FAMILY Businesses are the cornerstone of the economy. They are all around us –from neighborhood mom-and-pop stores and the millions of small and midsize companies that underpin many economies to household names such as BMW, Samsung, and Wal-Mart Stores. One-third of all companies in the S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses.
The tumultuous nature of transition is not merely an Asian phenomenon, as across the globe, family-owned companies have been vulnerable when it comes to handing over the business. The numbers are alarming and the issue is complex. Only one-third of family businesses survive the transition to the next generation. Smooth transition across key leadership portfolios in family business takes time, strategy and communication to ensure success. Yet, there exists many business families around the world that have successfully made the transition and endured beyond three generations.
As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder may insist on running the company even though they are not suited for the job.
As the number of family shareholders increase exponentially generation by generation (with few actually working in the business), the commitment to carry on as owners can’t be taken for granted. According to a recent McKinsey research, those that reach till the third generation tend to perform well over time compared with their corporate peers.
Ownership structure
Maintaining family control or influence while raising fresh capital for the business and satisfying the family’s cash needs is an equation that must be addressed, since it’s a major source of potential conflict, particularly in the transition of power from one generation to the next.
Enduring family businesses regulate ownership issues – how shares can (and cannot be) traded inside and outside the family – through carefully designed shareholders’ agreements that usually last for 15 to 20 years.
Family businesses who have perpetuated over generations value incremental over explosive growth, evolutionary over revolutionary change and have a long term vision for the future which is rooted in tradition.
A case in point is that of Joseph Gallo. After leaving the family wine business, Joseph Gallo went his own way to become California’s largest selling cheese producer. Joseph was the man behind the cheese brand as well as the third and youngest brother to wine giants, Ernest and Julio Gallo. (With annual sales of $3.5 billion – Gallo is a brand name synonymous with the phrase “largest US winemaker.”) Although he got embroiled in a legal battle with his brothers, .Joseph and son Mike always felt their family-owned and operated business would be enhanced by creating a family atmosphere – alignment of family goals and the importance of remaining connected as a family.
To that end, employees are encouraged to hire family members. Mike carried on this unique employee policy when son Peter joined the company – moving Joseph Gallo Farms into the third generation.
The recent Family Business Network Pacific Asia (FBNPS) Summit 2010 held in Malaysia featured speakers such as 4th Generation Chen Tien Yue, General Manager, Royal Selangor Marketing Sdn Bhd, Malaysia, who is responsible for all sales channels in Malaysia (retail, corporate, wholesale) as well as Royal Selangor’s Asian markets such as Singapore, China, Hongkong and Japan.
Another speaker, Frédéric de Mevius, a member of the eight generation of family ownership of global brewing and beverage group Anheuser-Busch InBev (a company that traces its origins back to 1366) and a director of the family holding company EPS, outlined the strategies and structures which have supported long-term family continuity and prosperity in the face of generational change, economic crises and political upheavals, enabling them to stay in business together across the generations.
Based on his family’s experience, he discussed managing generational change at the sibling level and diversification whilst maintaining entrepreneurship at the family level.
Drawing lessons from some of the world’s leading and enduring family businesses such as the 250 year Haniel Group, Professor Joachim Schwass (PhD), Faculty Director of ‘Leading the Family Business’ based at IMD, Switzerland, talked about the importance for family businesses in achieving clarity in three areas: namely, their identity, vision and governance structures.
In his speech during the said Summit, Prof. Schwass stressed that ‘passion’ was what drove family business, but as it was not always possible to transmit the same ideals and zeal from one generation to another, each generation therefore needed to discover its own ‘passion’. With a reference to Hermes, which has achieved 6 generations of success, Joachim reminded delegates of the words of 20th century French author Antoine de Saint-Exupéry who wrote: “We do not inherit the earth from our parents; we borrow it from our children”.
* * *
Prof. Soriano is the Turnaround Advisor of wongadvisory.com and the Chairman of the Marketing Cluster at the Ateneo Graduate School of Business. For comments please email writer at [email protected].