BEST PRACTICES:

Family Businesses Doing It Right
by Mike Cohn 

Far from being the weaklings of the commercial world, family businesses are the invisible giants of industry. Family companies are the world's dominant form of enterprise.

Two- thirds of all U.S. companies are family owned and managed. Nearly half of the 1000 largest industrial companies in the U.S. are family companies. So are 40% of the Fortune 500. Sixty percent of all U.S public companies are family owned, and family firms are even more prevalent abroad.

ABOUT DR. DAVIS
Dr. John Davis, Senior Lecturer at Harvard Business School and President of the Owner Managed Business Institute based in Santa Barbara, Calif., has been working with family businesses for 20 years.

Families that have managed to nurture both family and business over two or more generations can teach us a great deal. Research by Dr. John Davis, president of the Owner Managed Business Institute in Santa Barbara, Calif., shows that those family businesses that have been most successful and enduring have demonstrated many important practices:

• Family and company management treat family as family and business as business.
• The family nurtures a family culture of loyal differences.
• The family cultivates a garden of virtues for family members.
• The company maintains a compelling, long-term business vision.
• The family, management, and shareholders practice patience.
• The family and management emphasize competence and openness in the company.
• Business leaders respectfully manage shareholder loyalty.
• Family and company make tough decisions in a timely way.
• Family and business leaders plan beyond their own lifetimes.
• Family and company support their servant leaders.

Magical Synergy

Properly woven together, family and business elements create a magical synergy of forces. A business can enhance a family's sense of purpose and build mutual loyalty as well as wealth. Family leadership and ownership of a company can sustain a long-term innovative culture of surprising passion and loyalty. For family and business to function well, they must be integrated—yet relaxed enough to keep family and business separate and distinct from one another.

'I succeed when my family succeeds' is an ancient Chinese saying that truly applies to successful business families.

Given the central role of the company in the life of a business family (especially in the first two generations of the family), it is difficult to separate what is business from what is family. It is very tempting to hire relatives who do not deserve jobs in the company, pay them more than they deserve and pay higher dividends to family shareholders—all in the name of family love and harmony.

Successful business families recognize that a business must have a clear set of rules and boundaries that everyone follows. But along with treating a business like a business, leaders of successful family companies must respect the needs of the family and be compassionate to the relatives.

Successful business families recognize their responsibility to provide emotional support and guidance to their members and to raise responsible adults. They nurture individual identities and encourage respectful relationships and healthy interdependence.

To help maintain healthy boundaries between business and family, successful family and business leaders set explicit rules, rights, and responsibilities (the 3Rs) for members of the family, employees of the business, and for shareholders. Where there are agreed-upon boundaries, business leaders are more likely to demonstrate respect and enthusiasm for their families, and communication in each of these areas will typically be more clear and effective.

Nurturing Loyal Differences

Successful families recognize thateach individual within thefamily is distinctive and for a family to thrive, differences must be respected. Without a basic respect for individuality, individuals wither, and with them goes their creativity and ambition. The instinctual need for unity within the family challenges this individuality. Business families, which have a lot at stake financially and otherwise, sense an even greater need for unity.

When unity is forged by respecting and harnessing the diverse strengthsof relatives, the family becomes oneof relatives, the family becomes oneof the most powerful teams known tosocial scientists.

"I succeed when my family succeeds" is an ancient Chinese saying that truly applies to successful business families. Family members do not rely on each other for every need or become overly dependent on the family for support, but they learn to use the strengths and skills of the family and its members to support their individual and family goals.

Cultivating Virtues

For a business to continue thriving for generations under family leadership, each successive generation must be developed to effectively carry on its values and traditions. Key virtues must be instilled in at least some of the children to perpetuate both the company and the family.

The best family business dynasties forgo short-term personal benefits in favor of long-range prosperity.

Successful business families cultivate many virtues in their children, including individual responsibility, teamwork, problem solving, honesty, fairness, loyalty, respect, strong work ethic, discipline, love of family, modesty, humility, bravery, confidence, and giving back to the world. It is not enough just to espouse virtues such as these; they must be taught and nurtured by example.

Compelling, Long-term Vision

High performing family businesses excel at fundamental business practices and at creating compelling, long-term business visions. This vision unites everyone in the organization and focuses them on a target. It makes them reach and extend beyond themselves.

Family companies are more likely to create visions that go beyond just making profits into creating visions that compel generations of people to contribute to the organization, its customers, and society as a whole. The best family business dynasties forgo short-term personal benefits in favor of long-range prosperity.

Practicing Patience

Patience is a virtue that invariably pays off. Aggressive reinvestment in the business, and modest dividend payouts to shareholders, have always been hallmarks of high performers, but these practices are extremely important today.

It takes that much more reinvestment for most companies to keep pace with competition and remain viable. The best family companies aggressively reinvest earnings for the long-term, refraining from short-term gain. The leadership of a family business must build a sense of long-term value created by hiring and developing competent managers and investing in innovation and growth.

Family companies come to this strategy more naturally than other companies because family shareholders usually share a mutual interest in perpetuating the business, and in watching its equity, and thereby their own wealth, grow for the benefit of the next generation.

Competence and Openness

The highly successful family business maintains an innovative, open culture that is highly responsive to its environment, including customers, employees, competitors, technology, and external ideas.

They are on a quest to do business better by seeking advice and constructive feedback from family members, employees, customers, and external experts. These businesses maintain adequate external privacy while openly sharing information with employees and family members. Internal openness about the business improves employee motivation, family loyalty, and company profitability. These businesses hold all employees accountable for results, and they give them the tools necessary to produce results.

Leading family businesses insist on competence within company ranks, regardless of whether this hurts career prospects of family members. Outside experience is encouraged and "safeguard structures" (like family employment review committees) are developed to assure fairness in all situations. Rules are most effective when they are developed before a family employment situation arises. Employment rules are discussed by the family, endorsed by the board of directors, and implemented by management.

Management Shareholder Loyalty

Attentive shareholder relationship management is key to success in family businesses. Active shareholders proactively manage information and communication with passive shareholders. They avoid shareholders being the "last to know" by ensuring appropriate shareholder involvement in discussions and decision-making Boards of directors, family councils audit committees, and family customer focus groups are created to provide vehicles for information sharing and gathering. Although it may seem ridiculous to establish such explicit rules for shareholders at the early stages of the family business, it is imperative for long-term success.

Once the family company is passed to the siblings, decision making often becomes more difficult because of the rivalry that often exists among them. Decision-making problems generally grow at the cousin consortium stage.

Timely Decisions

Nothing brings a business down faster today than indecision. If a family business stalls out because it can't set direction at the top, it soon will be overpowered by companies that can and do make timely decisions. Families, too, can be disabled by the fear of deciding. Decision-making in family business is fraught with conflicting goals and powerful emotions.

Decades-old patterns of behavior are preserved and perpetuated in the family, and decisions about matters such as management and ownership succession can be delayed, often too long.

Successful family businesses ensure and that decisions can be made in a timely fashion. They use their boards of directors, family councils, and management teams to assist them in important decision-making processes. And they empower employees at all levels to make decisions regarding their own positions and tasks.

Because family relationships are more emotional and have more history behind them, successful business families need to manage their emotions and anxiety and build trust in each other's abilities to make decisions.

Planning Beyond Lifetimes

Successful family companies anticipate the challenges they will face in the future and prepare for them. They adopt a generational outlook and a commitment to maintaining their businesses over the long haul. To plan really long-term, however, family leaders must plan beyond their own lifetimes.

Family leaders of successful family firms consider succession early on and champion the process of change. They make sure the family or others are prepared to assume leadership in the future...

Families and boards must periodically review their plans and policies to ensure that the family feels psychological ownership of the rules that bind it to the company and that the rules are sensible. The planning process should allow for healthy discussions and consideration of business concerns (performance, products, services, customers, employees), family concerns (finances, leadership, involvement, employment), and ownership concerns (shareholder involvement, returns on investment, leadership succession) so that all issues can be voiced and managed effectively.

One of the most important plans that the family must make regards succession in the business. Family leaders of successful family firms consider succession early on and champion the process of change. They make sure the family or others are prepared to assume leadership in the future and that family members and employees alike support the transition process.

Supporting Servant Leaders

Leadership of these complex systems must be strong-willed, clear, and decisive. It must provide the strategic direction and moral compass for business and family. Servant leaders bring their own visions to their roles, but more importantly they see themselves as serving the needs of their company and family.

Those effective in this role see their position as resulting not from entitlement, but from their ability to advance the cause of the system. Good family leaders are caring and seek their power for the good of all those involved. It is not unusual for business families to have more than one leader, and leaders of the business and the family may not always be the same.

Fairness bravery, empathy and trustworthiness are fundamental characteristics of successful servant leaders. These leaders are ultimately focused on the values that have made their companies and families strong. In the final analysis, enduring business families and their companies are about values. It should come as no surprise that their leaders are the chief protectors of these guiding values.