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What can corporates learn about governance from family businesses?
Governance in family businesses is often seen as being outside of or behind governance in corporates. Yet actually, there are areas where corporates could learn from family businesses – not least in the long term vision they have to ensure they survive through the next few family generations, but also the way they think about succession planning and how to groom future leaders.
What are the top issues facing family businesses in terms of governance? Here I share the key findings from a number of reports and research documents.
The success of family businesses
It is true that many family businesses can struggle with governance and leadership succession. Research by the Family Business Institute shows only 30% of family businesses last into the second generation and only 12% are viable into the third.
However, there are just as many success stories and family businesses now account for around 80% of all businesses worldwide. These are not just small businesses but represent some of the biggest organisations and brands on the planet.
The Global Family Business Index looks at the top 500 family firms in the world and shows they account for a combined $6.5 trillion in annual sales, enough to be the third-largest economy in the world, and employ nearly 21 million people, about 42,000 people per company on average.
Perhaps most interesting is that family businesses are also the largest source of long-term employment in most countries around the world.
But, what can corporates learn from this? A major investigation by the Family Business Institute and global executive search firm Egon Zehnder into 50 of the world’s top family businesses found the most successful firms establish good governance as a baseline, preserve “family gravity,” identify and develop both family and nonfamily talent, and bring discipline to top-level succession.
A culture of success
One of the author’s of the Leadership Lessons From Great Family Businesses report, Claudio Fernández-Aráoz who is a senior adviser at Egon Zehnder and an executive fellow at Harvard Business School, says: “Family businesses cannot hope to manage internal talent (both family and nonfamily) or attract the best outsiders without establishing good governance practices that separate the family and the business and ensure oversight from a professional board.
“Good governance is an obvious first hurdle for family businesses that want to hire and keep the best people and compete successfully over the long term. Committing to sound decision-making and management practices is thus essential, whether a company is publicly traded, partly owned by professional investors (such as private equity firms), or completely under family ownership.”
Claudio says key lessons from successful governance in family businesses includes preserving “family gravity”, identifying future leaders and having highly disciplined succession systems for the chief executive.
When it comes to identifying talent, the report says companies with sound governance will have no trouble attracting talent but everyone, and especially family members, must be assessed on competencies, potential, and values. The final test should also be do they fit with the corporate culture?
Claudio adds: “Key competencies include strategic orientation, market insight, results orientation, customer impact, collaboration and influence, organisational development, team leadership, and change leadership. In family businesses you should also look for people who understand the company’s ownership dynamics, accept that responsibility for multiple generations comes with the job, and are able to manage social ventures and sustainable growth.”
When it comes to leadership succession, the report says successful family businesses have a clear, three-phase process. It begins with a shareholder discussion around the qualities of an ideal candidate and a strategy for succession before then identifying candidates and finally planning a clear integration and development plan for the successor.
Arguably the most important finding of the report was preserving “family gravity” in a governance structure. Claudio adds: “Although family businesses should match non-family ones in their governance structures and opportunities for professional growth, they must also be careful not to lose what makes them special. We call this ‘family .gravity’.
“These firms usually have one key family member at the centre of the organisation, like the sun in our solar system. These people personify the corporate identity and align differing interests around clearly defined values and a common vision. They focus on the next generation, not the next quarter. They tend to embrace strategies that put customers and employees first and emphasize social responsibility. And they have strong personalities that draw talented people into their orbits and keep them there.”
A long-term vision for succession
In terms of governance, family firms are arguably the strongest because of the inter-generational approach they take to business. Succession planning looks decades beyond many corporates and research suggests this makes family run businesses more resilient.
Speaking in Forbes, Thomas Zellweger, professor of business administration at the University of St Gallen in Switzerland and managing director of its Center for Family Business, says family companies are better suited to survive difficult periods.
He says family firms are not focused on the next quarter, but on the next generation and they are also especially good at fostering employee commitment and engagement, which Zellweger thinks can lead to stronger brands and more innovation as they are more likely to retain their best employees.
Peter Englisch, global family business leader of Ernst & Young and a contributor to the Global Family Business Index, agrees and says about family businesses: “They’re really superior in leading in generational transition. It’s an amazing fact because 44% of firms in the 500 are owned by the 4th generation or older – this is in contrast to less than 5% of firms overall.”
Put simply, by laying the foundations for future generations to follow, successful family firms are following exemplary governance practices whether they know it or not.
Sonny Iqbal, Global Family Business Advisory Co-Leader at Egon Zehnder, concludes: “Sustaining a family business across multiple generations presents complex challenges but can be very successful with the proper leadership planning and foresight.”
What other lessons can family businesses teach us about governance? Please share your thoughts and comment below.