FAMILY BUSINESSES FAMILY BUSINESSES THE ESSENTIALS FAMILY BUSINESSES FAMILY BUSINESSES THE ESSENTIALS PETER LEACH Foreword by Roger Pedder First published in Great Britain in 2007 by Profile Books Ltd 3a Exmouth House Pine Street Exmouth Market London EC1R 0JH www.profilebooks.com Reprinted with revisions in 2011 Copyright © Peter Leach 2011 The moral right of the author has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. A CIP catalogue record for this book is available from the British Library. ISBN: 978 1 86197 861 5 Consultant editor: Simon Perry Illustrations by Belle Mellor Text design by Sue Lamble Typeset in Stone Serif by MacGuru Ltd info@macguru.org.uk Printed and bound in Great Britain by Clays, Bungay, Suffolk The paper this book is printed on is certified by the © 1996 Forest Stewardship Council A.C. (FSC). It is ancient-forest friendly. The printer holds FSC chain of custody SGS-COC-2061 In fond memory of Neil Crawford, Leslie Lewis, Jonathan Davis and Paul Bates SGS COC 2061 Foreword by Roger Pedder / xii Preface / xiv Acknowledgements / xxiv 1 Why family businesses are special 1 Definitions / 2 Economic impact / 2 Special strengths / 4 Family business culture and values / 4 Predictable problem resolution / 5 Commitment / 6 Knowledge / 6 Flexibility in work, time and money / 6 Long-range thinking / 7 A stable culture / 8 Speedy decisions / 9 Reliability and pride / 10 Dilemmas and challenges for family businesses / 11 Resistance to change / 11 Business challenges / 12 Succession / 13 Emotional issues / 14 Leadership / 15 A competitive edge and outperformance? / 15 Successful sectors for family businesses / 16 2 Family business dynamics: people, systems and growing complexity 19 Family business people / 19 Founders / 19 Women in family businesses / 23 Husband and wife teams / 24 In-laws / 25 Multifamily ownership / 27 Contents viii ✱ Family businesses Contents ✱ ix Non-family employees / 29 Managing conflict in family firms / 29 Family business systems / 38 Seeking a balanced approach / 39 Introducing the ownership dimension / 41 Family business life cycles: a story of growing complexity / 44 Life-cycle stages / 44 Ownership transitions / 47 3 The family’s relationship with the business: developing a strategic vision and building teamwork 50 Articulating values and a shared vision / 50 Effective business families / 54 Ingredients of successful planning / 56 Establishing open communication / 56 Creative versus destructive conflict / 58 Building family teamwork / 60 Unifying plans, processes and structures / 62 Designing family governance / 64 Family council / 64 Family retreats / 67 Family constitution / 67 Conclusions / 70 4 The next generation: human resource management and leadership perspectives 72 To join or not to join? / 72 The importance of outside experience / 76 Self-esteem and confidence / 76 Wider business experience / 76 Credibility with non-family employees / 77 Systems overlap and human resource management issues / 78 Recruitment / 79 Training and development / 82 Remuneration / 83 Performance appraisal and promotion / 85 Working in the business / 86 Seek out a mentor / 87 Gain the respect of employees / 87 Tread carefully / 88 Beware sibling rivalry / 88 Work at establishing personal identity / 89 Relationship with the senior generation / 89 5 Getting help: making the most of outside resources 91 Non-family managers / 91 Relationships with the family / 92 Introducing external executives / 94 Motivation and rewards / 96 Incentive design and delivery / 97 Non-executive directors / 100 Selecting the right candidate / 101 Board practices / 103 Professional advisers and consultants / 104 Are your advisers keeping pace with your needs? / 104 Consultants / 104 Family business consultants / 105 Beware conflicts of interest / 107 Relationships underpinning an advisory role / 108 6 Professionalising the boardroom: the role of a balanced board of directors 109 The rubber-stamp board / 109 Making the transition / 110 Establishing a well-balanced board / 112 Board composition / 112 Organising the board / 115 Effective, working boards / 115 Relationship with the family / 117 Two-tier boards / 119 7 Cousin companies: family governance in multigenerational family firms 121 Introduction / 121 Evolution of family business ownership / 124 Culture shock / 126 Complexity in cousin companies / 126 Family complexity / 127 Ownership complexity / 127 Responding to growing complexity / 129 Ownership policies / 130 Business policies / 132 Family policies / 133 Setting up a family governance process / 133 Recording decisions – the family constitution / 134 Structuring family governance / 135 Family council / 137 x ✱ Family businesses Contents ✱ xi Other governance entities / 139 Roles and membership / 143 Getting the structure working / 144 Conclusions /145 8 Managing succession: the leadership challenge 146 The succession paradox / 147 Resistance to succession planning / 149 The founder / 151 The family / 152 Employee and environmental factors / 152 Leading the transition / 153 Start planning early / 154 Encourage intergenerational teamwork / 155 Develop a written plan / 157 Involve everyone and obtain outside help / 158 Establish a training process / 159 Plan for retirement / 159 Decide when to retire and stick to it / 159 Selecting the right successor / 161 Who to choose? / 162 What if no one fits the bill? / 164 Some conclusions on selecting a successor / 166 Preparing next-generation managers and leaders / 167 In-house training and development / 168 The next generation’s perspective / 169 Succession in older family businesses / 170 Second to third generation / 170 Third to fourth generation and beyond / 171 New generation, new system, new culture / 172 9 Building financial security and relinquishing control 175 Building financial security / 176 Money into or out of the business? / 177 Selling the business / 178 A hard decision / 178 Sale mechanics / 179 Principal exit options / 180 Passing down the business / 182 Capturing values for later generations / 183 Estate-planning principles / 185 Treating heirs fairly / 185 Ownership and control considerations / 187 Life insurance / 188 Splitting the company / 188 Conditions attaching to ownership / 188 Isolating voting control / 189 Implementing the estate plan / 191 Trusts and their uses / 191 The benefits of life insurance / 195 Conclusions on estate planning / 195 10 Wealth management: family offices and philanthropy 196 The family office / 196 Roles / 196 Structures / 197 Evaluating MFOs / 200 Family business philanthropy / 200 Organising giving / 202 11 Summary 204 Notes / 216 Index / 225 Foreword ✱ xiii F or those interested in family business this is a must-read book – not a prescriptive manual, more a dramatised docu- mentary. Here is the proper distillation of experience that Peter Leach has gleaned over 30 years of advising family companies. It is also a work of scholarship. I am impressed by the understanding that every family business situation is different. Nevertheless, a well-considered interpretation of the established principles of good family management is essential for any family business. My experience of working in a major family-owned company for over 40 years, and chairing it for 13 of those years, echoes Peter’s insightful analysis. If, when I was learning, he had been writing about how to conduct a major family enterprise, I would have had a reliable text to guide me on issues which, frankly, I had to address on a trial-and-error basis. It would have saved me and the family time and anxiety. Much modern management writing is full of jargon, takes a unifocal point of view and is presented as a panacea for all management ills. It is a pleasure to read a book that is written in plain language, is well ordered and is not dogmatic. Any family member of any family business will find something relevant which, if they think about it, will improve not only their understanding of the enterprise and their relationship to it, but also how they can help and improve the conduct of the enterprise itself. Family members in a family business often suffer emotional pain and anguish. They may be neglected and even abused by both family owners and non-family managers, and their lives may be blighted by insensitive or hostile treatment. Active understanding and implementation of Peter’s advice on the treatment of family members in family businesses should ameliorate the worst aspects of the problem, but it remains the dark side of the family business experience. Family members are often trapped in a frustrating or demeaning situation, because moving on from a family business without any external experience is difficult. Our management culture seldom recognises family company management as valid and professional experience. Perhaps this should be the subject of Peter’s next book. The importance and contribution of family businesses to our society and economy is increasingly being recognised, particularly since the global financial crisis of 2008, which occurred since the first printing of this book. Family companies do not suffer the dislocation between ownership and management that is a feature of the quoted sector, and most notably in publicly quoted banks. They manage their affairs on a prudent financial basis, since the family business is often the family’s main store of wealth and source of income. They seldom indulge in reckless borrowing, and are thus able to avoid the worst effects of a financial crisis. Their longer-term view and short-term flexible management practices are also able to steer the business through the subsequent recession. Such I believe has been the recent experience of family businesses, where very few of the more established companies have fallen into bankruptcy. It is not a surprise then that so many questions are being raised as to why family and unquoted companies are more stable and durable over time than their public counterparts. So Peter’s insights and sound recom- mendations appear again at a propitious time. My hope is that now a wider audience will take note and act on them. Roger Pedder Chairman, C. & J. Clark (Clarks Shoes), 1993–2006 May 2011 Foreword Roger Pedder Preface ✱ xv T his is a very personal book. It has grown out of my years observing, advising and learning lessons from some of the world’s most successful family-owned businesses and business-owning families. Also, the book in a sense records my personal journey through a period of remarkable change, beginning in an era (the late 1970s) when family companies were largely seen as quaint anachro- nisms of bygone times, and misunderstood as inefficient drags on entrepre- neurialism by dint of their under-investment 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 appre- ciate the strengths of family enterprises and their immense contribu- tion 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 some 30 years ago. From the early 1980s, as a partner with 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 succes- sion; 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 busi- nesses 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 Preface 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 busi- nesses 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, 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 Some 20 years have elapsed since these events, and over that period the family business community has become firmly established in the UK and Europe as an independent, dynamic and increasingly well-researched study discipline. Prestigious academic journals across 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 – while the value of family business consulting too is now coming to be 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. xvi ✱ Family businesses Preface ✱ xvii Reflecting these developments, and the raised profile of the sector, family-owned businesses themselves have become much more knowledge- able and sophisticated – much more willing to embrace a fresh outlook and policies that start to counter some of their in-built disadvantages. For example, 20 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 much more thought being given to building family and corporate govern- ance, accountability and more efficient decision-making processes. Similarly, it used to be rather unusual to find female family members employed in the family business, but today it is much more common. Also, favouring the eldest son in family business succession now tends to be regarded as an 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 values, vision 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; 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 business 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. A Phrase Book and 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 businesses 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 Family Business Phrase Book. Some examples of transla- tions from ‘what is said’ into ‘what is actually meant’ will serve to give the flavour of the phrase book and 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 to ‘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.’ Some 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: ✱ 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 will drop 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 xviii ✱ Family businesses Preface ✱ xix 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. ✱ The money that people are paid in a family business is often a tell-tale sign as to what is really going on. For instance, if the next generation is wildly overpaid for the job they are doing, stakeholders will not respect them because they will see their pay package as a special perk attaching to family status. Similarly, if they are grossly underpaid, stakeholders will conclude they do not have the respect of their family and are unlikely ever to take over. ✱ 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 aspira- tions with the commercial goals of the firm? Can they motivate family and non-family employees alike? Should they try to solve problems them- selves 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, de-merge, 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 on the brink of failure. The chances of success for a family business 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 develop- ment 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 activ- ities of their company, they put off getting to grips with them until a later date. Reluctance to face the problems and to take external profes- sional advice often stems from family business 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 businesses. Indeed, there can be no such thing because each family business 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, what are 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 businesses 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 businesses in a coherent fashion has meant that the book structure in many ways reflects the development and life cycles of family businesses themselves – that is, a progression from straightforward owner-manager beginnings through to third-genera- tion 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 inte- grating outside expertise. Next, family membership becomes broader and more inclusive, although family activity in management becomes more restricted based on objective competence. Finally, management and ownership succession become more planned. On occasions, the need to progress through the subject in this way [...]... 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 Family business leaders must think, therefore, about how best to reshape their attachment to the business... as are the uses of trusts Finally, once larger family businesses have established the family governance structures and mechanisms they need to manage complexity and the relationship between family and business, they often look for other ways to help foster their family commitment and vision and to perpetuate their family s legacy Opportunities to achieve these objectives can be provided by the family. .. much Thus they are manipulated into an ambivalent position of wanting to become their own persons with mature, adult independence on the one hand, and the wish to take of what they are being offered on the other If they leave, seemingly they will be ungrateful If they threaten to depose the father or demand to share his power, then they will indeed destroy him If they don’t do as he says, then they are... harmony in the organisation Conductors like the idea of a family business, and they like the idea of their children joining the company 22 ✱ Family businesses and working with them Thus they invite and orchestrate the involvement of the children and, to preserve harmony, often encourage them to take over different areas of the operation – so one may assume responsibility for marketing, another production... and non -family employees believe they have got the job solely because they have married into the family They thus find that their deficiencies swiftly become the focus of attention, and if they are to be accepted they must prove themselves to be very good indeed To help overcome both types of opposition, new in-laws should try to acquire outside experience before they join the family firm With their... and they lie behind the way family firms become more complex with the passing of time, especially with the transition from one generation to the next Family business people Family businesses are unique because of the people who are involved in them Rather than a random cross-section of employees, managers, directors, advisers and investors, they are family members and they are all related to one another... 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 struc- tures that help the family develop a cohesive approach to the. .. expressed in the form of aggressive and/or 30 ✱ Family businesses destructive behaviour) turn up and are played out in the context of the family business their impact can be devastating There are, however, two particular types of family conflict that can seriously disrupt the operation of the business: the relationship between fathers and sons, and sibling rivalry Their impact need not take the form... well:6 The father often communicates to the sons that he is building the business for them, that it is going to be theirs, and that they should not be demanding of either appropriate salary or appropriate power because they are going to get it all anyway in due time Nor should they leave the father and the business because it is self-evident that he has been good to them and is going to give them so... how they run their businesses and the idea of the family losing control is usually unthinkable Family business people can feel that control is inextricably linked to the love of freedom and independence that has often been the principal driving force behind the establishment of the business and its subsequent success Succession The passage of a family business from one generation to the next, and the . FAMILY BUSINESSES FAMILY BUSINESSES THE ESSENTIALS FAMILY BUSINESSES FAMILY BUSINESSES THE ESSENTIALS PETER LEACH Foreword by Roger Pedder . 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. reconcile their own and their family s aspira- tions with the commercial goals of the firm? Can they motivate family and non -family employees alike? Should they try to solve problems them- selves or