The Two Sides of the Business Family: Governance and Strategy Across Generations

By Arist von Schlippe, Tom A. Rüsen and Torsten Groth

This book focuses on a central success factor for family businesses: maintaining the decision-making ability over generations while not jeopardizing the business due to family conflict, inefficient governance structures, or lack of identification. The authors identify that this is not as easy as the endeavor to bring two social systems together with contradicting logic (family and business) leads to many dangerous pitfalls. This book presents outcomes of a unique research project in which family managers of eleven of the oldest and largest German family businesses, at least the fourth generation, met for more than three years on a regular basis and presented the essence of their family governance structures to each other and to the authors. It was a joint “learning journey” that admits identifying twelve core questions that these families had been answering to keep up the relationship between family and business successfully over generations. Obviously, there is no “right” answer to these questions. The key to success is rather engaging the families in a process to find out their own answers and make them aware of the “two sides”: being a family is different from being a business family.

• Language: English
• Publisher: Springer
• Release date: Jan 4, 2021
• ISBN: 9783030602000

Arist von Schlippe

Prof. Dr. phil. Arist von Schlippe, Diplom-Psychologe, Psychologischer Psychotherapeut, Familientherapeut und Familienpsychologe, hat den Lehrstuhl »Führung und Dynamik von Familienunternehmen« am Wittener Institut für Familienunternehmen der Universität Witten/Herdecke inne. Er ist Lehrtherapeut für systemische Therapie, Coach und Supervisor (SG).

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Part I

Introduction

This chapter introduces the underlying issues explored in the book, as well as establishing key terms and concepts. We start with a historical perspective, looking at the various ways in which ownership has been passed on and how these procedures have developed over the centuries. In doing so, we seek to address a central dilemma facing all societies that have developed around biological kinship and private ownership, indeed most societies: should acquired ownership be handed down within the family and, if so, how is it to be protected at the same time? In early times, society developed a wide range of rather rigid rules in response to this crucial question. Today, in a modern, open, and liberal society, we rightly regard these as inappropriate and unfair—such as the overriding right of the first-born or the exclusion of female offspring from the line of succession. In modern society, these rules are seen as obsolete, but their disappearance shifts the difficult task of resolving underlying conflicts back to the family. The question as to how successful modern-day business families resolve these conflicts, and how they have done so in the past, is the subject of Chapter 1.4 Longevity as a subject of research: how do families arrive at solutions that are as fair as possible to their members while successfully managing an enterprise, and despite the often considerable tensions that arise from this dual task?

© Vandenhoeck & Ruprecht GmbH & Co. KG 2021

A. von Schlippe et al.The Two Sides of the Business FamilyManagement for Professionalshttps://doi.org/10.1007/978-3-030-60200-0_1

1. Family Strategy over Generations

Arist von Schlippe¹  , Tom A. Rüsen² and Torsten Groth¹

(1)

Witten/Herdecke University, Witten, Nordrhein-Westfalen, Germany

(2)

WIFU, Witten/Herdecke University, Witten, Germany

A business family is a special type of family, at least in our culture and age, since it is distinct from the private, nuclear family that is more typical of today’s society. History has seen considerable changes in the structure of families and households. The separation of family and commerce during the course of the nineteenth and twentieth centuries saw a situation in which work emigrated from the family (Tyrell, 1976). Before, families were rather organised in economic productivity units, and survival, not relationship, was first and foremost on their minds. Nowadays, the family represents a private sphere: family is regarded as opposite to the workplace and seen as a protective retreat from the demands of society. Family life and the world of work are largely distinct from one another, with family life standing in contrast to the impersonal domain of work (Gestrich, Krause, & Mitterauer, 2003, p. 391; see also Mitterauer, 2009). However, in business families, the situation is different, and in many cases, work is still directly linked to the family. Research into family enterprises has widely tended to adopt a business management perspective and has rarely examined this particular problem in great detail (Litz, Pearson, & Litchfield, 2012). There has to date been little investigation into the business family as a specific type (Dyer, 2003). Recently, the interest in integrating theories from family science into family business research has grown (Combs, Shanine, Burrows, Allen, & Pounds, 2020; Jennings, Breitkreuz, & James, 2014; Rieg & Rau, 2017; Sharma, Chrisman, & Chua, 2019; von Schlippe & Schneewind, 2014; Zachary, 2011). The importance of the family to the business is, however, repeatedly emphasised. The family is seen as a special resource for the business, giving it a particular competitive advantage, although mention is also made of the worst-case scenario in which the family has the potential to disrupt, or even destroy, the business as a result of internal conflict. Both material and immaterial values are at stake here: The biggest value destroyer in family business is discord (Hennerkes & Kirchdörfer, 2015, p. 62).

1.1 Family Strategy in Fact Has Always Been There

The challenges that this book examines in detail do not apply only to business families seeking to perpetuate an enterprise across the generations. If the spectrum was broadened well beyond modern forms of entrepreneurship, both historically and thematically, the fundamental issues involved concern the retention and transfer of land and property within a family or bloodline. Seen from this perspective, the subject of family strategy that interests us here, despite the term being of comparatively recent origin, in fact dates back many centuries and was a principal concern of royal dynasties as well as aristocratic families and clans and, later, also the bourgeoisie and farmers (see Felden, Hack, & Hoon, 2019; Gestrich et al., 2003; Weber-Kellermann, 1981). Over time, the solutions arrived at were repeatedly tested in terms of their sustainability and legitimacy, so we will begin with a brief examination of the formerly widespread strategies for dynastic preservation.

The defining characteristic of a dynasty is the determination of a ruling family—later, as mentioned, also applicable to other social classes—to pass on property within its own bloodline, thereby securing power, influence and wealth over generations. In pre-industrial times, it primarily concerned estates and titles, but a close link can be seen between the succession strategies deployed by European dynasties and those pursued by family businesses in the twenty-first century.

History provides numerous examples of inadequate and unsuccessful arrangements, often inflicting suffering on thousands of people over vast regions. To this day, the map of Europe is full of boundary demarcations reflecting solutions to inheritance conflict that were paid for with great hardship and a high death toll. Charlemagne provides an almost perfect example of the old saying: Established by the first, passed on to the second, wrecked by the third!¹—his realm collapsed well over 1000 years ago as a result of his grandchildren’s fiercely waged wars of inheritance (Riché, 1991, p. 201 ff.). Charlemagne attached great importance to effective succession and had previously made provision for the division of his empire in the Divisio Regnorum of 806, possibly the first family strategy document in history. Married five times, he appointed his three sons as heirs and successors—even at that time, the question seems to have arisen as to whether everything should remain in the hands of one person, ensuring ownership is well protected, or equally distributed among the male descendants, which was more in line with family logic and solved at least 50% of the problem, according to the thinking of that era.

Charlemagne opted for family logic: since two of his sons died during his own lifetime, the imperial honours were bestowed on his third son, Louis the Pious. Louis, however, failed to successfully oversee the succession as envisaged by his father (Booker, 2009). Charlemagne himself apparently had reservations about handing all his power to his son and for a time appointed his grandson—the son of his first-born—as king of some of his territories. Without digressing too far, the problem seems to have arisen from the way in which Louis the Pious handled his succession. He had three sons from his first marriage and one from his second. His second wife, Judith, is said to have urged him to change the original plans for succession, which had favoured Louis’ three older sons, to the benefit of her own son (later known as Charles the Bald). This caused the elder sons to go to war against their father. The conflict culminated in Louis’ deposition, but it was not long before the brothers themselves became embroiled in internecine warfare. After many years of turbulence, Charlemagne’s three remaining grandchildren (Lothar, Charles the Bald and Louis the German) divided the empire up among themselves in the Treaty of Verdun of 843. This brought peace but tore apart the unity of the Carolingian Empire. The words of a poet of the time provide a suitable lament for the end of many a large-scale corporation in the modern world, fragmented as a result of family dispute, The realm is now split into three. There is no longer an emperor, the king was replaced by a wren and the kingdom as a whole is nothing but a ruin (Riché, 1991, p. 205).

Even this brief foray into history reflects a core issue that will run throughout the book. How is it possible to combine two propositions that are barely compatible: to act according to the interests and expectations of each individual descendant while at the same time preserving the estate as a whole? The first follows a family-based rationale and a socially oriented logic of interests, while the second adheres more closely to the logic of economics and power. It would seem that balancing these two elements—i.e. preserving the family while also securing or augmenting the estate—is something that is rarely handled entirely satisfactorily. History provides examples of family strategies which prioritised preserving the whole as well as those focussed more on ensuring equal treatment of all descendants, often resulting in the division of land or property. Most identifiable practices reflect this contradiction: what are the criteria of fairness, correctness and appropriateness on each side and how can the two be combined? Is it preferable to act for the good of the overriding economic unit (the kingdom, country or estate) and subordinate all personal interests and destinies to it, or is it better to ensure the good of the various social units (families or clans) or individuals and attach a higher priority to respecting their rights and needs than to preserving the economic unit as a whole?

Historically speaking, the law of succession was the same throughout large areas of Europe, though in some cases customs varied at the local level from one dominion to the next (Gestrich et al., 2003, p. 393). In any case, no clear solutions emerged, indicating that there is no right or wrong way of approaching the problem: different forms are capable of surviving, although there is often a high price to be paid. The wars of inheritance fought to secure the legitimacy of dynastic succession—resolving conflicts between generations and siblings through violence—were certainly destructive and bear living testimony to the fact that the issues confronting business families to this day can probably never be resolved without problems and dispute. The consequences of all these altercations continue to have effect to this day. Just as wars of succession defined the map of Europe as it stands today, so early business families had to survive diverse conflicts and family wars (Gordon & Nicholson, 2008). In one example, the Fugger family was involved in more than 300 lawsuits between 1497 and 1805 in which family members litigated against each other—approximately 1 legal dispute per year (Herre, 2005; Schneider, 2011, p. 120 f.). With the rise of the bourgeoisie from the eighteenth century onwards, the predominance of the aristocracy dwindled, and there was a huge spread in entrepreneurial activity (Ziegler, 2000), with many master craftsmen who were economically independent. With property no longer a privilege reserved for the aristocracy, the problems associated with the transfer of ownership and succession now applied in the same way to middle-class business enterprises.

Clearly, no single appropriate solution to the problem of succession was found, and no ideal family strategy was identified, so the sheer range of solutions is hardly surprising. A common, but not exclusively used, system observed early on was the right of primogeniture with a focus on male descendants. However, a right of the most industrious is also to be found (Gestrich et al., 2003, p. 252), introducing the issue of selection and the criteria this involves. There are examples of arrangements whereby predecessors selected their successors (designation) and procedures by which electors chose their representative. All these systems were ultimately aimed at solving problems that can be regarded as issues of family strategy.

In the Mediterranean region, as well as in Central and Western Europe, it is possible to distinguish between two fundamental systems: the equal division of an inheritance among all children and the indivisible inheritance, which in the agricultural domain could mean the division of an estate or an indivisible (impartible) inheritance (Gestrich et al., 2003, p. 394) with the following likely outcomes²:

Whenever the option of equal treatment for all descendants was chosen, the price to be paid for peace within the family, whereby nobody felt disadvantaged, was that the estates became increasingly small in size. In some cases, this meant that individual rooms in the small farmhouses had to be divided up by chalk lines or that plots of land were so small they were insufficient to feed families. Where equal division of the inheritance was common, land ownership became increasingly fragmented and therefore led to antiquated forms of land tenure, in many cases resulting in indebtedness and the inability to keep up with the idea of private enterprise with its free market and monetary system (Weber-Kellermann, 1981, p. 151).

Where a single heir was given preference, whether as the first-born (primogeniture or impartible inheritance) or—less commonly—the last-born (ultimogeniture), priority was attached to securing the unity of the property (usually land and houses). But here the family often broke up, either as a result of dispute or else because the impecunious siblings subsequently moved away or were marginalised. This often involved injustice to the younger siblings, especially the sisters, who may have felt compelled to marry boys from the poorer tradesman class or even spent several years serving under their own siblings. The result was frequently significant social inequality within one and the same family (op. cit., p. 151).

One particular form of aristocratic law of inheritance was the entailed estate, whereby the entire family estate—often very large in size—was declared to be indivisible. It was a form of trust model by which an estate was withdrawn from the existing inheritance laws and established as inalienable. One family member, usually the first-born, became the beneficiary and custodian of the estate during their lifetime. Seen as a way of securing obsolete aristocratic privileges, this particular arrangement was abolished in Germany in 1919 (Gestrich et al., 2003, p. 397).

There have been frequent attempts throughout history to strike a balance that would do justice to all protagonists involved. In the German-speaking countries, the Hausordnungen or family contracts were especially important. These may be regarded as an early form of today’s family strategies, since they set out rules governing the line of succession, general legal succession and, in particular, issues concerning the inalienability or the division of property. The middle classes had an early tendency towards treating all children equally, especially in the larger European cities. At the same time, large private enterprises and banks in this milieu endeavoured to avoid any distribution of an estate so as to preserve the business as a whole (Gestrich et al., 2003, p. 397 f.). Concern about excessive fragmentation was especially relevant in farming. In southern Germany, for example, the practice of distributing estates led to the impoverishment of the rural population, increasing the pressure on the inhabitants to move away from their home territory and—on a more positive note—forcing them to engage in commercial activity.

This brief historical survey, while far from complete, shows that the endeavour to combine the two principles that have defined our culture for thousands of years—kinship and private ownership—almost inevitably generates a conflict that is anything but trivial, posing an ongoing challenge to both society as a whole and the individuals concerned.

The next section will take a more concrete look at modern family businesses and the question of what ownership of an enterprise means as far as a family is concerned.

1.2 The Business Family as an Object of Research

The economic importance of family businesses has been widely emphasised in both the literature and the press (for an overview, see Wimmer, 2009). Over 90% of businesses in Germany are controlled by a family (for details, see Stiftung Familienunternehmen, 2014; Kay, Suprinovic, Schlömer-Laufen, & Rauch, 2018), although it should be noted that the figures vary between 60% and 95%, since varying definitions are applied in different studies (Astrachan, Klein, & Smyrnios, 2002; Klein, 2004). Similar figures apply in many Western countries (e.g. for the USA, see Astrachan & Shanker, 2003; e.g. for Switzerland, see Fueglistaller & Zellweger, 2007). With an estimated total of about 3.38 million family businesses in Germany (Kay et al., 2018), we are clearly talking about more than just a few negligible exceptions. If we then consider that many of the families behind a family business are organised as extended families, we begin to realise the sheer number of people affected by the specific issues that arise when a family is closely linked to a company in its immediate environment. Not only does the family have to organise its own relations; in many respects, its day-to-day existence is also closely linked to what happens in the business. There is considerable variety here, ranging from micro-enterprises and small-scale businesses, in which family and business life are barely distinguishable because all family members work in the business, through to large-scale corporations in which only individually selected family members—if any—are actively involved in running the business, or indeed the family is explicitly excluded from business operations. In the latter case, the family only influences proceedings from its majority shareholder position. There are also huge differences among business families from the point of view of size alone: from the family of four that runs a restaurant together or the small shareholder group with a holding interest in a large company through to cases of extended families of well over a hundred individuals (Klett, 2009) sharing ownership of a corporation worth billions.

The characteristic potential of chance and risk (Wimmer, Domayer, Oswald, & Vater, 2005, p. 7) of business families has to do with the fact that these families are faced with particular challenges (see the next chapter for a definition) compared to non-business families (for the sake of simplicity, we shall refer to the latter as other families). Other families exist as self-contained entities. By contrast, the members of a business family are joint owners of a business (in whatever precise form or on whatever scale) and are, thus, permanently involved in three very different social systems: the family, the business and the group of owners (the three circle model is addressed in more detail and from a critical perspective in Sect. 3.​2). This imposes communicative demands which can be described as paradoxical from the outset (cf. Groth & von Schlippe, 2012); in contrast to other families, the business family is constantly called upon to make economic decisions and requires some form of structure and organisation. As such, an external element is introduced to the family which is alien to other families. A family is normally a social unit that is not subject to any explicit organisation but centres around personal dialogue, relationships and ties. The family system is determined by kinship and emotional intimacy, while the business system tends to be dominated by rational criteria, although on closer inspection this is not always the case (as already discussed by March & Simon, 1958). The need to establish organisation-like structures, selection processes and voting procedures is often felt as a disruption to the family peace, provoking responses along the lines of We don’t need things like that!, We never used to do things that way!

The question of how business families respond to these challenges is the starting point of this book. We were interested in discovering the various structures and regulatory systems used by these families to organise and administer themselves, learning about their experiences—both positive and negative—of the various solutions found to address insoluble problems and ascertaining how feasible these solutions were over time. Time is indeed an important factor here: one thing quickly becomes apparent when looking at families: they operate according to different time scales than the fast-moving organisations of the modern era. Nor is the time scale of a family the same as that of a human lifetime. Processes in families encompass generations, and it is sometimes not until decades have passed that a particular solution to a problem is revealed as having been a success or a failure, as illustrated by the following little case study.

A company founded at the end of the nineteenth century was bequeathed in equal parts by the father to his three sons; the daughters received a monetary payment as was common practice at the time. The father also stipulated that the parts must remain a unified whole in terms of voting rights and that the clans thereby established were each to be represented by one managing director in the company. This arrangement, which from today’s perspective reflects a family first approach, ensured that family relations remained relatively harmonious. In fact, the plan was executed fairly smoothly over several decades: within each of the three sons’ families, there was one son who carried on business operations in collaboration with his cousins. It was not until the transition from the grandchildren’s to the great-grandchildren’s generation that the weaknesses of the model were revealed. At this point, representatives of both the third and the fourth generations were simultaneously involved in the company, and, although their ideas as to how the company was to be managed diverged starkly, no action was taken to buy in external expertise and the highly divergent business philosophies were not discussed. As one of the individuals involved reported when interviewed, It was swept under the carpet. People just ignored it—the attitude was: ‘Where problems aren’t wanted, they simply don’t exist’. At one fateful meeting between the cousins and uncles, everyone realised far too late that their fairly large-sized company was in fact dramatically at risk, and this later resulted in insolvency (Rüsen & von Schlippe, 2007, p. 368 f.). Only with the hindsight of several decades was it possible to see the weaknesses in how the family had managed the family/business fairness paradox (which will be discussed in the course of this book), and this was why it ultimately failed to secure the family’s decision-making capacity in the long term: None of us was really in charge (p. 373).

This case story is a good example of how a business family is continuously faced with a multiple mandate: it has to organise its interaction as a family or family alliance and run a business enterprise—whether in person through individual members involved in business operations, strategically by taking far-reaching leadership and management decisions, or on a controlling basis through supervisory and advisory functions. While each of these tasks on its own is challenging enough, in addition, all decisions must adhere to corporate law and procedural rules which, in itself, places constraints on the capacity to switch between formal and informal communication (Waibel, 2016). Moreover, it is not uncommon for individual family members to receive special attention, following the family logic, especially if they are in need, and, finally, decisions frequently have to consider the usually close connection with the region or more general social concerns.

The art of family governance—a core element of which is the establishment of a family strategy and the resulting practice of family management—is to tackle the challenges involved in ensuring that the family and the business enterprise remain reliable partners to each other over generations (Aronoff, Astrachan, & Ward, 1998; Koeberle-Schmid & Caspersz, 2013; Mustakallio, Autio, & Zahra, 2002; Suess, 2014). In essence, the primary requirement of family management boils down to securing the solidarity of the family on the one hand and ensuring the capacity for entrepreneurial decision-making on the other (Wimmer, 2014). For this purpose, competences and structures are needed which help ensure that family cohesion is preserved and that decision-making capacity is retained despite growing numbers—this may apply when making selection decisions between family members, for example. In summary, the business family is to be regarded as a unique family type. To be successful in the long term, business families have to align their self-characterisation, their philosophy and their decision-making structures to this specific set of requirements: Anyone who believes such a family is quite normal with just the ‘small’ difference that they jointly own a business will miss out on the opportunities available to strengthen the family as a result of its situation […] while at the same time fail to recognize the risks associated with its status (von Schlippe, Groth, & Plate, 2011, p. 523).

1.3 Defining Terms

This section looks at the fundamental terms to be used in our study of family strategy and business families across the generations. First of all, we will explain how we understand the terms underlying this study, and then we will go on to outline the state of knowledge and research context on which these understandings are based.

1.3.1 Family Businesses and Business Families

To this day, no standard definition of a family business exists, nor is there a standard definition of a business family (Kleve, 2020; Kleve & Köllner, 2019; Litz, 1995, 2008). Some definitions, for example, require not just ownership but also active involvement of the family in the operational management of a business for it to be described as a family business. Others regard a share of at least 51% as the decisive factor. It is also possible to regard the question Family business or not? less as an either-or question but rather as a question of determining the degree of the family nature of a business enterprise (for more detail on this, see, e.g. Astrachan et al., 2002; Klein, 2004; Wimmer et al., 2005; Zellweger, 2017). The inconsistencies among these definitions pose a major problem for research (Harms, 2014), especially in terms of the comparability of studies, since the findings can sometimes convert the definition into its very opposite (Hack, 2009).

This is not a dilemma we will be able to resolve here. In this book, we follow the definition of Wimmer et al. (2005), which takes as its point of departure the influence exerted by the family on a business, based on its ownership (p. 6 f.). This is a deliberately broad-based definition that encompasses a wide range of possibilities as to how each family is linked to its business, regardless of the latter’s size: the influence of the owner family can be felt through active operational involvement at diverse points in the business as well as through active participation in a monitoring or supervisory body.

We talk of a family business when the business in question is partially or wholly owned by one or more families or family associations. The latter exerts a defining influence on the development of the business, based on its entrepreneurial responsibility via either a management or a supervisory function or both. If the family is not represented on the management, it sees itself as a partner to the business, in particular in the development of entrepreneurial strategy. The legal status and size of the business are irrelevant to this definition, so a family business is not equated with an SME (micro, small and medium-sized companies), but the transgenerational element is crucial (Basco, Calabrò, & Campopiano, 2019; Suess-Reyes, 2017). A business is a family business if there is discernible will to pass on the enterprise in whatever form (whether in concentrated or split ownership or through management) to the next generation. Start-ups or owner-managed companies are therefore not family businesses per se.

We talk of a business family where there is a definable group of people with distinct membership criteria who are related to each other (going back to an original couple, usually the founders of the business, who thereby determine the boundaries of the family) and where the development of this group of people is shaped by a business enterprise owned by one or more family members (Kleve, 2019; Kleve & Köllner, 2019). This group does not necessarily have to live under one roof but is defined by the fact that all members are descendants of the original couple. The question as to how ownership is passed on within the family group is an issue that occupies the family. The type of solution reached (the clan alliance, so-called crown prince arrangement or extended family organisation) is of less importance, as long as there is a discernible will to transfer ownership to the next generation, in whatever form, whether through concentrated or split ownership or through management.

In the following, we shall also deliberately use the term business family when it comes to issues usually decided on and assessed by the shareholders or the shareholder group of a business enterprise. The aim here is to show clearly that the individuals involved are not simply shareholders or managers, investors or owners but that, as a result of mutual ties of kinship, they share—and to some extent endure—additional social dealings with one another. To put it in the words of one participant in a real-life case study: "When I married him, as he was a shareholder of company XYZ, I realised at the time that, one way or another, I had in fact married the entire business family. All close and not-so-close relatives have their own particular role to play within the family or business milieu. So, we had significantly more guests at our wedding than originally planned, for