2 What is a family business? amazonaws com
2016 VIC FAMILY BUSINESS DAY Introduction: How Family Businesses Differ from Other Businesses Written and presented by: Dan Simmonds Sladen Legal
VIC Division 16 August 2016 Fenix Events, Richmond
© Dan Simmonds 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
CONTENTS 1
Overview ......................................................................................................................................... 3
2
What is a family business? ........................................................................................................... 4
3
The statistics .................................................................................................................................. 5
4
The system of a family business .................................................................................................. 7
5
The context of the family business system................................................................................. 9
6
The family business system – where are decisions made? .................................................... 12
7
Understanding the family business culture .............................................................................. 13
8
Business family life cycle stages ............................................................................................... 15
9
The dynamic capabilities of family business and the fundamental paradox ........................ 16
© Dan Simmonds 2016
2
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
1 Overview The importance of family business to the Australian economy is becoming increasingly recognised. Working in the family business space provides the foundation of the practice of many professional service providers. Increasingly, family business is requiring that its’ advisors bring to their role an understanding of the different dynamics under which a family business operates. The purpose of this introductory section is to explore these issues and provide a context for the rest of the day, and to challenge professional service providers to consider the way in which they inter-relate with family businesses as a client.
© Dan Simmonds 2016
3
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
2 What is a family business? There are many definitions of what constitutes a family business. However, each family business contains one or more of the following components:
ownership and effective control by two or more members of a family, or a partnership of families
family members exert significant influence on the direction and management of a business
can be limited to a husband and wife, and therefore does not necessarily include more than one generation
need not include all members of the family, eg may be a father and daughter
© Dan Simmonds 2016
4
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
3 The statistics The following statistics are gleaned from a combination of research undertaken by KPMG and Family Business Australia through a number of surveys over time, most recently represented by their Family Business Survey 2015, and some general research undertaken through various other sources.
family businesses constitute approximately 72% of all businesses in Australia
family businesses generate 50% of gross domestic product
family businesses employ around 50% of the total work force of Australia
the sector comprises many small to medium size businesses – the average number of employees in a family business in Australia is 23:
64% of family businesses have less than 20 employees
32% of family businesses have 20 to 199 employees
4% of family businesses have 200 or more employees
the average age of a family business owner is 58 and 25% of the owners of family businesses are aged over 65
many family businesses survive for generations, and the average length of time each family business has been operating in Australia is 34 years
the average tenure of a CEO in a family business in Australia is 17 years
26% of family businesses are in a second generation of ownership and 14% are in a third generation or more
36% of family businesses have only one generation involved in the business, 59% have two generations involved and 5% of family businesses have three or more generations involved in the business
31% of family businesses have a formal constitution, 43% have a shareholders agreement and 52% have a formal Board
Only 11% of family businesses are owned by females and only 7% of daughters are actively involved in the business compared with 35% of sons. 15% of family businesses have female CEO’s.
There are a number of conflicting statistics in relation to succession:
72% expect to have some transfer of ownership in the next five years
60% of businesses intend to pass leadership to a family member but there is significant concern amongst existing leaders about whether or not the anticipated successor is ready to take over
64% of family businesses intend to pass ownership solely to family members
© Dan Simmonds 2016
5
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
37% of family business owners report that letting go of leadership and control is one of the most critical issues facing their business
61% of family members involved in the business, excluding the CEO, believe they will bring a different leadership style than the incumbent
10% of family business leaders intend to sell their business in the next ten years
61% of family business owners would seriously consider selling if approached
80% of family businesses indicate they have experienced conflict or tension between family members over the last twelve months. The major sources of conflict are:
vision, goals and strategy
balancing the needs of the businesses versus the family
lack of family communication
Those businesses with a family council were significantly less likely to have experienced conflict.
family businesses report superior performance in terms of profitability, return on investment and market values
© Dan Simmonds 2016
6
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
4 The system of a family business A family business is comprised of three separate but overlapping systems:
the business system
the family system
the ownership or governance system
The business system encompasses the organisation's mission and strategy. It also includes the various elements that support the business strategy, such as the organisation's structure, systems and technology, along with the key processes that help the organisation achieve its goals.
The ownership or governance system includes the organisation's legal form (such as a discretionary trust; company or unit trust), the distribution of its ownership, the board of directors or other governance mechanisms, and the goals and aspirations of those who govern the business.
The family system involves the family (or families) connected with the organisation. The family's goals and aspirations, its roles and relationships, its communication patterns, and its cultural values are all part of the family system.
© Dan Simmonds 2016
7
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
The unique dynamics of a family business arise as these three systems overlap one another. Many of the conflicts, issues and dilemmas facing family business leaders who attempt to manage all three systems successfully are the result of the differing values between businesses and families. Those differences are represented in the following table: Areas of conflict
Family systems
Business systems
Goals
Development and support of family members
Profits, revenues, efficiency, growth
Relations
Deeply personal, or primary
Semi-personal or impersonal,
importance
of secondary importance
Informal expectation (“That’s
Written and formal rules, often
how we have always done it”
with rewards and punishment spelt out
Members rewarded for who they are; effort counts;
Support conditional on performance and results;
unconditional love and support
employees can be promoted or
Rules
Evaluation
fired Succession
Caused by death, divorce or
Caused by retirement,
illness
promotion or departure
Authority
Based on family position or seniority
Based on formal position in the organisation’s hierarchy
Commitment
Intergenerational and lifetime; based on one’s identity with the
Short term; based on rewards received for employment
family The above is extracted from:
R. Tagiuri and JA Davis (1982) Bivalent Attributes of the Family Firm. Working paper. Harvard University Press
Consulting to Family Businesses. A Practical Guide to Contracting, Assessment and Implementation by Jane Hilburt-Davis and W. Gibb Dyer Jr
© Dan Simmonds 2016
8
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
5 The context of the family business system All businesses face challenges of sustainability in a competitive market, staff competencies and performance, financial performance, return on investment and overall sustainability and profitability. In a family business there are other issues which are overlaid including:
financial security for all members of the family especially older members moving into retirement
family cohesion, ability and loyalty
nurturing and protection of those less fortunate
building and protecting the family’s legacy
ensuring the family business remains competitive in the market place in circumstances where the older management/owner generation do not see the need for change and addressing these issues potentially involves the family in conflict
the balance between personal and family needs, interests and objectives and the needs of the business
a perceived obligation to provide or receive employment in the family business
In summary, the family system involves a complex web of personalities, history, capabilities, attitudes, motivations and values. Consulting in the family business space requires an understanding of these issues and the development of emotional intelligence of a far different nature to that which is brought to bear in most consulting engagements. In many cases, technical expertise and a correct solution for the business may need to make way for a human focus and the provision of a solution which suits the needs and desires of the family, more than the needs of the business. As such, technical skills sometimes need to be pushed to the background to be replaced by human skills. A good example of the differences is in something as simple as doing an assessment of mission, vision and values of a family business.
© Dan Simmonds 2016
9
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
Listed below are a series of those values most commonly found in a non-family business (left hand column) and a family business (right hand column).
Business Values
Family Values
Innovation
Courage
Empowerment
Dignity
Performance
Honesty
Teamwork
Fairness
Integrity
Open mindedness
Leadership
Authenticity
Efficiency
Hard work
Profitability
Stewardship
Honesty
Dependability
Communication
Empathy
Creativity
Curiosity
Learning
Humility
Continuous improvement
Discipline
Entrepreneurship
Prudence
Excellence
Sincerity
Customer service
Do the right thing
Change
Integrity
Quality
Reputation
Such concepts as open mindedness, empathy, doing the right thing and importantly stewardship would not be expected to be listed within the values of a business. The values which are family first tend to be personal values which have an intuitive quality, and as such are difficult to measure. The
© Dan Simmonds 2016
10
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
values which are more readily identified by a business, tend to be transactional in nature and can more readily be measured. Importantly, family values do not change over time, but when management changes in a business that is not a family business, the values of that business may change. The values which are said to be the family values have been shown to comprise 70% of the values which are adopted by family businesses, with family businesses only adopting 30% of those values which are said to be business values. Conversely, non-family businesses have 70% of their values from the business list, and only 30% from the family list of values. This then leads to those values which have been found to be the most common in family business. They are: Most common values
Those values are demonstrated by
Mutual respect
Empathy, tolerance, compassion, trust, generosity, cherishing individuality
Stewardship
Perseverance, long term, determination, tenacity, persistence, hard work, legacy
Integrity
Doing the right thing, honourable, trustworthy, reputation
Personal responsibility
Independent thinking, reliability, freedom
Fun
Enthusiasm, passion, celebration
Of the above, integrity is the value which is most readily adopted by both family and non-family businesses. Mutual respect is a value which is adopted by some businesses, although it is much more commonly found in a family business. However, those values of stewardship, personal responsibility and fun are almost solely the domain of family businesses.
© Dan Simmonds 2016
11
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
6 The family business system – where are decisions made? From a consultant’s or advisor’s perspective, other issues also arise when consulting to a family. The first, which sounds legalistic, but can cause a conflict to many professions, is who in fact is the client. Depending upon the nature of the engagement, and in particular where there is already conflict, or there is the potential for conflict, this can become an important question. However, the position frequently arises that whilst there is an initial or main point of contact with the family (and this may not necessarily be the same person), the bills are paid by the business and contact is multifaceted, instructions are provided by numerous people and confidences are shared with many. This particular issue is compounded when consideration is given to the type of advice which is being provided and the level at which it is being directed, and importantly which of the family business systems are involved. The ownership or governance system is more likely to be directed towards strategic directions, dividend policies, potential acquisitions or disposals, reinvestment in the business, the ongoing capital needs of the business and return on investment. On the other hand, the business system will be looking at such things as financial performance on a day to day basis, operational issues, workplace related issues, problem solving, and implementing strategy. Overlaying all that are the expectations of and decisions which need to be made around the family system which involve such things as family expectations, providing for family members’ interests, the issue of birthright and the right to work, the in-law/out-law problem and generational change. In particular, this identifies the need for an advisor to gain an understanding of the family and the roles of the people in it, which involves not only an understanding of the individual, but how that person works within the family and within the business. It requires an understanding of the different personalities, the unwritten rules which have developed, how the members of the family work together as a team, and importantly how that is overlaid by the history and traditions of the family and its business. For example, in many cases the family name is the brand of the business. Through its’ reputation as a business, the name has reputation in the community at all levels. That reputation has many components, and usually within a family invokes many emotions, but also imposes in the minds of some, obligations. This is where such things as pride, passion, cohesion, destiny, stewardship and dynasty become important in understanding the nature of advising to a family business.
© Dan Simmonds 2016
12
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
7 Understanding the family business culture An understanding of the family business systems, the distinction between the family system and business system, and an understanding of how family business values can differ from those of a nonfamily business, can also be analysed from the view point of different cultures which are developed within a family, to be contrasted with those which develop within a business. This has been represented as: Business cultures
Family cultures
Competitive
Protective
Objective
Emotional
Task based
Obligation based
Business results oriented
Family relationship oriented
Select best person for the job
Status by birthright
Business performance
Family loyalty
Survival of the fittest
Nurture and support weakest
Encourage/exploit change
Minimises change
Business employment is an opportunity
Employment is a right
Competencies required
Nepotism applied
Source: Family Business Institute What this list of cultures shows, is the inherent obligations or expectations imposed upon a family and its members, not only those involved in the business. For example, the fact that a family business provides opportunities to all can give rise to conflict, for example by a belief that some do not contribute to the level of others but receive acknowledgement, including by way of remuneration above that which they would achieve elsewhere. Those who are not involved in the business, can often have a sense of isolation, and this can also give rise to significant conflict where they form opinions about the business or the people involved in it or how they are being treated, without fully understanding all of the issues. This can often be caused by a lack of communication between the family members, but also can be caused by a deep sense of attachment to and pride in the business which has been such an important part of their life since childhood, perhaps even being involved in discussions around the proverbial kitchen table, overridden by a sense of separation because they are no longer involved in the business. Strategies about how to overcome some of these issues will be addressed throughout the course of other presentations to
© Dan Simmonds 2016
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Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
this conference. However, the important issue from the perspective of this paper is that an advisor must be aware of these issues.
© Dan Simmonds 2016
14
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
8 Business family life cycle stages A family business advisor must also be mindful of the stage of the business cycle in which the business is operating. There are three dimensions to this understanding, whereas in many businesses there is only one. The dimensions are:
the business dimension – is the business a startup, in growth phase, has it reached maturity, is it in renewal or should it be in renewal?
the ownership dimension – is the business still under founder control, is there a sibling or other partnership, is there a cousin consortium, are there owners not actively involved in the business whose needs or wishes must be considered?
the family dimension – at what stage of life are the owners of the business and those of the family who are involved in it, do they have a young family, are family members looking to enter into the business, what are the capacities of the business to subsume more family as employees on a basis which will retain the profitability of the business, what is the ability of the family members to work together, and when, how and what basis should the baton be passed to other leaders and what process is in place to support all family members and the business through this change, with a particular focus on both the incoming and outgoing manager?
Each of these dimensions at each stage raise different issues, all of which require different advisory, planning and management skills. One problem for families in business is that often when these issues arise, they come as a surprise. A family business professional service provider can assist in predicting these providing he or she understands the characteristics of a family business and becomes appropriately enmeshed in the business so that all issues which arise under the family business system, are known and understood.
© Dan Simmonds 2016
15
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
9 The dynamic capabilities of family business and the fundamental paradox It is generally considered that family business has ten dynamic capabilities, many of which do not exist in or are not focused on in non-family businesses. They are:
the ability to think long term
the ability to sense, analyse and seize opportunities
the understanding and management of the paradox
the assessment of risk
the alliancing with other businesses and family members
the building of social capital
the retention of memory and history
building owner – manager – Board relations
thinking of options
managing succession
The fundamental paradox of family business is the conflicting goals between business principles and practices compared with those of the family. The focus of this paper has been to highlight many components of this paradox. A family business focuses significantly on the past, little on the present and much in the future. A non-family business virtually ignores the past, focuses a lot on the present and moderately on the future. As such, the focus is reversed between family and non-family businesses. A proposition could therefore be that if there is the need to consult to a family business, particularly where there is conflict, it should be approached on the basis that there is an understanding of this underlying paradox, and the approach which is adopted by the advisor is built on a framework of addressing issues from the context of the family. Acknowledgement In addition to the specific acknowledgements provided in the paper, I would like to acknowledge the contribution which has been made in the formation of the ideas and concepts contained in this paper by a number of my colleagues:
Ashleigh Wall, Special Counsel, Harwood Andrews
Directors of Family Business Consultants Network Limited
Jon Kenfield, Ross Anderson, Mac Hay of Family Business Institute
© Dan Simmonds 2016
16
VIC Division 16 August 2016 Fenix Events, Richmond
© Dan Simmonds 2016 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
CONTENTS 1
Overview ......................................................................................................................................... 3
2
What is a family business? ........................................................................................................... 4
3
The statistics .................................................................................................................................. 5
4
The system of a family business .................................................................................................. 7
5
The context of the family business system................................................................................. 9
6
The family business system – where are decisions made? .................................................... 12
7
Understanding the family business culture .............................................................................. 13
8
Business family life cycle stages ............................................................................................... 15
9
The dynamic capabilities of family business and the fundamental paradox ........................ 16
© Dan Simmonds 2016
2
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
1 Overview The importance of family business to the Australian economy is becoming increasingly recognised. Working in the family business space provides the foundation of the practice of many professional service providers. Increasingly, family business is requiring that its’ advisors bring to their role an understanding of the different dynamics under which a family business operates. The purpose of this introductory section is to explore these issues and provide a context for the rest of the day, and to challenge professional service providers to consider the way in which they inter-relate with family businesses as a client.
© Dan Simmonds 2016
3
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
2 What is a family business? There are many definitions of what constitutes a family business. However, each family business contains one or more of the following components:
ownership and effective control by two or more members of a family, or a partnership of families
family members exert significant influence on the direction and management of a business
can be limited to a husband and wife, and therefore does not necessarily include more than one generation
need not include all members of the family, eg may be a father and daughter
© Dan Simmonds 2016
4
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
3 The statistics The following statistics are gleaned from a combination of research undertaken by KPMG and Family Business Australia through a number of surveys over time, most recently represented by their Family Business Survey 2015, and some general research undertaken through various other sources.
family businesses constitute approximately 72% of all businesses in Australia
family businesses generate 50% of gross domestic product
family businesses employ around 50% of the total work force of Australia
the sector comprises many small to medium size businesses – the average number of employees in a family business in Australia is 23:
64% of family businesses have less than 20 employees
32% of family businesses have 20 to 199 employees
4% of family businesses have 200 or more employees
the average age of a family business owner is 58 and 25% of the owners of family businesses are aged over 65
many family businesses survive for generations, and the average length of time each family business has been operating in Australia is 34 years
the average tenure of a CEO in a family business in Australia is 17 years
26% of family businesses are in a second generation of ownership and 14% are in a third generation or more
36% of family businesses have only one generation involved in the business, 59% have two generations involved and 5% of family businesses have three or more generations involved in the business
31% of family businesses have a formal constitution, 43% have a shareholders agreement and 52% have a formal Board
Only 11% of family businesses are owned by females and only 7% of daughters are actively involved in the business compared with 35% of sons. 15% of family businesses have female CEO’s.
There are a number of conflicting statistics in relation to succession:
72% expect to have some transfer of ownership in the next five years
60% of businesses intend to pass leadership to a family member but there is significant concern amongst existing leaders about whether or not the anticipated successor is ready to take over
64% of family businesses intend to pass ownership solely to family members
© Dan Simmonds 2016
5
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
37% of family business owners report that letting go of leadership and control is one of the most critical issues facing their business
61% of family members involved in the business, excluding the CEO, believe they will bring a different leadership style than the incumbent
10% of family business leaders intend to sell their business in the next ten years
61% of family business owners would seriously consider selling if approached
80% of family businesses indicate they have experienced conflict or tension between family members over the last twelve months. The major sources of conflict are:
vision, goals and strategy
balancing the needs of the businesses versus the family
lack of family communication
Those businesses with a family council were significantly less likely to have experienced conflict.
family businesses report superior performance in terms of profitability, return on investment and market values
© Dan Simmonds 2016
6
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
4 The system of a family business A family business is comprised of three separate but overlapping systems:
the business system
the family system
the ownership or governance system
The business system encompasses the organisation's mission and strategy. It also includes the various elements that support the business strategy, such as the organisation's structure, systems and technology, along with the key processes that help the organisation achieve its goals.
The ownership or governance system includes the organisation's legal form (such as a discretionary trust; company or unit trust), the distribution of its ownership, the board of directors or other governance mechanisms, and the goals and aspirations of those who govern the business.
The family system involves the family (or families) connected with the organisation. The family's goals and aspirations, its roles and relationships, its communication patterns, and its cultural values are all part of the family system.
© Dan Simmonds 2016
7
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
The unique dynamics of a family business arise as these three systems overlap one another. Many of the conflicts, issues and dilemmas facing family business leaders who attempt to manage all three systems successfully are the result of the differing values between businesses and families. Those differences are represented in the following table: Areas of conflict
Family systems
Business systems
Goals
Development and support of family members
Profits, revenues, efficiency, growth
Relations
Deeply personal, or primary
Semi-personal or impersonal,
importance
of secondary importance
Informal expectation (“That’s
Written and formal rules, often
how we have always done it”
with rewards and punishment spelt out
Members rewarded for who they are; effort counts;
Support conditional on performance and results;
unconditional love and support
employees can be promoted or
Rules
Evaluation
fired Succession
Caused by death, divorce or
Caused by retirement,
illness
promotion or departure
Authority
Based on family position or seniority
Based on formal position in the organisation’s hierarchy
Commitment
Intergenerational and lifetime; based on one’s identity with the
Short term; based on rewards received for employment
family The above is extracted from:
R. Tagiuri and JA Davis (1982) Bivalent Attributes of the Family Firm. Working paper. Harvard University Press
Consulting to Family Businesses. A Practical Guide to Contracting, Assessment and Implementation by Jane Hilburt-Davis and W. Gibb Dyer Jr
© Dan Simmonds 2016
8
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
5 The context of the family business system All businesses face challenges of sustainability in a competitive market, staff competencies and performance, financial performance, return on investment and overall sustainability and profitability. In a family business there are other issues which are overlaid including:
financial security for all members of the family especially older members moving into retirement
family cohesion, ability and loyalty
nurturing and protection of those less fortunate
building and protecting the family’s legacy
ensuring the family business remains competitive in the market place in circumstances where the older management/owner generation do not see the need for change and addressing these issues potentially involves the family in conflict
the balance between personal and family needs, interests and objectives and the needs of the business
a perceived obligation to provide or receive employment in the family business
In summary, the family system involves a complex web of personalities, history, capabilities, attitudes, motivations and values. Consulting in the family business space requires an understanding of these issues and the development of emotional intelligence of a far different nature to that which is brought to bear in most consulting engagements. In many cases, technical expertise and a correct solution for the business may need to make way for a human focus and the provision of a solution which suits the needs and desires of the family, more than the needs of the business. As such, technical skills sometimes need to be pushed to the background to be replaced by human skills. A good example of the differences is in something as simple as doing an assessment of mission, vision and values of a family business.
© Dan Simmonds 2016
9
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
Listed below are a series of those values most commonly found in a non-family business (left hand column) and a family business (right hand column).
Business Values
Family Values
Innovation
Courage
Empowerment
Dignity
Performance
Honesty
Teamwork
Fairness
Integrity
Open mindedness
Leadership
Authenticity
Efficiency
Hard work
Profitability
Stewardship
Honesty
Dependability
Communication
Empathy
Creativity
Curiosity
Learning
Humility
Continuous improvement
Discipline
Entrepreneurship
Prudence
Excellence
Sincerity
Customer service
Do the right thing
Change
Integrity
Quality
Reputation
Such concepts as open mindedness, empathy, doing the right thing and importantly stewardship would not be expected to be listed within the values of a business. The values which are family first tend to be personal values which have an intuitive quality, and as such are difficult to measure. The
© Dan Simmonds 2016
10
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
values which are more readily identified by a business, tend to be transactional in nature and can more readily be measured. Importantly, family values do not change over time, but when management changes in a business that is not a family business, the values of that business may change. The values which are said to be the family values have been shown to comprise 70% of the values which are adopted by family businesses, with family businesses only adopting 30% of those values which are said to be business values. Conversely, non-family businesses have 70% of their values from the business list, and only 30% from the family list of values. This then leads to those values which have been found to be the most common in family business. They are: Most common values
Those values are demonstrated by
Mutual respect
Empathy, tolerance, compassion, trust, generosity, cherishing individuality
Stewardship
Perseverance, long term, determination, tenacity, persistence, hard work, legacy
Integrity
Doing the right thing, honourable, trustworthy, reputation
Personal responsibility
Independent thinking, reliability, freedom
Fun
Enthusiasm, passion, celebration
Of the above, integrity is the value which is most readily adopted by both family and non-family businesses. Mutual respect is a value which is adopted by some businesses, although it is much more commonly found in a family business. However, those values of stewardship, personal responsibility and fun are almost solely the domain of family businesses.
© Dan Simmonds 2016
11
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
6 The family business system – where are decisions made? From a consultant’s or advisor’s perspective, other issues also arise when consulting to a family. The first, which sounds legalistic, but can cause a conflict to many professions, is who in fact is the client. Depending upon the nature of the engagement, and in particular where there is already conflict, or there is the potential for conflict, this can become an important question. However, the position frequently arises that whilst there is an initial or main point of contact with the family (and this may not necessarily be the same person), the bills are paid by the business and contact is multifaceted, instructions are provided by numerous people and confidences are shared with many. This particular issue is compounded when consideration is given to the type of advice which is being provided and the level at which it is being directed, and importantly which of the family business systems are involved. The ownership or governance system is more likely to be directed towards strategic directions, dividend policies, potential acquisitions or disposals, reinvestment in the business, the ongoing capital needs of the business and return on investment. On the other hand, the business system will be looking at such things as financial performance on a day to day basis, operational issues, workplace related issues, problem solving, and implementing strategy. Overlaying all that are the expectations of and decisions which need to be made around the family system which involve such things as family expectations, providing for family members’ interests, the issue of birthright and the right to work, the in-law/out-law problem and generational change. In particular, this identifies the need for an advisor to gain an understanding of the family and the roles of the people in it, which involves not only an understanding of the individual, but how that person works within the family and within the business. It requires an understanding of the different personalities, the unwritten rules which have developed, how the members of the family work together as a team, and importantly how that is overlaid by the history and traditions of the family and its business. For example, in many cases the family name is the brand of the business. Through its’ reputation as a business, the name has reputation in the community at all levels. That reputation has many components, and usually within a family invokes many emotions, but also imposes in the minds of some, obligations. This is where such things as pride, passion, cohesion, destiny, stewardship and dynasty become important in understanding the nature of advising to a family business.
© Dan Simmonds 2016
12
Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
7 Understanding the family business culture An understanding of the family business systems, the distinction between the family system and business system, and an understanding of how family business values can differ from those of a nonfamily business, can also be analysed from the view point of different cultures which are developed within a family, to be contrasted with those which develop within a business. This has been represented as: Business cultures
Family cultures
Competitive
Protective
Objective
Emotional
Task based
Obligation based
Business results oriented
Family relationship oriented
Select best person for the job
Status by birthright
Business performance
Family loyalty
Survival of the fittest
Nurture and support weakest
Encourage/exploit change
Minimises change
Business employment is an opportunity
Employment is a right
Competencies required
Nepotism applied
Source: Family Business Institute What this list of cultures shows, is the inherent obligations or expectations imposed upon a family and its members, not only those involved in the business. For example, the fact that a family business provides opportunities to all can give rise to conflict, for example by a belief that some do not contribute to the level of others but receive acknowledgement, including by way of remuneration above that which they would achieve elsewhere. Those who are not involved in the business, can often have a sense of isolation, and this can also give rise to significant conflict where they form opinions about the business or the people involved in it or how they are being treated, without fully understanding all of the issues. This can often be caused by a lack of communication between the family members, but also can be caused by a deep sense of attachment to and pride in the business which has been such an important part of their life since childhood, perhaps even being involved in discussions around the proverbial kitchen table, overridden by a sense of separation because they are no longer involved in the business. Strategies about how to overcome some of these issues will be addressed throughout the course of other presentations to
© Dan Simmonds 2016
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Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
this conference. However, the important issue from the perspective of this paper is that an advisor must be aware of these issues.
© Dan Simmonds 2016
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Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
8 Business family life cycle stages A family business advisor must also be mindful of the stage of the business cycle in which the business is operating. There are three dimensions to this understanding, whereas in many businesses there is only one. The dimensions are:
the business dimension – is the business a startup, in growth phase, has it reached maturity, is it in renewal or should it be in renewal?
the ownership dimension – is the business still under founder control, is there a sibling or other partnership, is there a cousin consortium, are there owners not actively involved in the business whose needs or wishes must be considered?
the family dimension – at what stage of life are the owners of the business and those of the family who are involved in it, do they have a young family, are family members looking to enter into the business, what are the capacities of the business to subsume more family as employees on a basis which will retain the profitability of the business, what is the ability of the family members to work together, and when, how and what basis should the baton be passed to other leaders and what process is in place to support all family members and the business through this change, with a particular focus on both the incoming and outgoing manager?
Each of these dimensions at each stage raise different issues, all of which require different advisory, planning and management skills. One problem for families in business is that often when these issues arise, they come as a surprise. A family business professional service provider can assist in predicting these providing he or she understands the characteristics of a family business and becomes appropriately enmeshed in the business so that all issues which arise under the family business system, are known and understood.
© Dan Simmonds 2016
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Dan Simmonds
Introduction – How Family Businesses Differ from Other Businesses
9 The dynamic capabilities of family business and the fundamental paradox It is generally considered that family business has ten dynamic capabilities, many of which do not exist in or are not focused on in non-family businesses. They are:
the ability to think long term
the ability to sense, analyse and seize opportunities
the understanding and management of the paradox
the assessment of risk
the alliancing with other businesses and family members
the building of social capital
the retention of memory and history
building owner – manager – Board relations
thinking of options
managing succession
The fundamental paradox of family business is the conflicting goals between business principles and practices compared with those of the family. The focus of this paper has been to highlight many components of this paradox. A family business focuses significantly on the past, little on the present and much in the future. A non-family business virtually ignores the past, focuses a lot on the present and moderately on the future. As such, the focus is reversed between family and non-family businesses. A proposition could therefore be that if there is the need to consult to a family business, particularly where there is conflict, it should be approached on the basis that there is an understanding of this underlying paradox, and the approach which is adopted by the advisor is built on a framework of addressing issues from the context of the family. Acknowledgement In addition to the specific acknowledgements provided in the paper, I would like to acknowledge the contribution which has been made in the formation of the ideas and concepts contained in this paper by a number of my colleagues:
Ashleigh Wall, Special Counsel, Harwood Andrews
Directors of Family Business Consultants Network Limited
Jon Kenfield, Ross Anderson, Mac Hay of Family Business Institute
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