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The tricky challenge of evolving the family business

May 07, 2023 Leadership, Management, Strategy

Look at this list of companies: Walmart, Ford, Bosch, Aldi, Tata, Toyota, Hermès, Maersk, Samsung, Dangote, Bidvest, BMW. Quite a roll-call, huh? What do they have in common? They were all family founded.

Family businesses are a really big deal in the world. Surveys around the globe regularly suggest that they contribute close to two-thirds of GDP in their countries; and employ something like 60 per cent of the global workforce. That’s huge. We all need to pay attention to this phenomenon.

I have observed a lot of family-led firms in my life, often close up. What’s great about them? They tend to have strong natural kinship and a shared mission and culture; they are close-knit and take long-term positions; they have unusual motivation levels; they can make quicker decisions than competitors who separate ownership and control.

But there’s also a downside. Family businesses can make emotional decisions that are not in the company’s best interests; they often end up promoting mediocre kinsfolk and struggle to attract the best external talent; and in blurring the line between personal and business interests, they frequently lack strict controls. Many have gone down in flames, burned by their own highly emotional splits and divisions.

Nonetheless, family businesses forge on. Families start unlikely ventures no one else would, and they often grow to take significant shares of their industries. They face special challenges, though—which require deep insight to navigate.

At some point in its life, the family business faces the inside-outside dilemma. Should we continue with family members dominating the shareholding and management of our successful enterprise—or try to admit outside capital and talent? Is letting go of the reins the only feasible path after a certain size—or could that be the path to degradation of what we so painstakingly created and nurtured?

Once the family business reaches a certain size, this dilemma looms large. It probably can’t trawl the family pool for talent anymore—but how senior should outside hires be? It can’t raise the capital needed to take advantage of the bigger opportunities—but how much control should it cede to new shareholders?

Tricky questions—and there are no glib answers. Ford Motor, for example, retains considerable family control decades after founder Henry Ford’s passing. BMW, on the other hand, ceded most of the family shareholding and management control to newcomers. It all depends on the intricacies of the situation. When a firm has run out of appropriate successors or family capital to fund growth, or needs a large cadre of specific high-level skills, it has little choice but to lower the walls and let outsiders in. And even where these conditions are more muted, intelligent evolution is still needed. It is a long time since anyone called Ford controlled that company, for example, but family members still hold special voting rights. Bill Ford, Henry’s great-grandson, is currently the chairman and largest individual shareholder.

A crucial decision-point appears in the life of every great family firm when the original founders have reached a certain age. The decisions around the first transition and succession are often critical, and can be a make-or-break situation. This is when greatest wisdom is needed. Is it time to open up and bring in the funds and talent to drive the future—differently from the business’s first phase? Or do we hold on to our tight-knit kinship as our greatest advantage?

The choices made will differ, but some general advice applies in this situation. First, start thinking about it very early—not when the founders are in their advanced dotage and no longer thinking clearly. Second, discuss it out in the open with all the key stakeholders. The crucial succession issue should not be confined to the whims and fancies of the ageing founder. Third, create a proper succession plan, with agreed parameters to guide the selection and transition decision. And fourth, whichever way you go on the inside-outside path, for heaven’s sake tighten up on governance and financial controls. You cannot continue funding family activities or personal escapades using business budgets. That’s a recipe for disaster once you have crossed a certain size.

Navigating this path adroitly will, in all likelihood, require professional external advice. In my observation, family owners are rarely able to handle the intricacies without using independent and experienced lawyers, finance experts, talent specialists, and strategists to help them. That is a necessary investment before plunging into the unknown—and it is one that is often shirked.

Family businesses can evolve into remarkably long-lived behemoths—but they can also take a series of missteps and cap their own growth, or even stumble and fade. Intelligent change is needed at key decision-points, to protect the original founding vision and values, while making necessary changes to structure and governance. The watchword is evolution. The good old ways can serve you very well for the first part of the story; but they need smart adjustment and remodelling as time goes on. When the music changes, so must the dance.

(Sunday Nation, 7 May 2023)

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