Family business – getting it right
20 April 2016
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Hello and welcome to another edition of Old Mutual Live Business, my name is Chris Gibbons. In this edition we look at family businesses and in particular some of the key problems that can occur and what to do about them. An expert in the field of family business is Dr Jonathan Marks, Senior Lecturer at GIBS, Gordon Institute of Business Science, one of South Africa’s leading business school.
Jonathan, welcome to Old Mutual Live Business, thank you for joining us. I know that owning and running a family business is a dream for many people and when it works well it can work very well. Where does it start to go wrong?
Jonathan Marks: Thanks Chris, I think it goes wrong often because of its success. I think family businesses firstly are prevalent throughout the world. In some countries they’ll account for 80% of employment within the economy. South Africa can account for anywhere up to 75% of businesses would be regarded as family owned or family operated businesses.
The issue around governance
I think the origins of many of the challenges of family businesses are around issues of governance. I think it’s because you have this challenge of leading or having a business that, in terms of creation of economic wealth and at the same time is attempting to create socio-economic wealth for the family. It becomes a place of meaning for many families. So you’ve got to balance these two issues around the creation of wealth, at an economic level and the creation of socioeconomic value and socioeconomic wealth.
CG: Does running a family business require a more consultative approach, say from mom and dad, if they’re the major shareholders and they’re bringing children onto the team?
JM: Yes it does and I think this issue of governance is often solved through the combination of a board of directors and a family council. To manage this duality between economic and social value. I think that the parents or grandparents, whoever might be the current leaders of the business, often have a great responsibility to the family to include them.
Not necessarily in the day to day operation of the business, unless they have the skills that are appropriate, but also in thinking about where the business goes into the future. That’s often the role of the family council. It acts like a little bit of a super board of directors. To help inform the directors of the company who may or may not be family members, but to where they want the business to go. Absolutely, it’s got to be consultative, but I think that successful family businesses, institutionalise this, often through a family council.
Maintaining the family balance
CG: If the business is a big one and all you have to do is think of Pick n Pay and the Ackerman family, if you’re looking for one example or the Murdoch Media Empire, for another. How do you bring a favourite son or daughter on board without demotivating the non-family employees?
JM: That’s a very tricky one and I think that often comes down to the issue of values. What are the family’s values around inclusion? How you find an opportunity for family members to somehow play a role. I don’t think it always works well.
I think it’s rare that the skill of the founder is just automatically transferred from one generation to the next through genetics. I think some people have the ability and others don’t. If we look at Pick n Pay as a wonderful example, I think they’ve entered the third phase of the business where they’re brought in entirely professional management for the business.
The CEO is not a family member, obviously Gareth remains on as Chairman of the Board. I think that’s a good example of how you begin to separate out some of the governance and the leadership from the day to day management.
I think in smaller family businesses it’s not uncommon that you bring family members and even if they don’t necessarily yet possess the skill. Because often the family business has been designed to provide employment and economic opportunity for the family itself, but that has a two-fold problem.
The first is that it signals to non-family members and non-family leadership but they may not be the same set of opportunities within this business as say a non-family owned business. Secondly you often promote a little bit too early and the family member often can’t meet the expectation. Both of the parent who might have placed them there as well as the market or the organisation at large. I think it’s an inordinately tough call.
One way that businesses get around this is that, we’ve seen a sort of trend within literature, talking about enterprising families. So instead of bringing a favoured family member into the business, you might stake them to start their own business. So the family becomes an enterprising unit but you may not necessarily bring the person into the heart of the business itself.
When a family becomes too large
CG: Of course if you go from generation to generation, the shareholding can become immensely complex. Think about the Ford family, think about the Walton family in the United States.
JM: It does and obviously if you start bringing in cousins and multiple generations, it becomes very complex. All the more reason why you have something like the family council. As a way of guiding some of the family’s interest into the business, especially if the business is listed.
I think you raise also the issue of how you think about succession, which always remains one of the most topical issues connected to family business. How do you decide who takes over next and if you’re now at a third or fourth generation and there are multiple cousins and everybody wants a chance to lead the business. How do you make that decision?
Coming back to Pick n Pay, maybe you do what they have done. You bring in professional leadership and you say no family member is going to run the business. Or I think the more preferred model is to begin to think about and engage with this idea of succession long before it becomes a real issue.
I think well into the, sorry let me rephrase that rather, I think at the early stages that maybe a second generation is leading the business. Maybe that person is in their 50’s, you begin to think, who is going to take over from this person in 15-20 years’ time? You begin to groom people within the family or potentially outside of the family who might be in the business to begin to take on the role of leadership.
That does create all kinds of disputes and I know that there are, I think of one particular South African business which has struggled with, they’re a smaller South African business. But they’ve struggled to try and think, who was the right leader in the business.
In the end it was left to the generation leading it to sort of pick someone, to pick one of the cousins. It was fortunate that the others all had their own interests and their own professions, although I think they would have liked to have led the business.
So it does create a little bit of tension within the family and obviously if that tension exists in the workplace, it’s going to spill over into the social space. Into the family environment and dinners on Sunday and what people are talking about. I think that the great value in a family business is that it’s a mechanism to build and contain wealth for the family, hopefully for a long time, ultimately through multiple generations.
I think that’s the initial selling point, is to say to the family, including you in the business might be a good short term decision. But let’s think about how we retain the value and build wealth in the long term to allow you to do what you want to do. It’s a place you can come back to, but it might not be a place you’re always employed.
Some of the key problems
CG: Jonathan, what are the other key problems that you’ve identified in family businesses?
JM: I think one that we haven’t spoken about, which does link to the shareholding issue is around access to capital. Often access to growth capital, especially if a large business is implied some sort of dilution of ownership.
Of course, this is something that families don’t necessarily want to do and for good reasons. I think as you begin to dilute the capital it changes the nature of the business. I think that’s probably one of the greatest challenges, is how do you raise capital if you can’t self-fund to ultimately grow the business.
You’re largely locked into either a complex corporate structure, much like the Ackerman’s, Pick n Pay, multiple holding entities. Or you’re really reduced to loaning money and based on whatever your asset base is, is whatever you can loan to grow the business.
I think that’s a real challenge for businesses and then I think in South Africa, coupled to that, is how do family businesses, especially large ones, deal with issues of transformation and broad based black economic empowerment.
Again, I think it implies a dilution of ownership and I think the one organisation, we don’t often think of it as a family business. But the one business I see that has done that exceptionally well is Allan Gray Limited. I think that the Gray family thought long and hard about they were going to deal with BEE within their organisation and they really dealt with it through a two-fold process.
One was the inclusion of staff instead of selling out a stake in their business to an empowerment group. They gave it to their staff through a staff trust. Then the second one was through philanthropy and feeling that actually their gift was to rather give the money away to the broader population. Rather than to empower a small group of people.
So we see, again, a growing trend around family philanthropy and the creation of family offices as both investment vehicles and vehicles for philanthropy. I think that’s something we’re seeing a lot of in South Africa and I sense it’s a way of dealing with issues of transformation. Empowering one’s staff and giving money away to the broader community is, I think, one way of dealing with that.
CG: Fascinating insights, Dr Jonathan Marks, Senior Lecturer at GIBS, thank you for joining me on Old Mutual Live Business.