Self-Perpetuation Family Organization Built on Values: Necessary Condition for Long-Term Family Business Survival

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1 Self-Perpetuation Family Organization Built on Values: Necessary Condition for Long-Term Family Business Survival Craig Aronoff Family businesses have long been conceptualized in terms of overlapping and interacting management, ownership, governance, and family systems. As family businesses evolve and develop across generations, observing progress in each of the requisite systems presents a variety of challenges. This article demonstrates the importance of family organization to the systems of management, ownership, governance, and family as a family business evolves over time. For decades, family businesses have been conceptualized in terms of overlapping and interacting management, ownership, governance, and family systems. Family business health and longevity can be predicted, if not precisely measured, in terms of the institutionalized functioning of each of these three systems and the linkages between them. Each of these systems should develop as selfregulating and self-perpetuating processes with their own structure, leadership, and communication systems. Indeed, Joe Astrachan s research demonstrating correlation between family business longevity and strategic planning (representing the management system), an acting board of directors (representing the ownership system), and a family meeting process supports this view. As family businesses evolve and develop across generations, observing progress in each of the requisite systems presents a variety of challenges. From the perspective of management, progress can be observed not only in terms of the business s financial performance, but also in terms of the clarity of managerial processes and structures, the capacity of the organization to attract and develop executive leadership, and the effectiveness of the planning and implementation of strategies. From the perspective of ownership, governance progress can be traced by observing the development of board composition and processes. To what extent does the board of directors provide independent oversight? Does the board stimulate and support executive functioning? Is the board agenda managed to sustain focus on key priorities over time? Tracing the progress of the family system is, in some ways, more problematic than doing so FAMILY BUSINESS REVIEW, vol. XVII, no. 1, March 2004 Family Firm Institute, Inc. 55

2 Aronoff in relation to management and board governance. It is, however, of no less importance.we will return to the process of ascertaining family system functioning later in this article. As businesses grow, loosening family/ management and family/governance ties become more complex and face increasingly sophisticated challenges; increasingly, family is unable to provide the executive leadership necessary for success. Although the founding entrepreneur may have played all the bases, attracting and managing nonfamily executives becomes essential to ongoing success. Ultimately, the need for effective nonfamily executive involvement may clash with the family s role in management. Choosing a nonfamily CEO, assuring that family members do not block out nonfamily executive opportunities and aspirations, and weathering family disappointment when a family member s executive aspirations fail to match managerial abilities are examples of this conflict. With business success and the passage of generations, a self-perpetuating and self-regulating system of executive leadership evolves beyond the family. Even while family members may continue to play key leadership roles, the relative importance of nonfamily management increases. The bonds between family and management are loosened. Some family businesses actually develop policies that ban family members from the business so that judgment of executive talent will not be clouded by nonbusiness considerations (or because the family wishes to avoid the potential pain and disappointment that can be inflicted when family members prove unable to achieve their career ambitions within the family business). In many cases of growing family businesses, the ties between family and management are loosened and, indeed, weakened over time. The opportunity for leadership in the family business as a reason for sustaining a family business diminishes over time as the vast majority of family members become unable or have no desire to pursue careers in the family business. Likewise, the challenges faced by the board of directors make it less likely over time to be able to fulfill its function while relying exclusively on the family for its membership. The need for independent oversight, experience in a variety of business circumstances, and highly developed financial acumen demand resumes and talents different from what most family groups can produce. The result is more outsiders and fewer family members on the board of directors. The board and its deliberations take on less of a family flavor and family members are less likely to aspire realistically to express their connection between family and governance through board membership. Again, as the business grows, the ties between family and board are loosened and weakened. Importance of Family Organization As the ties are loosened between family and management, on one hand, and between family and the board, on the other, the importance to family business longevity of a self-perpetuating and self-regulating family organization becomes clear. Sustaining the family s commitment to its business can no longer be manifest as career ambition or the hope that one can achieve the power and status offered by service on the board of directors. In many cases, when these motivations become no longer readily available, the drive shifts toward the financial. Financial motivation can take many forms, ranging from a 56

3 Necessary Condition for Long-Term Family Business Survival sense of entitlement to a sort of pure returnon-investment mentality that promises commitment as long as the family business offers above-average rates of return. Under such circumstances, family businesses tend to lose the very distinctiveness (and competitive advantages) that being family owned permits. If family owners are interested only in financial returns and view their asset as interchangeable with any other asset offering comparable returns, then there is little reason for sustaining the family business. In short order, the purely financial perspective becomes a selffulfilling prophecy. Family ownership groups, on the other hand, while not denying the importance of the business s successful financial performance, are typically motivated by commitment to a set of values represented by the business. The family organization serves to build cohesiveness of the family ownership group in support of the business as an expression and example of the family s values and a primary means of achieving the family s aspirations related to its values. Family members may continue to cherish the perceived opportunity to contribute by providing executive leadership or directorial oversight. They typically hope to benefit financially by sharing in family wealth, but they are often primarily motivated by their sense of belonging in a group that possesses the uniquely meaningful opportunity to sustain and extend a legacy of values. Over generations, these family values become the basis of the family business s culture. Because the business s strong culture and unique values really do distinguish it from other enterprises,it may well be the basis of irreplaceable competitive advantages. The family s articulation and cohesive support of its expectations about how business should be conducted really can provide clarity for directors and executives concerning their decisions and actions. A cohesive ownership group committed to goals and values that include but supercede financial considerations really can lower the business s cost of capital. Thus, a family ownership group organized to sustain itself in the service of cherished values represented in the conduct of its business can be the most potent force of all for family business continuity and persistence. All this becomes particularly evident when loosening bonds between family and management and between family and board calls for strengthening the family organization itself in the service of family business longevity. Several cases in our recent experience illustrate the point. Case 1 A century-plus old family business suffered business reversals associated with the recent recession. A family-dominated board expressed concerns about both strategy and execution, but finding solutions proved difficult due to family dynamics within the board and among top management. Although the company had more than 100 related shareholders, no formal family organization existed. Interviews with numerous shareholders demonstrated widespread concern with both strategy and performance but also a deep and continuing commitment to the business, its legacy, and values. Especially important was the company s reputation for innovation, quality, and support of its community and employees. Moreover, the family was concerned with conflicts among family members in the company and on the board, not because of what disputes might do to the parties in the disputes, but because of the injury the dis- 57

4 Aronoff putes might cause to the business and, thus, to all its constituencies. Based on shareholder input, the board decided to transform itself by removing family and management representatives from the board and adding several carefully selected outsiders. The concerns of family factions and the sensitivities of family executives about their own roles and recognition almost immediately ceased as factors influencing strategic and managerial decisions. With several family members removed from the board and less prominent in management, some expressed concern that the rationale for being a family business was lost. Through the consultative process, however, many family shareholders came to recognize and more deeply understand that the family itself served as a meaningful asset to the business. The family s commitment to its legacy and values reminded individuals that the whole is and should be treated as greater than any of its parts. The family gave individuals the strength to do the right thing. In this way, executives found the support for making tough but proper decisions about strategy and personnel that might have adverse impacts on other family members. Family member directors found the support and strength to vote to change the board even when it meant personally losing a cherished director role. To assure the family s ongoing constructive role in the family business, a family council was organized and set out with relish to define its role and articulate its mission. The business has returned to health but still must find solutions to several strategic issues. With less need to respond to the sensitivities of specific family members, the company is in a much better position to make the necessary changes to assure its future. Case 2 Another century-plus old family business also suffered reversals in the recent recession, along with its entire industry. While the company enjoyed financial success, its 100+ related shareholders were quiescent. Now that the company s performance has declined, dissatisfaction has been voiced. No family members are currently in management, but several serve on the board along with a majority of outside, nonfamily directors. The board is seeking to develop methods to better evaluate and add more value to the enterprise. A survey of shareholders indicated little interest in becoming more organized. The effort to extract more information about the shareholders goals for the company revealed little more than a desire for greater liquidity. In effect, the family dimension of the company has diminished to the point that it no longer has an impact on the company s strategy or direction. Without the family influence, the board must use financially driven criteria exclusively to evaluate company performance and the quality of its own oversight. In all probability, this company will succumb to future industry consolidation. Case 3 Our final example is a 75-year-old company transitioning from second- to thirdgeneration leadership. Although overall performance is good, several smaller units of the company are performing at levels that could use substantial improvement. A family member heads each of these units. Almost all of the approximately 20 shareholders are active in the business. Family members fill the majority of key leadership 58

5 Necessary Condition for Long-Term Family Business Survival positions. The board consists of family executives and a few nonfamily executives but governance decisions are made informally by a group of older family leaders who also hold key executive positions in the business. It is unclear how such governance decisions will be made in the future. Family/management and family/governance connections in this business are extremely strong and no family organization exists outside of that which exists in management and governance. A very strong set of family values related to hard work, customer and employee relations, ethical business practices (in an industry not known for its high moral standards), and philanthropy permeates the family and the business, creating a culture that gives the business a genuine competitive advantage. For the immediate future, this family business looks very strong. Over the course of the third generation s leadership, however, it must evolve stronger governance and build a family organization if it hopes to remain strong and independent for the long term. Conclusion For multigenerational survival and success, family business must focus on excellent management and governance, but true sustenance also requires a self-sustaining, self-regulated family organization to assure that a unique culture of values and meaning provide motivations beyond money. Such family businesses have the three-dimensional infrastructure that make them built to last. Craig Aronoff is founder of the Cox Family Enterprise Center at Kennesaw State University and co-founder and principal of the Family Business Consulting Group. 59