Dino Frescobaldi, a poet of the late 13th/early 14th century, played an important role in the development of Italian literature by salvaging the first seven cantos of Dante’s Divine Comedy when the more famous poet was forced to flee Florence for political reasons. This was not Frescobaldi’s only legacy: He was also a member of a successful Tuscan merchant family that began producing wine around that time. Some 700 years and 30 generations later, the family is still running a thriving wine production business and continues to expand and innovate (see Case 1).

Only a small minority of highly successful business-owning families have exceled and thrived through several generations, including Miele, Follett, Takanashi (see Case 2) and Henkel. A high proportion of family firms struggle to survive to the second and third generations, 1 and articles often comment on the risks associated with family firms. This statistic is misleading and biased, however. The lifespan of any company is typically a couple of decades and is falling. In 1958 a Fortune 500 company would remain on the index for over 60 years. By 2012 it was just 18 years.2 a more recent study concluded that the half-life of a US publicly traded company was a decade.3 Moreover, almost all long-lasting firms are owned and managed by a family. These families have much to teach other businesses, not only on governance, strategy and management but also on social and environmental responsibility and economic development. Some of the most successful family firms have deliberately gone against prevailing management fashions (see Case 3).

There are obvious lessons for struggling family firms but there are also quite profound implications for all businesses. The findings imply that significant changes are required in terms of how strategic management is understood and that revisions need to be made to the traditional business school curriculum.

So, what are the features of family firms with sustained high performance over decades or even centuries? In Dante’s time, success may have been attributable to anecdotal knowledge. Since then, however, dozens of years of research findings have been accumulated. Working with high-achieving families has helped identify 25 principles necessary for long-term success. Collectively, these 25 principles, which have been clustered into four broad categories, form the Family Business Secrets of Success model (see Figure 1). This comprehensive model covers particular themes and business priorities and recognizes the importance of values, dominant narratives and behaviours. It is a practical tool that helps businesses understand how the different elements interact and make up the whole.

The effectiveness of this model has been empirically confirmed. An initial model based on the four categories was devised some 15 years ago based on an analysis of numerous successful firms profiled in the book Sharing Wisdom, 4 which noted, “…regardless of the diversity among these families and businesses, the number of similarities is striking.”5 Since then, the model has been applied and refined, and its use consistently indicates that the most effective family firms excel at 80% or more of the 25 principles at any given point in time and that they apply all of the principles over time (see the last section of this article for a comparison of this model with other family business models).

In our model, a key positive and distinct indicator is that successful families feel intrinsic pride in their values. Firms that are struggling are typically weak in all four categories. A company that is weak in one category may get by, but the more categories in which a company is failing, the more vulnerable it is.

Counterintuitive realities

These principles are not only difficult, they cover a wide range of areas. Moreover, some of them are counterintuitive. For example, it transpires that respecting tradition can help you be innovative; also, planning for the long term helps nurture innovation. Another example, recently popularized by John Mackey, author of Conscious Capitalism, as “the paradox of profit,” is that a company does not tend to maximize profits by aiming to do so. Rather, financial rewards come from focusing on products, services and customers. A succession of strong quarters is not always good for the business, as we saw in the most recent credit crisis, especially in risky trades. Smart business-owning families have understood this for centuries and made it one of their unchanging principles.

There is growing evidence demonstrating that ethical conduct can enhance brand reputation and long-term business resilience. One example is Rosabeth Moss Kanter’s research on admired and financially successful companies, 9 though this does not yet seem to be widespread knowledge. In practice, especially for publicly quoted firms, executives can come under pressure to abandon a commitment to long-term sustainability if financial results slip even for just a couple of quarters. Some even face takeover threats. At Unilever, for example, Paul Polman has been leading an ethical, sustainable strategy since 2010 yet he now finds himself under pressure from shareholders and analysts to focus on short-term results and ward off takeover threats.10 By contrast, the most successful family firms never make profit maximization their main priority or even one of their top ten.11

The principles identified during 25 years of research on successful long-lasting family firms cannot be reduced to a set of competences or “dos” and “don’ts;” they have to be nurtured in a healthy culture. They present a formidable challenge, which explains the disparity between the highest and lowest performing business-owning families. However, they also present an exciting agenda because it becomes evident, through the study of the paradoxical reality, that one does not have to sacrifice ethics to be commercially successful and one does not have to prioritize the business over the family. For the most high-performing family firms, a near-perfect equilibrium between family and business is achieved over time.

The four broad categories into which the 25 principles of high-performing business-owning families are clustered, are:

  • Long-term success in the business
  • Long-term continuity of the family
  • Long-term success in ownership


What do successful firms do differently today?

Organizing the discussion around these four categories helps create a manageable framework for learning.

1. Long-term success in the business

The principles in this category are Vision, Entrepreneurial Drive, Business Skills, Employees, Ethics, Succession Process and Adaptability.

Some of these are closely linked: Companies with strong Entrepreneurial Drive are likely to display Adaptability. Others may be assumed to be in conflict: Focusing on the needs of employees may temper a company’s commitment to entrepreneurial renewal, which could result in redundancies. Similarly, paying attention to Ethics is traditionally assumed to collide with commercial objectives and not naturally support Business Skills. A dimension of the latter is handling the Succession Process, which is most effective when treated as part of the business strategy, rather than as a headhunting transaction, and may involve tough choices.

Firms that enjoy long-term success defy such assumptions, however. They understand that, in order to be entrepreneurial and adaptive, they need to harness the engagement of Employees, and that doing the right thing ethically bolsters reputation, trust and, ultimately, the brand. Without trust, held together by a strong Vision and sense of purpose, a business struggles. Tough decisions are sometimes necessary, but firms with high engagement and adaptability are better positioned to make them in a way that maximizes opportunities and minimizes the fallout.

2. Long-term continuity of the family

The identified principles in this category are: Pride, Mutual Support, Strong Values, Social Engagement, Fairness, Ability to Handle Conflict, and Strength in Unity.

A highly functional, successful family like the Frescobaldis exudes a quiet self-confidence. Family members may give the impression that their lives are conflict-free; but this is never true of any family – or firm. People in all family firms will, from time to time, have clashing viewpoints on future directions, the role of individuals and so on; in addition, no one is immune to feelings of resentment or jealousy. But high-performing families have the courage to acknowledge the differences and facilitate honest conversations about them. They are not immune to conflict, but they have learned to address it openly and respectfully.

Hence, the Ability to Handle Conflict, one of the toughest of the 25 principles, deserves special attention. Emotions can run high, especially when important matters such as careers, the future of the business and its potential for wealth creation are at stake. So the ability to discuss such issues in an open and rational manner, to come to a negotiated or democratic decision and to attend to the feelings of those who lost the argument, becomes crucial. The principles Mutual Support and Strength in Unity may appear to be at odds with the practices of tolerating dissent and acknowledging conflicting ideas. However, high-performing families are not seeking a false unity but rather unity of purpose while acknowledging differences of opinion and honouring the principle of Fairness. Another advantage of open discussion and a diverse range of views is that they can foster innovation and creative ideas.

It is important to signal the role of Social Engagement. The most effective business-owning families have Strong Values and are anchored in their community, with which they share a culture, traditions and long-term friendships. They have Pride; they care about the societies that they are a part of, and they understand that a good name and social standing legitimizes the family and its business. They have little intention to leave their place of origin unless forced to do so and are thus naturally inclined to protect their environment and develop a rich cultural life for the well-being of generations to come.

Such families typically engage in charitable activities, though often with a low profile. As well as helping society or the environment, these activities can open up opportunities for family members, including those, for example, who lose out on leadership positions. It is quite common for a family member who feels unsuited to a business executive position to find fulfilment through a leading role in a philanthropic initiative.

In contrast, families that exhibit arrogance or a sense of entitlement struggle to survive.

3. Long-term success in ownership

The key principles in this category are: Trust, Control, and the Equal/Unequal concept, Voting Rights, Responsible Ownership and Equity Concentration.

One reason that some family firms hit a crisis is a failure to properly and professionally deal with ownership. Clarity on ownership, decision-making and stewardship are all fundamentally important in governing family-owned enterprises. Long-lasting family firms take time to discuss and clarify their values, which inform their strategic choices around sectors, technology and risk appetite. They exercise Responsible Ownership, tending to be conservative on debt levels, governing for the long term and caring about employees, society and the environment. They will not compromise those values for short-term gains.

Such family businesses exert honest Control through strong values and high levels of Trust. They tend to maintain control over major strategic decisions, as active owners, holding on to their vision and values. The distance between ownership and the business is short. There is relatively high Equity Concentration – most decisions are taken by the family, even in publicly listed companies.

The Equal/Unequal principle refers to the Voting Rights practice of one owner, one vote. It deals with a potential problem where inheritance would otherwise result in asymmetric patterns of influence. For example, in a third generation, there may be one child in one branch of the family and six in another, which would lead to the former having far more say if it were in proportion to ownership. But families have also found that the practice encourages good governance. Their principle is simple and clear: the most able person takes the leadership role, not the one with the most shares; the wisdom of the collective decides, not the majority owner. This directly counters the prejudice that a family firm discourages meritocracy because it is prone to nepotism; in the highest-performing examples, a sense of duty to the family and its values encourages the appointment of the most qualified leadership.

4. What do they do differently today?

The fourth dimension of attributes relates to how high-performing family firms distinguish and renew themselves. The five key areas are: Separation of Issues, Formal Processes, Stewardship, Governance Structures and Role of the Family.

Long-lasting families transmit values orally by living close to one another, sharing anecdotes that teach the history and keep their values alive; they know that the Role of the Family is central. They are, however, humble in admitting that they managed to thrive for centuries without a formal process in place. Today, that is, within the past 25 years, family members are more widely spread both geographically and in the knowledge they have acquired. Many of them operate over several countries or continents. They implemented the Governance Structures and Formal Processes that the business needed to ensure good Stewardship. They have learned the importance of Separation of Issues, so that particular issues of the business and the family, though often closely linked, can be identified and addressed independently. The result is that they typically have just enough structure to support the business and the family, without becoming overly complex and bureaucratic.

Conclusion

In keeping with the principle of paradox, a clear finding from the research is that the most successful business-owning families do not put profit-maximization first. When you spend time with them, you notice that they have an intense pride for the business and its history. They also have a really deep sense of family, unity and mutual support. They have a strong sense of self; they do not try to be someone else. Their self-confidence is discreet because they know that arrogance comes before a fall and that modesty is, counterintuitively, a natural ally of ambition.

The implications for those seeking to emulate the most successful family firms – whether or not they are a family firm – are profound. There are, however, no easily imitable competences. Success is more about character and resilience. Aristotle defined three dimensions of human intelligence: episteme (intellect), techne (craft) and phronesis (practical wisdom and ethical values). It is clear that, for decades, business schools have taught the first two to the exclusion of the third. It is equally clear, from the evidence based on the most highly effective family firms, that Aristotle was right that phronesis ought to be given equal parity in business education in the 21st century.

Author: By Professor Denise H. Kenyon-Rouvinez

Source : https://www.imd.org/research/perspectives-for-managers/secrets-of-success-in-long-lasting-family-firms/?MRK_CMPG_SOURCE=webletter-issue09-17&utm_source=DM&utm_medium=em&utm_campaign=webletter-issue09-17