15 Considerations for Family Businesses in Transition

15 Considerations for Family Businesses in Transition

Whether emerging from a global pandemic or navigating the accelerating pace of change, family businesses are rich in the qualities that help companies thrive in times of upheaval. The current drivers of change in family companies are structural, cultural and generational, all complicated by the impact of the COVID-19 global pandemic. Even so, family businesses stand ready to thrive in an unpredictable world.

That’s excellent news, considering the economic impact of family businesses. According to Tharawat Magazine, family businesses generate 70-90% of global GDP annually. Ernst and Young reports the largest 500 family businesses constitute the third largest economic contribution in the world by revenue (after the US and China) and employ 24.1 million people worldwide.

THE NATURE OF CHANGE

What is changing for all companies is the same: digital transformation, the shifting priorities and expectations of employees and customers, and the natural turnover in organizational leadership exacerbated by the retirement of the baby boomer generation. Family businesses experience these transitions in their own, distinct context.

Digitalization - COVID-19 accelerated digital transformation worldwide. The pandemic-related stay at home orders forced many family businesses to accept remote work arrangements, which has improved work-life balance and opened candidate pools to people less eager to relocate. Many of these businesses also invested resources into ecommerce, digital finance, or digital tools to engage their constituents virtually, unencumbered by any short-term financial reporting concerns.

Changing priorities - The priorities of family businesses are evolving, with ESG principles rising in importance with the emergence of next-gen leadership and the urgency around climate change. Legacy remains critically important, while the formality that existed with the older generation is losing traction to the informality preferred by younger leaders.

Passing the torch - The generational turnover in family run businesses extends beyond top leadership to the cadre of family-member senior executives and advisors. Either the people in those roles are also reaching retirement, or the incoming leaders prefer a team of people who are of the same generation, are more digitally savvy or have more relevant experience.

TALENT IN TRANSITION

Companies that are led or controlled by members of one family are not immune to the talent challenges faced by other businesses, however they must navigate additional issues unique to family businesses.

Professionalization - Family businesses are likely to ensure that their members receive training and professional development to meet the needs of the company. Accessing essential skills and experience from outside the family can advance the interests of the business if that talent is well-integrated into the family culture and has a deep understanding and acceptance of the family’s values and intentions.

Professionalization includes strengthening governance, for example creating consensus around ownership, establishing shared goals, codifying values and establishing well-defined decision-making processes. Things that were understood within a family at the beginning of a business need to be recorded, perhaps renegotiated, as the business grows and subsequent generations take over.

Succession - Perhaps the weightiest issue for family business is succession. Conflict can arise over who ascends to the top leadership position, and who has authority over the rest of the family’s stake in the business. Many families are having a much harder time getting the younger family members interested in the family business. Once, it was expected that the next generation would take over, but the third and fourth generations are different; they were born wealthy, they didn't see the founder build the business. In China, the one child policy leaves the family business with fewer choices.

Bringing outsiders in - Non-family managers can bridge any experience or skills gap family members may have, but hiring senior executives from outside of the family is rife with challenges, not limited to the risk of loosening family control and trusting an outsider with both the family wealth and family legacy. From the candidate perspective, top talent wants to know they have a promising career path, but in a family business those top roles may go to… family.

THE ADVISOR ADVANTAGE

The decisions families make in their businesses are personal and can affect generations. Working with an independent, trusted advisor can be a significant advantage.

Confidentiality - When the chief executive needs to explore certain changes that affect the business and the family, it makes sense to talk to someone confidentially. An advisor is neutral and can provide confidential advice without having a personal stake in the outcome.

Objectivity - An executive search firm can help succession in family businesses by bringing structure and objectivity to the process. For example, setting neutral guidelines for what makes a candidate eligible such as work experience, education, and technical skills. And critically, taking the time to get the family ready for the transition.

Attracting talent - Even within families, next gen talent is motivated by purpose and aspires to lead a company toward a great societal impact. Executive search consultants can help clients meet that vision, inspiring the next generation to stay engaged in the family business. Search advisors who know and understand family businesses are also those businesses’ best advocates, able to help candidates understand a family’s culture and values, and recognize the benefits of joining that business.

Understanding the family and the business - In any trusted advisor relationship, the advisor must understand the business. In family businesses, the advisor must also understand the family, their culture, their values and their goals. There is an emotional component that drives a number of decisions in family run companies, and the right advisor understands the emotion and pays attention to the broader family perspective.

Diversity - Diversity is important to any business, including family businesses. The internal candidate pool is gradually expanding to women in the family as gender norms change over time. Large family corporations are more successful attracting and retaining diverse people from outside the family, though it is harder for mid-cap and smaller companies that have a unique family culture. Executive search consultants are often able to identify, attract and help clients retain diverse talent from within the family and from the external talent pool.

THE NOT-SO-SECRET FAMILY RECIPE FOR SUCCESS

The environment within and around family businesses, many of which have thrived for generations, is in transition. Everything is changing—and changing fast. So why are companies that seem so entrenched in their long-term perspective, family control, and family values doing so well? It may be because of their long-term perspective, family control, and family values.

The long view - A family business usually has more of a wealth-creation mentality as opposed to a transactional, stock price-driven mentality. It’s not the next quarter that matters, it’s the next three years, even the next generation that matters. Long-term orientation means family businesses are less vulnerable to short-term pressures and more likely to take risks and endure challenges.

Family control - Agility is an essential ingredient for adapting to change, and perhaps counter intuitively, family businesses have agility in abundance. For example, family control allows for streamlined, expedited decision-making that allows them to pivot quickly. Family businesses also enjoy certain efficiencies that make them particularly good at troubleshooting, decision-making, risk-taking and looking for new ways of doing business.

Values - Consider the global pandemic. When many companies used the events surrounding COVID-19 to cut costs, many family businesses made decisions based on their values and endured significant losses to keep their people employed. Those companies earned extraordinarily good will, social capital, and loyalty among employees, candidates and customers alike. An adherence to values not only burnishes a family legacy, it elevates public trust in family businesses.

Self-Awareness may also be a feature and advantage of the family business. The global 2021 PwC Family Business Survey found that family businesses recognize the need to expand and diversify, focus on digital transformation, technology and innovation and generate new ways of thinking, making family businesses unlikely to rest comfortably with their current success, and more likely to continue adapting and innovating.

Data reported by Harvard Business Review shows that family businesses typically outlast other companies, and “dominate most lists of the longest-lasting companies in the world.” The global pandemic stress-tested family businesses, providing some of the best evidence yet that these organizations are some of the most resilient, agile, innovative and enduring companies, and are likely to remain so for generations to come.

For family businesses seeking support from a trusted advisor on talent strategy, succession planning or culture shaping, AESC Members can help.

Contributing AESC Member Authors

  • Helga Kayser-Dörr

    Helga Kayser-Dörr

    Managing Partner, Germany and Global Sector Co-Leader, Industrial Manufacturing,
    Boyden – Düsseldorf

  • Francisco (Paco) Ruiz-Maza

    Francisco (Paco) Ruiz-Maza

    Mexico Country Manager and Managing Director
    Russell Reynolds Associates – Mexico City

  • Simon Wan

    Simon Wan

    Chief Executive Officer, Cornerstone International Group and President,
    Cornerstone China – Shanghai