the current generations' interests. There's a treasured legacy yet there is also the ability to speak to the passions and needs of the times.
Families, when small, work hard to find ways to select family leaders without the risk of competing against each other. Therefore, smaller families regulate democratic processes to protect family harmony and family member disappointment.
Large families come to realise that this can't last forever. Elections become increasingly 'normal' over time, with all the personal disappointments and imperfections of any democracy. Elections become more transparent, contested and competitive. The disappointment of a few doesn't destabilise or compromise the many - the family continuity still stands as a whole.
Of course, sensitive and farsighted families work hard to manage people's expectations, to assure very fair election processes, and to support those who are eager to contribute yet are not selected for preferred leadership roles.
Approximately 10% of long-lasting business families become 'large' families. It's likely that more and more will, as families, choose to be more embracing of owning their companies by multiple heirs. These families are distinct in that they become very complex and must formally organise their large families. When they do, inevitably, they will confront a special set of challenges, not unlike other forms of voluntary, non-profit associations. They need to keep the economic engine strong and build an effectively functioning community. Paradoxically, governing each better makes the other stronger.