Make the Family Business Last

Tuesday, September 13, 2005

John L. Ward, http://wellsupdate.wellsfargo.com/m/p/wls/sta/article293.asp?ck=MaketheFamilyBusinessLast

Starting a company with relatives is easy. Creating a dynasty or sustaining a company for three generations is not. John L. Ward is an expert on what makes some family owned companies stand the test of time, having studied businesses from the Marriotts and the Fords to the corner dry cleaner. Ward is professor and director of the Kellogg School Center of Family Enterprises at Northwestern University, author of The Family Constitution: Agreements to Secure and Perpetuate Your Family and Your Business and a co-founder of the Marietta, Ga.-based Family Business Consulting Group International.

Roundup: What's more challenging: Running a family or running a family business?

Ward: Both are tough, but the head of the family knows that the business can fail for any number of reasons beyond his control and the family will remain intact. But if the controlling family structure collapses, the business is likely to follow. We've seen powerful families and businesses implode and make headlines in tabloids and the business media. That's why family companies need structure. Families must shape their companies to conform to their values, institute vehicles to deal with emotional issues such as family feuds, and they have to identify and encourage leadership for successive generations. Companies that stand the test of time generally extend well beyond the founder. They encompass children and cousins and in-laws who see the businesses as a collective inheritance to be divided among family members, many of whom are owners in name only. By then, organizational structures must be well-established if the company is to succeed as a business and be a desirable workplace for non-family employees, rather than just a place for relatives who can't find jobs anywhere else.

Q: What advice do you give family companies about governance?

A: I am a proponent of the Family Agreement. These are formal documents that regulate the relationships between the family owners and the business. Without them, family members can drift into patterns of decision-making and communication based on their personal relationships. Agreements tap the collective desire of the family to maintain unity and preserve their assets and wealth. Non-family companies don't have such a powerful motivation. Family Agreements vary, but they often include a statement of commitment to continuity, the family's values, and policies regarding employment, ownership, succession, and the shareholder's agreement. The Agreement is a living document and it should evolve as the family and business evolve. One component of the Agreement should address the topic of how often or when to review or revise governance practices.

Q: You say that family-run firms have a competitive advantage of being able to pursue counterintuitive strategies. What is the basis for those opportunities?

A: Primarily, family firms take a long-term view of business versus their public counterparts that must meet shareholder expectations, analysts and big institutional investors. Families are motivated by a passion to create a legacy for future generations. Continuity is more important to them than current return. That gives decision-makers the luxury of patience to see plans through to fruition rather than looking for short-term results or their own exit strategies.

Then there's trust, which makes it possible for company leaders to take the chance that their long-term views will succeed against more predictable short-term benefits. When family members trust one another to do the right thing—for customers as well as the other family members—and manage for the long term, they can weather the unpredictability and discomfort that may come with unconventional strategies. I often tell people that trust encourages deference to different—and better—thinking.

Q: Why do so many family companies fail?
A: Failure happens when owners have no interested heirs or they choose to sell the business rather than trying to pass it on. For those who do try to put the second generation in charge, the most challenging obstacles are the lack of adequate succession planning and the inability of the founder to relinquish control. The best way to conquer these challenges is to have a strong resolve for succession planning, strong advisors and/or independent directors, good governance and a well-written Family Agreement that reinforces the roles, responsibilities and relationships of family members who are managers and active board members.

Q: Where do independent directors fit in the family structure?
A: Non-family board members are chosen, not born into their jobs, and that can make a great deal of difference in their contribution to the company. They are not bound by the complexities of family relationships. They offer the benefit of their previous managerial or executive experience at other companies. They can be catalysts for original, strategic thinking. And, presumably, they have developed some ties to the family and are committed to the success of the enterprise.

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