Family Enterprises: The Essentials

By Peter Leach

Family firms are to be found in every sector of commercial activity. Commitment, family values and pride in the business are typically their special strengths, yet they also face major challenges in reconciling the needs of the business with those of the family.

Drawing on the author's extensive experience of working with and advising some of the world's most successful business families, this new and updated edition of Family Enterprises: The Essentials explains the pitfalls, tensions and competing demands that destroy too many family businesses. These problems can be avoided, and Peter Leach reveals the techniques and strategies needed to do so. Running a successful family business is always a huge challenge, but this book offers real insight and guidance on how to keep both business and family united and buoyant.

• Language: English
• Publisher: Profile Books
• Release date: Jan 21, 2016
• ISBN: 9781782832065

Peter Leach

Peter Leach is seen as the founding father of family business thinking in the UK and pioneered research in the field in the 80's. He founded the Stoy Centre for Family Business, and was previously a partner at BDO LLP. He founded his own business, Peter Leach & Partners LLP, in 2008, which won the STEP Family Business Advisor of the Year 2013/14 before being acquired by Deloitte LLP in 2015. He is now a partner at Deloitte leading the family Enterprise Consulting practice there.

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Preface

In January 2015 I joined Deloitte UK as a partner. I am also delighted to be leading the Family Enterprise Consulting practices carried on by the network of Deloitte member firms throughout the world. It is a privilege to work with an organisation that takes family enterprises so seriously and fully recognises their importance to the global economy. We focus on helping entrepreneurial families tackle the complexities of family business governance, succession planning, and next-generation education and engagement – but we also go further. Although there is often a family business at the core of their activities, wealthy families today increasingly see themselves as diversified enterprises managing a collection of their shared legal, financial, real estate and philanthropic interests. So with Deloitte I am working to build a deeper and more integrated service portfolio for our clients, embracing this broader ‘family enterprise’ model, helping families who find themselves as co-investors together to negotiate the delicate dynamics of family relationships and to establish a unified and cohesive family approach to their enterprise.

While this book looks forward, celebrating the prospect of a rewarding partnership with Deloitte in the years ahead, it also reflects upon and records my personal journey through a period of remarkable change. This began in an era (the late 1970s) when family companies were seen largely as quaint anachronisms of bygone times, and misunderstood as inefficient drags on entrepreneurialism by dint of their underinvestment and parochial management style. I feel privileged to have witnessed and to have participated in the transformation that has taken place in this viewpoint. Today, we appreciate the strengths of family enterprises and their immense contribution to the world economy, and find ourselves in a new era when family business has become an enlightening and exciting area of interest among researchers, theorists, advisers, policymakers and legislators.

My fascination with family businesses took hold in the early 1980s when, as a partner at accountants Stoy Hayward (now known as BDO), I worked with owner-managed businesses and some older family companies in the UK. I noticed the way that business and family overlap and depend upon each other in these firms, and I kept seeing the same issues cropping up: dads unwilling to think about the future and succession; brothers finding it hard to work together; and so on. But at that time no one in the UK had really studied what makes family businesses special. In contrast, on my travels in the USA (from the mid-1980s onwards) I saw the way that conceptual thinking about family companies was taking hold among both advisers and family business people, spurred on by focused academic research into the unique issues faced by these companies.

Influential figures working on researching and analysing family businesses in the USA at the time included Peter Davis (then at Wharton Applied Research Center), Ivan Lansberg (at Yale School of Organisation and Management) and Harry Levinson (at Harvard), with more practical input from established consultants like Benjamin Benson and Léon Danco. During my US visits I was fortunate enough to have the opportunity to shadow Davis on his assignments advising major US family businesses, and I also attended many family business seminars and conferences, which, by the late 1980s, were becoming increasingly popular across the country. Witnessing all this interest and enthusiasm, I decided to organise some activities and events in the UK.

The first step was to commission two studies, supervised by the London Business School, designed to review and quantify family business activity.¹ These included the key finding that 76 per cent of UK businesses are family-controlled. Next I wrote the first edition of Guide to the Family Business (a forerunner of the current book), which was published in March 1991, and invited Peter Davis to help launch various UK projects – he was the keynote speaker at a series of sell-out seminars (organised in conjunction with venture capital group 3i) that took place around the country. Family business people at these seminars spoke of a new sense of belonging, based on the realisation (for many, a true ‘eureka’ moment) that what they were experiencing was not unique to them, and that all family businesses faced and shared the same sorts of systemic tensions and challenges – and advantages.

It rapidly became clear that taking a fresh look at family businesses was an idea whose time had come, and via a series of initiatives – seminars, conferences, lobby groups, newsletters and other specialist publications – a stir was created that quickly took shape as the first attempt to do some joined-up thinking in the UK about family systems theory, family psychology and family business.

A quiet revolution

A quarter of a century has elapsed since these events, during which I have enjoyed a wonderfully privileged and rewarding career, working as adviser, teacher and facilitator with many dozens of business families around the world – in Europe, North America, Asia and the Middle East – helping multigenerational, multinational family enterprises, but also smaller and medium-sized family firms keen to foster growth and continuity. And in those 25 years the family business community has become firmly established internationally as an independent, dynamic and increasingly well-researched study discipline. Prestigious academic journals focusing on a wide spectrum – management, law, economics and the behavioural sciences – now regularly publish articles exploring the unique challenges and advantages of family businesses. At the same time, family business educational programmes at universities and business schools have grown significantly – including specialist courses for family members – and the value of family business consulting too is being fully recognised. This is not consulting in the traditional sense of client-visiting, fact-gathering and report-writing. Family business advising and consulting offers families expert facilitation, trust-building, support and guidance services that empower family members, helping them arrive at their own solutions and their own consensus as to the best way forward.

Reflecting these developments, and the raised profile of the sector, family-owned businesses themselves have become more knowledgeable and sophisticated – and more willing to embrace a fresh outlook and policies that start to counter some of their in-built challenges. For example, 25 years ago the hallmark of most family firms I encountered was their unstructured (often chaotic) approach to decision-making and organisation, but it is noticeable that family firms today for the most part have adopted what could be termed a ‘structured but flexible’ model, with more thought being given to building family and corporate governance, accountability and more efficient decision-making processes.

Similarly, it used to be unusual to find female family members employed in the family business, but today it is much more common. Also, in many countries (but not all) favouring the eldest son in family business succession now tends to be regarded as a historical anachronism, with attention quite rightly focusing instead on competence. At the same time, equal remuneration of family members is giving way to merit-based reward systems; secrecy is giving way to more openness; and family business values, rather than being assumed (‘We’ve always done it this way’) are more likely to be embraced, with families making special efforts to define and articulate their values in the belief that vision, values and culture can make their businesses more special, competitive, resilient and sustainable.

Encouraging as these trends are, they should not disguise the fact that a great many family businesses still face huge challenges coping with the dangerous overlaps between family and business systems, and a daunting list of consequential issues: organising responsible family ownership; working productively with non-family members; engaging and developing the next generation (and future leaders); creating policies to manage the roles, remuneration and rivalries of family members; implementing successful generational transitions; and upgrading family and business governance. So the family enterprise adviser’s job is far from over – especially as there is no obvious sign of improvement in the key mortality statistics for family firms that fail to make it to the next generation. Another challenge is the trend towards more family businesses being run by groups of siblings rather than by a single leader.² Team leadership is not a problematical concept in itself – and in family companies there may be compelling reasons to combine two or more people in leadership – but it remains true that we have only limited experience of how to make this team-based family business model work well.

Some golden rules

During my career I have come to understand that a key aspect of an adviser’s role is finding out what is really happening both within the family and at the company. Plagued by selective amnesia, procrastination, paranoia and a few other syndromes, family firms are generally very good at concealing what is actually going on. I have developed a number of techniques to help me (and the family) get at the truth, including compiling my own metaphorical phrase book or subtext translator. Some examples of translations from ‘what is said’ into ‘what is actually meant’ will give the flavour of many of the scenarios discussed in this book:

On a pay package for the kids – ‘I know it’s less than the going rate but we can’t be seen to be overpaying family’ translates as ‘You’re going to own the business someday, and a bit of hardship along the way will help remind you of the fact and keep you in line’.

Reasons for joining – ‘I mainly joined the business to continue the family traditions’ equals ‘I can’t really explain why I joined, and now I’m not quite sure what my long-term plans are’.

Succession – ‘Someday, all this will be yours’ equals ‘I really don’t know what’s going to happen and I want to keep my options open’.

Important lessons I have learned – courtesy of the many families who have generously shared with me their setbacks and successes – are summarised in the following golden rules:

Remember that it’s all about ‘purpose, purpose, purpose’. The key questions family members must address are ‘What do we want to achieve by being in business together?’ and ‘What do we hold dear to our hearts in terms of values and our vision for the future?’ When families are able to come up with a clear consensus on answers to these fundamental questions, normally everything else drops into place.

The issues that present themselves in family businesses can almost always be divided into three categories: (a) personality – such and such a person is impossible, unreasonable, illogical, irrational; (b) structural – something is malfunctioning in the structure of how the family relates to the business; and (c) business – the business may be going downhill and nobody is quite sure whether commercial or family factors are causing the underperformance. In the great majority of cases the real challenge facing the company is found to lie within the second category (structural), even though the case is presented as concerning the first (personality) or the third (business).

Linked to the previous point, because structural issues in family businesses are to a large extent predictable, such businesses enjoy a special advantage relative to their non-family competitors – they have the opportunity to solve tomorrow’s predictable problems today. In other words, they can effectively resolve such problems before they arise. For instance, the development and mentoring of next-generation leadership can be planned in detail ahead of time, in a calm atmosphere, under an agreed process, thus reducing the potentially disastrous impact of unexpected yet predictable events.

Lastly, when family business people find themselves making business decisions for family reasons, all sorts of alarm bells should start ringing.

Objectives for this book

Family firms face complex dilemmas that affect not only the destiny of the business but also the destinies of owners, their families and their employees. How do owners reconcile their own and their family’s aspirations with the commercial goals of the firm? Can they motivate family and non-family employees alike? Should they try to solve problems themselves or take independent advice? There is the major issue of who is to succeed to management and ownership control – when should planning for succession begin and who to choose? Other concerns include whether to sell out, raise external finance, diversify, demerge, bring in more family members or more outside management, and so on.

All these dilemmas affect most family businesses sooner or later – that is, to a greater or lesser extent they are all predictable – and the aim of this book is to help family business people approach them in the right way and arrive at the right decisions. Depressingly, in many cases by the time the problems associated with the issues arise it is too late to take action and the business is well down the road to distress and upheaval, and sometimes to the brink of failure. The chances of success for a family enterprise are greatly increased by ensuring that the major, life-threatening questions are tackled at an early stage and plans are developed for the future. In the same way that the company’s commercial activities and opportunities must be continually examined and evaluated, the development of its relationship with the family needs to be constantly assessed, managed and reviewed.

Family business owners and managers often fail to consider these crucial issues in sufficient detail. Too involved with the day-to-day activities of their company, they put off getting to grips with them until a later date. Reluctance to face the problems and to take external professional advice often stems from family enterprise leaders’ inability to gain knowledge (and in some cases self-knowledge) concerning the systems-based and psychological forces that are at work. How, for example, have others tackled the problems and with what consequences for the firm? What might happen if the issue is ignored – will it go away or will a major crisis arise?

This is not a how-to book for family enterprises. Indeed, there can be no such thing because each family enterprise is different, and there are really no success and longevity rules that can be applied from firm to firm without serious qualification and adaptation. Instead, proposed in the pages that follow are broad frameworks, principles, processes and mindsets to help shape problem-solving perspectives, as well as some tools and working guidelines designed to contribute to the efforts of family enterprises to achieve long-term continuity, growth and prosperity.

Structure and organisation

First, an explanatory note about my approach to and treatment of the subject. The need to discuss family enterprises in a coherent fashion has meant that the book structure in many ways reflects the development and life cycles of the businesses themselves: that is, a progression from straightforward owner–manager beginnings through to third-generation and multigenerational family companies; from clear-cut simplicity through to significant complexity. The book (and to an extent each chapter within it) reflects this evolutionary process, starting with personal, hands-on management and governance, which then benefits from integrating outside expertise. Next, family membership becomes broader and more inclusive, although family activity in management becomes more restricted based on objective competence. Lastly, management and ownership succession become more planned.

On occasions, the need to progress through the subject in this way has required that certain topics be introduced and explained in one part of the book and then re-examined in a different context in another part. For example, most family businesses benefit from having what is called a family council, the principal role of which is to ensure that the vision, values and aspirations of the family and the business are aligned. But a family council in a small-scale second-generation business (the sort of firm discussed in Chapter 3, where family councils are first introduced) bears only passing similarity to that same body at work within a sixth-generation business with hundreds of shareholding cousins (so, in the light of this, we revisit family councils again in Chapter 7, which is devoted to the special factors affecting these more mature businesses).

The book is divided into ten chapters. Chapter 1 is a broad-based introduction, covering the economic importance of family businesses, what factors make them special, and the dilemmas and challenges they need to overcome. Attempts via research to test whether these advantages and disadvantages have a measurable impact on commercial performance are reviewed. Although family firms are to be found in every sector of commercial activity, their special strengths mean that they flourish best in fields in which their advantages can be fully exploited. These sectors are examined, together with supporting cases and examples.

The special status of family businesses, introduced in Chapter 1, derives from their structural form. This structure is characterised by complexity – a family system, a business system and an ownership system linked together through wealth, legal arrangements, employment relationships and emotional/relational bonds. Understanding the interaction of these systems is crucial to understanding family business dynamics, and this is the central topic in Chapter 2. The other feature that makes family businesses special is the people who are involved in them; the background and perspectives of each of the major participants are examined. The chapter also introduces some of the main causes of conflict that can arise – particularly father–son conflict and sibling rivalry.

Families learn to build a shared vision by aligning individual and family values and goals, and that vision becomes a guide for planning, decision-making and action. A good starting point always is to focus on purpose, with the simple question: ‘What’s our business for?’ Developing a consensus on this most basic of questions helps families improve their chances of success when they move on to establishing ground rules for their relationship with the business (the main subject matter in Chapter 3) and in defining the responsibilities of family members. The aim is to formulate and adopt policies that strike a good balance between the best interests of the business and the well-being of the family, and then to design and establish effective governance structures that help the family develop a cohesive approach to the business and provide organisational focus and accountability.

Chapter 4 discusses the next generation – to join or not to join the business, the importance of outside experience, and issues surrounding relationships with the senior generation. It goes on to highlight how conflicts arising between the family, business and ownership systems are particularly acute and troublesome in relation to human resource management practices. Clear and explicit management criteria must be drawn up relating to HR issues and family members. Guidelines designed to help control and manage the contradictory forces are proposed. Family employees should be rewarded and promoted in line with their contribution to the business; their performance should be evaluated regularly and objectively within a system that applies to all staff.

Family businesses have a dangerous tendency to introversion that needs to be countered by the effective use of external talent. Chapter 5 discusses making the most of outside resources under three headings: employees, non-executive directors and advisers. Family companies must endeavour to attract and motivate high-quality, non-family employees and (under carefully designed incentive schemes) reward their contribution. Non-executive directors can be especially valuable to family-owned companies, providing seasoned guidance, specialised expertise and networking connections. Lastly, skilled family enterprise advisers and consultants are able to probe difficult issues and develop discussion of a family’s problem areas in a subtle and sensitive way that minimises the possibility of friction and confrontation. Their selection should be based on competence and their performance periodically reviewed. Possible conflicts of interest need to be thought about and avoided.

The role of the board of directors in the governance structure of a family-controlled company – the topic addressed in Chapter 6 – is critically important. Establishing a board that includes independent outsiders is probably crucial for the vast majority of family businesses if they are to achieve long-term success. Such a board brings objectivity and experience to operational and policy deliberations, and imposes important disciplines. When a family introduces board diversity it sends a positive and motivating message to customers, shareholders and employees. In larger, more mature family companies there is a balance to be struck between the interests of the family as owners of the business and the managers entrusted to run it. No single model works for all, and, instead, a solid set of principles and processes must be drawn up and applied in the unique circumstances of each company.

Chapter 7 is devoted to family governance in multigenerational family firms. By the time a family business reaches the third generation and beyond, ownership is generally in the hands of many cousins (sometimes hundreds) from different sibling branches of the family, with no single branch having a controlling shareholding. Some of these owners will work in the business, but probably most will not. There is significant potential for friction and dysfunctional behaviour if the large-scale complexity arising with these family and shareholder groups is not controlled and managed. At this stage pursuing a strategy aimed at achieving responsible, effective and stable ownership becomes a priority, and governance architecture must be tailored to meet the unique needs and circumstances of particular families.

A well-structured and systematic approach to succession planning is required to overcome all the forces that favour doing nothing. Chapter 8 explains why preparation and planning for succession are so difficult and important, analyses the options, discusses next-generation engagement, and aims to provide practical guidelines on ensuring that transitions are accomplished as smoothly and as advantageously as possible. Whether the transition is from a single owner to a sibling partnership, or from a sibling partnership to a cousin company, an important point is that it is not just changing the guard – it is more like a system change, a transition to a different type of business structure with a different culture, different procedures and different ground rules.

The words ‘retire’ and ‘retirement’ crop up a lot in this (and the next) chapter, and I should explain here that I have trouble with these words. My problem is based partly on current dictionary definitions – which centre on concepts like withdrawing from work/business, retreating and becoming something of a recluse, and singularly fail to define and explain retirement as it is understood today – and partly on confusion about the concept of retirement at a time when most people in their 50s and 60s are healthier and more vigorous than previous generations. But my main difficulty concerns the fact that family enterprise leaders do not retire, and never have done. Where families are in business together it does not matter whether leaders receive a monthly salary or indeed whether they ever cross the threshold – their name is above the door and they will always be attached to their family and the business.³ What retirement means for these people is not withdrawing from the enterprise, but reorganising and reshaping their attachment to it.

Family enterprise leaders remain an important resource, even when they have passed on day-to-day operational responsibility to their successors. Many leaders, as part of their succession plan, assume new roles in the enterprise, such as managing special projects, acting as roving ambassadors for the firm, managing the family’s property portfolio or co-ordinating its philanthropic activities. Experts are more or less unanimous that this phase is most likely to be successfully negotiated if owners are retiring to a new life of interesting activities, rather than from their old one, which implies that their useful and productive days are over. So, at the risk of repetition, the idea of leaders severing their connection with the family business is neither desirable nor possible because the business is part of the fabric of the family. Leaders must think, therefore, about how best to reshape their attachment to the enterprise and to plan their future work activities, while readers of this book are asked to reject dictionary negativity and to construe the words retire and retirement in the constructive sense described here.

Chapter 9 starts from the premise that building financial security is an important element in preparing for a successful ‘retirement’. This can be achieved either inside or outside the family business, or, if there are no viable succession options, by selling it, and various sale structures are examined. Insurance and share purchase (buy–sell) agreements can be used to resolve many of the complications arising from multigenerational ownership of a business. When passing the company on to the next generation, continuity of the business, liquidity and family needs are the cornerstones of estate planning. Ensuring ownership ends up in the right hands in the next generation may require treating heirs differently depending on whether or not they are active in the business. Ways of passing on voting control to selected heirs are examined, as are the uses of trusts.

I have already mentioned that wealthy families today increasingly see themselves as diversified enterprises managing a collection of shared family assets, all organised around a set of values that help to foster family commitment and vision and to perpetuate the family’s legacy. Opportunities to achieve these objectives can be provided in particular by the family office and organised philanthropy, and these subjects are examined in Chapter 10.

Finally, two personal votes of thanks, first to my colleagues at Deloitte – Alexandra Sharpe, Tony Cohen and Paula Higgleton. Secondly, my dayto-day work as a family enterprise consultant has brought me into contact with many fascinating business families over the years. It has been a pleasure and an honour advising and learning from these families, and I would like to take this opportunity to thank them for their willingness to let me share their experiences, problems and successes.

Peter Leach

September 2015

1

Why family enterprises are special

Family businesses comprise the predominant form of enterprise around the world, yet, until recently, little information or guidance has been available on the unique and complex issues they face. This is because it is only in the past 30 years that we have started to study and understand two fundamental ideas: that family businesses differ in a variety of critically important ways from non-family businesses; and that business families function quite differently from non-business families. These two distinctions lie at the heart of this book and, if a family business is to achieve its full potential, its management must understand them and the challenges they create.

As well as making the right decisions on the commercial problems that beset all enterprises, family business people have to be able to analyse the special dynamics that surround their businesses and their families. They need to develop special skills that enable them to identify and manage the unique difficulties and dilemmas that these dynamics introduce, and to adopt constructive strategies to foster growth of the business and the transfer of power and control within it.

So understanding the characteristics that distinguish family and non-family businesses and entrepreneurial and ‘normal’ families is the first step, and highlighting these distinctions is the main aim of Chapters 1 and 2. However, this does not mean that there are general panaceas: every family business is idiosyncratic, shaped by its own set of distinctive personalities, their concerns, objectives and relationships, and by a host of other personal and commercial characteristics. But there are some common patterns of experience, and developing an appreciation of them is important so that we can avoid repeating everyone else’s mistakes.

Definitions

Before introducing some of the characteristic strengths and weaknesses of family businesses, and commercial sectors in which they have proved especially successful, it is important to propose a working definition of what is meant by a family business. Criteria that are too rigid should be avoided – just