It’s all about longevity
By Rajmohan Krishnan
In today’s fast-paced world, how do family businesses prevent erosion of their wealth and values and derive the apt formula for continuity
The Japanese are known to lead long lives. The same can be said about the nation’s family businesses too. Dozens of them have lasted 500 years and approximately 20,000 are at least 100 years old. This at a time when businesses – around the world — collapse within a decade and the average life span of a family business is just 24 years.
What separates the family businesses that last generations from those that don’t? This is an important question not just for the families that own these businesses but also for the society as a whole. Even today, around two-thirds of all businesses around the world are family-run. Therefore, family businesses that sustain themselves become the backbone of the job market while those that go bust, rob a bit of unfulfilled potential from the society.
As a Family Office Investment Advisor (FOIA), I’ve seen my share of promising family businesses fading into oblivion. In my experience, an imploding family business might suffer from either of the below mentioned issues:
- 1.A patriarch/matriarch who refuses to let go
- 2.A new generation that shows reluctance or incompetence in taking control
- 3.Both, in rare cases
It’s not easy for two people to add a professional dimension to a relationship that was founded on years of deep emotional bonding. The challenge could become insurmountable in some families. Issues that don’t get resolved in the dining room get transferred to the boardroom and vice versa.
The key to building a lasting family business lies in paying as much attention to family management as to business management. Let’s understand what are the three pillars that help business families keep an unwavering focus on the long-term future of both, the family, and the business.
Stability: The Foundation
Most families find their wealth being squandered away by the second or the third generation scions, many of whom think it’s their prerogative to splurge. To check this, families must instil a deep respect for wealth when the scions are young and teachable. Through many age-appropriate conversations conducted regularly over many years, scions will learn that wealth is not just a privilege, but also a responsibility. As a part of this process, the FOIA can mentor the young scions, teaching them to invest, spend and save. Families who do this set a strong foundation for the long haul.
Adaptability: The Mindset
In sound family businesses, a tab is kept on changing market conditions, as well as on changing family dynamics.
While every family at some point in time faces the issue of generation gap, the effect gets compounded in families with large businesses. If the relationship between the patriarch/matriarch and the next generation sours during the latter’s adolescence, it can spell doom for the business in the long run. So, in addition to infusing stability in thinking, the older generation should also accept the inevitability of change. True, family leaders should accept that their children and grandchildren have their own unique perspectives. They will want different childhood experiences and, as a corollary, different life scripts.
Acknowledging this helps family leaders be flexible about the future of the business they created, perhaps from the scratch. Maybe, a young scion will want to diversify into a different domain or want things done differently.
A client of mine faced this reality when his son made it clear that he had no interest in running the family’s garment business. My client, ever the pragmatist, sold the business at a windfall profit and launched an unrelated business in a domain that his son fancied. He then handheld the son through teething problems. He handed over the reins only when the business was stable and growing.
Constitution: The Framework
Stability in the new generation and adaptability in the older one are ideal precursors to writing the family constitution. The stage gets set for a visionary document that helps every family member plan their careers and their lives.
A fair, fastidious and flexible constitution will have the following elements:
- Purpose: A unifying purpose justifying the existence of a family-controlled business is crucial. Family businesses that think making money is the only reason for existence don’t often experience longevity.
- Family values: Families typically underline the importance of values by having shared philanthropic goals. They would commit resources to causes that resonate. As an added benefit, young scions find the experience of managing a philanthropic trust useful for future leadership roles.
- Rules for entry: Entry-level barriers keep the top echelons primed for performance. Also, the scion that proves his mettle has higher self-esteem. It must be noted that entry-level barriers must be accompanied by training and development processes that gives every family member the best opportunity to prove his worth.
- Rules for exit: A family member who wants to pursue interests that are not aligned with the family’s vision can be ensured of a fair exit so that no one feels constricted while making life choices.
- Conflict resolution: A well-articulated methodology for conflict resolution and decision-making with clearly demarcated no-go areas is a must. A formal family council will have an important role to play here.
- Non-participating members: A dignified means of living for those not participating in the family business, so that they don’t feel helpless or worthless. This includes homemakers as well as those disqualified from participating in the business.
It goes without saying that since no two families are the same, no two family constitutions can be the same. The person or the family office preparing the constitution must get full visibility into unique family dynamics and potential areas of conflict. This information must directly feed into the design of the constitution – be it in the creation of the family council, formulation of an organisation structure or the appointing of members of the board.
A final word
Creating a successful family can be quite similar to creating a successful business. You need to build a solid foundation, keep an open mind and serve all stakeholders with sincerity and prowess. And let us never forget that our family is the first team we ever belonged to. And teams, like businesses, are not built overnight.
The author Rajmohan Krishnan is Principal Founder and Managing Director of Entrust Family Office Investment Advisors