February 2021 E-Connect Daily
Where the Heart Is
Understanding the ins and outs of family businesses
You can’t choose your family, but how does that impact the family business? Family conflict and different ideas and leadership styles all play a role. Understanding the ins and outs is crucial in how you approach them as a client. Dr. Josh Baron and Rob Lachenauer share the unique challenges of working with family businesses in their new book, “The Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise.” In addition to being co-authors, they are also co-founders and partners at the leading family business advising firm BanyanGlobal. The firm has advised over 200 business families in 20 countries since its founding in 2012, and was named the Family Business Advisory Practice of the Year by the Society of Trust and Estate Professionals in 2019 and 2020. We asked both for the behind-the-scenes take on family businesses.
How are family businesses different from other businesses?
Family and business are two of the most powerful forces in the world. Our families provide our nature in the form of our genes and much of our nurture. Businesses employ our most valuable resources—our people, our time and our capital. When combined, family and business amplify their impact, and their complexity. Imagine having to make a decision about hiring—or firing—a family member and then sitting across the table from them at Thanksgiving. Things can get complicated very quickly.
How are they surviving the pandemic?
In general, really well. Family businesses are typically privately-held companies, so they aren’t subject to the pressures of Wall Street or anxious investors. That means that, though they may not do as well in the “high highs” of a boom, they often are much better positioned in rough economic times. Our family businesses often have a healthy supply of cash on hand, can keep on loyal employees even as competitors might be looking to do layoffs, tighten operations, and even find opportunities for growth that their public competitors can’t in times like this.
What does 2021 and beyond hold for family businesses?
I think for many family businesses, 2021 will actually be a year of new opportunities. Having been conservative in “boom” times, they have some freedom to pursue opportunities in down times. I think many family businesses will emerge from the pandemic even stronger.
What does “ownership” mean in the context of a family business?
For all the talk of “imperial CEOs” of public companies, these executives can’t touch the influence of a family business leader backed by ownership power. The owners, a relatively small number of people (most family businesses are owned by far fewer than a hundred people), have ultimate authority over every decision in the business. They can fire the CEO, add or remove board members, change the strategy, sell the company, and decide who can be an owner, to name just a few things in their control. Family ownership keeps power in the hands of a few individuals.
What are some best practices related to governance where an extended family wants to be involved in the running of the business?
It’s important to remember that family business owners (and future owners) wear many different hats. They are members of a family, they are owners, they might be on the board, or they might be involved in management. Those hats come with different responsibilities and rights. Good governance takes into account that no every one of those roles should be involved in all aspects of the business. We suggest what we call a Four Room model—separate out a “room” for each of those roles (owners, board, management and family) and make sure that decisions are made in the appropriate room. That means, for example, that Aunt Tilly shouldn’t be advising on where to open your next factory, but she is entitled to express her opinion on how the family legacy should be fostered.
What is the key to a successful transition to the next generation?
The key is to start long before you need a transition. It can take years for the current leader to find a healthy path out—we call it a “glide path”—to doing other things that will keep him busy and happy outside of the business. And it’s important for the next generation to learn about the business and become involved long before there’s a formal discussion about succession. Fostering “psychological ownership” of the business is something that takes years, but will pay off in the long run.
How do you manage family drama so it doesn’t affect your business?
People assume that family businesses are full of conflict, but in our experience, it’s often the opposite. They’re so afraid of conflict because they don’t want to hurt the family that they avoid it at all costs. That can be equally destructive to the business in the long run because you avoid making decisions. We advise that people look for what we call “goldilocks” level of conflict—just enough to be healthy. You don’t have to always agree with every one of your co-owners, but you do have to be able to make good decisions together. That’s the goal for building an enduring family business.
Why business investments should align with your company’s mission
In times of panic, it can seem like every aspect of your business identity is up in the air. As the economy retracts and customers dwindle, more and more leaders will be tempted to move into new markets in search of opportunities — a choice that could prove disastrous for some.