Apr-Dec 2017

Sharing Wisdom: Lessons From Successful Family Dynasties

It is not an easy task to emulate the most successful family firms because success is more to do with character and resilience. The most successful business-owning families take great pride in the business and its history ahead of profit-maximisation. They also have a deep sense of family, of unity, and ways of supporting one another. The author, in this article, articulates the various attributes of high-performing business-owning families.

Dino Frescobaldi, a poet of the late 13th, early 14th century, played an important role in the development of Italian literature by salvaging the first 7 cantos of Dante’s Divine Comedy when the more famous poet was forced to flee Florence for political reasons. This was not his only legacy. Frescobaldi was a member of a successful Tuscan merchant family which, at about the same time, began wine production. Some 700 years and 30 generations later, the family still thrives as wine producers, and is still expanding and innovating. A significant minority of highly successful business-owning families excel and thrive through several generations: Miele, Follett, Takanashi, Henkel, and many more. It is common to read that a high proportion of family firms struggle to survive to the second and third generations, often in an article that features commentary on the risks associated with family firms. This is a misleading and biased statistic. The lifespan of any company is typically a couple of decades, and it is falling. One study showed that a Fortune 500 company spent over 60 years on the Index in 1958, but that figure had fallen to just 18 years by 2012. A more recent study concluded that the half-life of a US publicly traded company was a decade. Moreover, almost all very long-lasting firms are owned and managed by a family. These families have much to teach us: not only on governance, strategy and business management, but also social and environmental responsibility and economic development. So what are the features of family firms with sustained high performance over the decades or centuries? In the age of Dante, the reasons for success may have been based on anecdotal knowledge; now, decades of research findings have been accumulated. Working with high-achieving families has helped identify that 25 principles – clustered into four broad categories — are necessary for
success. The most effective family firms excel at 80% of them, or more, consistently. Counter-Intuitive Realities These disciplines are not only difficult but cover a wide range of areas. Moreover, some of them are counter-intuitive. For example, it transpires that respecting tradition can help you be innovative; also, planning for the long-term helps nurture innovation. In another example, recently popularised by John Mackey, author of Conscious Capitalism, as ‘the paradox of profit’, a company does not tend to maximise profits by aiming to maximize profits. Rather, financial rewards come as a by-product of attention to product, service and customer. A succession of strong quarters is not always good for the business, as we saw in the credit crisis, if it is in dangerously risky trades. The smart business-owning families have understood this insight for centuries, and made it one of their unchanging principles. The principles identified in this research cannot be reduced to a set of competencies or ‘dos’ and ‘don’ts’; rather, they have to be nurtured in a healthy culture. They present a formidable challenge, which explains the disparity between the highest and lowest performing business-owning families. They also, however, present an exciting agenda, because it becomes evident, through the study of the paradoxical reality, that one does not have to sacrifice ethics to be commercially successful. Also, one does not have to prioritise the business over the family – for the most high-performing family firms, the near perfect equilibrium between family and business is achieved over time. The 25 principles of high-performing business-owning families fall into four broad categories:

  • Long-term success in the business
  • Long-term continuity of the family
  • Long-term success in ownership
  • What do successful firms do differently today?

Organising the discussion into the four headings creates a manageable framework for learning. 1. Long-Term Success in the Business The attributes in this category are Vision, Entrepreneurial Drive, Business Skills, Employees, Ethics, Succession Process, and Adaptability. Some of these are close to each other: a company with a strong Entrepreneurial Drive is likely to display Adaptability. Others may be assumed to be in conflict. Paying attention to the needs of employees seems to temper commitment to entrepreneurial renewal, which can result in redundancies. Similarly, paying attention to Ethics is traditionally assumed to collide with commercial objectives, and not naturally support the category Business Skills. A dimension of Business Skills is handling the Succession Process, which is most effective when treated as part of business strategy, not simply a headhunting transaction, and which may involve tough choices. Firms that enjoy long-term success defy such assumptions, however. They understand that, in order to be entrepreneurial and adaptive, they need to harness the engagement of Employees; and that doing the right thing in ethical terms bolsters reputation, trust and ultimately, the brand. Without trust, held together by a strong Vision and sense of purpose, a business struggle. Tough decisions will sometimes be necessary, but firms with high engagement and adaptability are better positioned to make them in a way that maximises opportunities and minimises the fall-out.

2. Long-Term Continuity of the Family In this second category, the identified attributes are: Pride, Mutual Support, Strong Values, Social Engagement, Fairness, Ability to Handle Conflict and Strength in Unity. A highly functional, successful family like the Frescobaldis exudes a quiet self-confidence. They may give the impression that their lives are conflict free, but this is never true of any family, or any firm. People in all family firms will, from time to time, have clashing viewpoints on future direction, or the role of individuals, and so on; in addition, no one is free of feelings of resentment or jealousy, depending on the circumstances. What the high-performing families have the courage to do is acknowledge the differences and facilitate honest conversations about them. They are not immune to conflict, but they have learned to address them in an open and respectful way. Hence it is worth drawing special attention to the Ability to Handle Conflict. It is one of the toughest challenges in the list of 25. Emotions can run high, especially when such important matters as a career, future of a business and its potential for wealth creation are in play. So the ability to discuss such issues in an open and rational manner, come to a negotiated or democratic decision, attend to the feelings of those who lost the argument, becomes crucial. The principles Mutual Support and Strength in Unity could appear to be in conflict with the practices of tolerating dissent and acknowledging conflicting ideas. The explanation is that it is not a false unity that the high-performing families seek, but rather a unity of purpose while acknowledging differences of opinion, honoring the principle of Fairness. Another advantage of open discussion and a diverse range of views is that it can foster innovation, as it widens the range of views and sources of creative ideas. It is important to signal the role of Social Engagement. The most effective business-owning families have Strong Values and are anchored in their community, with which they share a culture, traditions, and long-term friendships. They have Pride; they care about the societies that they are a part of, and they understand that a good name and social standing gives legitimacy to the family and its business. Unless forced to, they have little intention to leave their place of origin and hence have a natural inclination to protect its environment and develop a rich cultural life for the well-being of generations to come.

The most effective business-owning families have Strong Values, and are anchored in their community, with which they share a culture, traditions, and long-term friendships.

Such families typically engage in charitable activities, often with a low profile. As well as helping society or the environment, such activity can create options for family members, including those, for example, who lose out on leadership positions. It is quite common for a family member who considers him/herself unsuited to a business executive position finds fulfillment with a leading role in a philanthropic initiative.

3. Long-Term Success in Ownership The key attributes in this category are Trust, Control, the Equal/Unequal concept, Voting Rights, Responsible Ownership, and Equity Concentration. One of the reasons some family firms hit crisis is that they fail to treat the question of ownership properly, as a professional discipline. Clarity of ownership and decision-making and wise stewardship are all of fundamental importance to the governance of a family-owned enterprise. Long-lasting family firms take time to discuss and clarify their values, which inform strategic choices around sectors, technology, and risk appetite. They exercise Responsible Ownership, tending to be conservative on debt levels, governing for the long term, caring about employees, society and the environment. They will not compromise the values for short-term gains. Such family businesses exert honest Control through strong values and high levels of Trust. They tend to maintain control over major strategic decisions, as active owners, holding to the vision and values mentioned earlier. There is a short distance between ownership and the business. There is relatively high Equity Concentration – most decisions are taken by the family, even where there is a public listing. The Equal/Unequal principle refers to the practice of high-achieving families to honor the principle of one owner, one vote. It deals with a potential problem where inheritance would otherwise result in asymmetric patterns of influence. For example, in a third generation, there may be one child in one branch of the family and six in another, which would lead to the former having far more say if it were in proportion to ownership. But families have also found that the practice encourages good governance. Their principle is simple and clear: it is the most able person who takes the leadership role, not the one with the most shares; it is the wisdom of the collective that decides, not the majority owner. This runs directly counter to the prejudice that a family firm discourages meritocracy because it is prone to nepotism; in the highest-performing examples, a sense of duty to the family and its values encourages the appointment of the most qualified leadership.

4. What do they do Differently Today? The fourth dimension of attributes of the high performing family relates to how they distinguish and renew themselves. Under this heading are five key areas to attend to: Separation of Issues, Formal Processes, Stewardship, Governance Structures and Role of the Family. These long-lasting families have transmitted values orally by living close to one another, sharing anecdotes that teach the history and keep their values alive; they know that the Role of the Family is central. They are, however, humble in admitting that they managed to thrive without formal process in place. Today, with the distance between family members – many of them operate over several countries or continents – and the knowledge they have acquired, they put in place the Governance Structures and Formal Processes the business needs, to ensure good Stewardship. They have learned the importance of Separation of Issues, so that particular issues of respectively the business and the family, though often closely linked, can be identified and addressed independently.

Conclusion
In keeping with the principle of paradox, a clear finding from the research is that the most successful business-owning families do not put profit maximization first. When you spend time with them, you notice that they have an intense pride for the business and its history. They also have a really deep sense of family, of unity, and how they can support one another. They have a strong sense of self; they do not try to be someone else. Their self-confidence is a quiet one, because they know that pride comes before a fall and that modesty is, counter-intuitively, a natural ally of ambition. For those seeking to emulate the most successful family firms, there are no easy, convenient benchmarks. Success is more to do with character and resilience. Aristotle defined three dimensions of human intelligence: episteme (intellect), techne (craft) and phronesis (practical wisdom and ethical values). It is clear that, for decades, business schools have taught the first two to the exclusion of the third. It is equally clear, from the evidence base on the most highly effective family firms, that Aristotle was right, and that phronesis ought to have parity in business education in the 21st Century.

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