What Sets Family Businesses Apart – Harvard Business Review

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

When you see family businesses in pop culture, it’s usually either the lovable mom and pop shop or the super wealthy, super dysfunctional, backstabbing family, like the kind profiled in HBO’s Succession.

SUCCESSION: My father keeps a watchful eye over every inch of his whole empire, and the notion that he would have allowed millions of dollars in settlements and compensation to be paid without his explicit approval, is utterly fanciful.

CURT NICKISCH: In reality, some of the world’s most successful and longest running businesses are family businesses, but it’s true that adding family dynamics to a business enterprise presents all sorts of challenges along with those opportunities.

Today’s guests study and advise family businesses, and they say that ownership really matters more than people realize. And they’re here to talk about the strengths and pitfalls that come with succeeding in a family business, whether you’re an owner or just working for the family.

Josh Baron is a co-founder of BanyanGlobal Family Business Advisors, and Rob Lachenauer is also a co-founder and the CEO. Together they wrote the Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise. Josh, thanks so much for coming on the show.

JOSH BARON: Thank you for having us, Curt.

CURT NICKISCH: And Rob, thanks for speaking with us.

ROB LACHENAUER: It’s a great pleasure, Curt.

CURT NICKISCH: Reading this book made me think about that term ownership very differently. We have so many different understandings of ownership, right? You could be a shareholder where you hold a share, an ownership share of a company. Taking ownership kind of within an organization often means showing leadership. Ownership in a family business is like a whole different level. Can we talk about that?

ROB LACHENAUER: You’re right, Curt, ownership is different in a family business. Let’s maybe first define what a family business is and there are many definitions, but we think the best one is that the company itself is owned by two or more family members, and this means legal ownership of the business. You sign a shareholder agreement, you submit that maybe to the state of Delaware, and it’s your company.

So unlike Apple, Apple computer, which is owned mostly by institutions, and you can buy and sell thousands of shares a day, it’s also owned by people you don’t know, everything’s different in a family business. You’ll have maybe six siblings owning a business together. They all have different characteristics about who they are. They, as people, who they are, what they want matters a lot, and also the relationships among them matter a whole lot. If they have a lot of sibling rivalry, it’s going to be very different than if they get along very well.

And because they’re family, imagine the decisions that you make in your own family, Curt, like going out to dinner or choosing the movie you’re going to watch on Netflix. In our family, those are often pretty hard decisions. These family owners, these people, are making typically big decisions about what they want to do with their business.

CURT NICKISCH: And then going home and deciding which movie to watch.

ROB LACHENAUER: And then, exactly. And then staying together as a family despite having to, we call it, going to the family room and enjoying dinner together versus working in the business room where they have to make these business type decisions together.

JOSH BARON: And ownership is such a big part of our lives in general. I mean, if you think, “What does it mean to own something, your house, your car?” it means that you get to make all these incredibly important decisions about it. Everything from who can visit, to the color scheme on the walls, to do you want to sell it, and who do you want to sell it to when you’re ready? And that idea, what we find is really missing from the conversation about businesses. And the reason is because when we talk about businesses, for the most part, we’re looking at them through the lens of a public company. And in a public company, the owners really don’t do very much. They buy low, they sell high, they maybe sign a proxy statement, but most of the power of ownership in a business has already been delegated to the board and to management.

And in addition to my day job, working at Banyan, I teach at Columbia Business School. For the most part, we don’t teach ownership, we teach management. And that whole idea of ownership as it exists in a public company is so different in a family business because, as Rob said, the owners are not sort of abstract institutions or people trading shares. They’re real people. They can get into a room together, even if it’s a virtual room, and exercise all this power that can come with the ownership of a business.

CURT NICKISCH: So what are those powers exactly that in public companies are delegated to the board, but in an ownership family is not farmed out like that?

JOSH BARON: Sure. And in the book, we talk about what we call the five rights of owners, because there are five core choices that the owners of a business get to make that no one else gets to make, unless they allow them in. As the owners of a business, you have what we call the right to design. You have the right to sort of say, “What are we going to own together? Is it just a business? Is it a business and a family office or foundation? Who can be an owner? Who gets to come into ownership? Who’s allowed, who’s not?” Some family businesses allow anyone who’s a descendant of the founder to be an owner. Others require you to work in the business to be an owner.

ROB LACHENAUER: Josh, let me comment on design because the implications can be so big. So some family businesses for generations, say fifth, sixth generation, all of the ownership will go back to one person. Other family businesses will have a design where everybody in the family becomes an owner. In fact, in Brazil, it’s legal that that not only the blood relatives, but the spouses will get ownership, as it passes through. So we know family b.sinesses with not two owners, but with a hundred owners, we’ve had a client with 700 owners of a family business. Imagine making decisions with a group of 700 of your closest family members.

CURT NICKISCH: 700 owners. That’s pretty impressive. What other powers do those 700 people have, besides the right to design, that we usually just don’t stop and think about?

JOSH BARON: Well, another is that you have the right to decide. You have the right to make decisions about what happens in the business, everything from, “What’s the strategy of the company?” to, “Are we going to pay out dividends or reinvest back into the business?” As the owners, you have the ability to make all of those decisions, or you can delegate them to a board of directors, to your managers. And that’s a lot of the work that family businesses do. When they start out, there’s oftentimes a single person who’s the founder, who’s the controlling owner. And they make decisions the same way I do with my kids, which is “Why are we doing this?” “It’s because I said so. That’s the reason why.” And as you get bigger, as the business grows, it becomes important to figure out what are those decisions that you’re going to hold on to as the owners of the business, and what are the ones that you’re going to delegate?

For example, we work with one family business in Latin America, and the controlling owner, they’re in the retail business, and the controlling owner still made a decision every time they opened a new store, he chose the location of it and the size, the format of the store. And the reason was, he said, “You know what? I’ve been doing this for 30 years. I know instinctively what’s a good corner of the street and what’s not. And if we make that decision correctly, then the store can be profitable and successful.” sAnd so those are the kinds of questions that part of this work in process of owning a family business is really figuring out. You have all this potential decision making power. What are the things that you really need to hold onto? And where do you want to delegate to people to help your business grow and succeed?

CURT NICKISCH: I mean, one of the strengths of this is that you can decide how you do business, what kind of business you are, who you serve, what your values are. That also makes it more complicated, amid the family dynamics, it sounds. Is this more of a complicated calculus to kind of put together on a family level?

JOSH BARON: It’s definitely more complicated. Rob and I both worked as strategy consultants in our pre-Banyan, pre-family business days. And one thing we never had to ask in conversations and making decisions was, “How are you measuring success?” Because it was always obvious. The answer was, “What decision will help us to maximize total returns to shareholders?” And in a family business, especially a privately held one, but even one that’s publicly traded that the family has control over, it’s so different. The family actually has the right to decide what they value in that business. And what we find is that it’s usually, of course, financial performance matters. If you don’t have a strong performing business, you’re not going to last for very long, but rarely is that the only thing that matters. Families oftentimes care about the family objectives. They want to avoid conflict or having a big disagreement about an issue, or they might have social objectives that they care about as much or as more as making money.

There’s one family business that we work with that’s in the chemical industry, and they could make a lot of money selling to cigarette manufacturers. And they decided, “We’re not going to do that no matter how much money we can make because it’s against our values.” And so a lot of the work of owning a family business is in understanding that you have the ability to set those objectives, to set your goals and to put guardrails in place that sort of specify how are you going to measure success both from a financial perspective, as well as what are the other non-financial, familial or social environmental objectives that you want to set or things that you want to avoid?

ROB LACHENAUER: We had a situation. I was on a Zoom call last week, and it was a great family business we know well, and we were talking just about what Josh was talking about, which is, what goals do you have for your family business? Is it to increase the value, to take money out through liquidity, or do something else through controlling it? And it was kind of a dry conversation. And then all of a sudden, one of the next generation owners, she started tearing up and she said, “I’m so proud of how we treat the employees of our company. That’s what matters to me.” And it’s just a great expression. And I just think that this is what family businesses are. They can do things because they’re the owners, because they’re emotionally connected to their business, that Josh and I never saw when we worked at Bain and BCG.

CURT NICKISCH: It’s interesting because a lot of companies today still feel a, I can call it a generational pressure, right? They’re trying to respond to younger workers. They’re trying to incorporate values of a more diverse and younger workforce and do business differently. I mean, that generational pressure would apply to family businesses too, but how does it manifest itself?

ROB LACHENAUER: It’s a big advantage for family businesses because in the owner room, many generation family businesses will have some voice coming from the next generation. And these voices are exactly what you’re talking about, Curt. They’ll challenge the current generation respectfully on, “Are we doing enough for the environment? What is our diversity policy?” So not only do these companies have it happening kind of down at the employee level, maybe at the board level, but also at the owner level and in the family level, there’s a lot of pressure. And what’s nice is because family businesses don’t have a share price that they have to slavishly watch and make sure it’s going up, they can make the kind of investments that long-term, generationally long-term, will benefit not only the company, but the communities.

JOSH BARON: Yeah. I would just add that these are things that family businesses have always done. They’ve always thought about, “What are our values? What do we care about? What are we trying to deliver on?” And so it’s actually in this moment, and we’ve been part of a number of these conversations in the last year, as people are talking about diversity and inclusion, there’s one family business that we work with that I’m so proud of because they’ve been talking environmental sustainability for years, but then as these issues of diversity and inclusion came up, they went right after them, and they put in place a voting initiative that they hosted in their facilities. They’re able to take these values that are coming across generations and put them very quickly and sustainably into their business practices. And I think that just makes them such a better form of company than others who have to justify every single thing, depending on whether it creates value next quarter.

CURT NICKISCH: Let’s say you’re thinking about going to work for a family business. You’re not a member of the family, obviously. What kinds of things do people in that situation need to be thinking about?

JOSH BARON: Yeah. One of the things that I think there’s a bit of a misnomer about that family businesses are not a great place to work, because especially if you have family members working there, that, basically, you’re going to top out, that there’s a top of a pyramid, and you will not be able to reach the highest echelons. And-

CURT NICKISCH: Because you don’t have the right last name.

JOSH BARON: Because you don’t have the right last name, exactly. And of course, there’s some of that, that’s true, although many family businesses have non-family members running them. But I do think there’s a part of that that’s true in every business. Every business has a pyramid, and only one person can reach the top at a time. So you often have to change companies if that’s really your objective. But what we find is that people that work in family businesses really value the way in which they’re different from other kinds of companies.

And a few things that they cite as being really important, first of all, they really like working for the owners. Even when the owners aren’t actively there, they’re closely connected. The satisfaction of working with the people who own the business, whose name’s on the door, brings a lot to it, but also you’re able to influence things in such a more rapid and powerful way. If you’ve got a big idea, there aren’t 10 layers of a chain of command. You can go and make things happen very quickly. It’s not for everyone. Certainly, there’s certain types of objectives that are going to be harder to achieve, but it can be a really extraordinary experience. And we see non-family members that make a career out of working at family businesses.

ROB LACHENAUER: One of the things you should look at as you’re getting in is what’s the nature of the relationship among the family members? And let’s just call it conflict. How much conflict do you witness? And you might see a whole lot of harmful conflict. You might see very little conflict. We call it fake harmony. What you want to see and you’d feel good about is if you feel that people in the family can get together and make some great decisions together, because that’s the space you want to be playing with them. You don’t want to step outside of your lane and work on any family issues, as a non-family employee, but you hope that the owners in the family have a good sense for how they’re going to deal with conflict.

The second thing is you want to see if the family and the owners understand boundaries. You’ll be, most likely, working in the, what we call the business room or the management room. You hope that there is pretty well-boundaried area called a family room. So you want to be able to say, or they will know what you mean when you say, “That’s a family issue, not something we’re going to be able to deal with in the business. I hope you can take that to your family room, or your owner room, but take it to your family room and deal with it over there.”

CURT NICKISCH: What’s more common, kind of an all-out battle between family members fighting for control, suing for ownership shares, taking swipes at each other in the courtroom versus the fake harmony there that you mentioned?

JOSH BARON: This is one of the biggest misnomers about family businesses, because the stories that people talk about are these knock-down drag-’em-out fights, the family feuds that are just these awful events. And because they make for great drama, both actual dramas like Succession, and Dynasty and Dallas before it, but also these truer than fiction stories that you can read about in the newspaper. But what we find much more often in our family, the families that we work with, is the other side of the spectrum, where there’s actually too little conflict, because families are programmed, usually from birth, to get along. And you’ll oftentimes hear people say, “It’s not worth ruining Thanksgiving or Christmas or whatever holiday in order to have that argument.” And what happens at these, these disagreements or differences just get swept under the rug until a point at which they make the business inoperable or ineffective, or it makes the relationships actually less authentic because people are tiptoeing on eggshells around each other.

And so one things that we talk a lot about is that conflict is a Goldilocks problem, where both too much of it and too little event cause very similar destructive impacts on both the business, as well as the family. And most family businesses that we come in contact with really struggle or have to work on, “How do we have a level of conflict that’s going to enable us to make those tough decisions?” You don’t have to resolve every disagreement, but you’ve got to be able to resolve and work through the big stuff.

CURT NICKISCH: Where do family businesses go wrong? I mean, you, just talked there about having these long-running conflicts that get swept under the rug and then probably have very negative consequences at some point. Where are other places that family businesses go wrong?

ROB LACHENAUER: A real inflection point for family businesses, and this is different than other ownership models, is in generational transition, where you’re going from, say, the first to the second or second to third generation. The issue often can be that the current generation, say it’s a bunch of siblings who are in their 60s or 70s, own the business together, fail to prepare. They don’t put a process in amongst themselves, first of all, to talk about what they want to do with their business, and second, to involve the next generation. We very much believe that transition should be a process. And it is a multi-year, if you’re doing it well, three, five, we’ve even seen 10 year transition process, getting ready to step back. Those that wait too long, and they’re in their… We do have clients that are in their 90s, and they’re still the controlling owner of the business, and they’re not prepared for transition, those are really difficult systems to get through to the next generation. Possible, but to do it is much harder if you wait.

Once you do it, you not only have to worry about the roles… Typically, there’s too much focus, actually, on the CEO role, you want to actually think about all the roles in the system and all the roles of the people in the owner and family group to work, because there are many roles, leadership roles, that need to be fulfilled. You also need to think about what assets. It could be the assets that were placed together for this generation aren’t the right assets for the next generation. You own three businesses with these three sisters, and maybe that’s not the right asset. So you might want to say, “We want to own these two businesses, and we’re going to sell this one.”

And the final thing that you need to worry about are building the capabilities of the next generation. Really important if you want to do a multi-generational family business, that cousins get together when they’re young and can create these lifelong bonds between them by going to the summer house, having Thanksgiving together. If they know each other deeply early in their life, you’ve got a really good shot. If they’re learning about each other when they’re in their 30s, and they’re really strangers, harder to keep a good family business together.

JOSH BARON: Ownership is really hard, in part because is it’s not really taught places, how do you be a good owner? And I think one of the things that family businesses can really struggle with is how do you find the right middle ground between being too in control and not delegating enough, especially as the business grows, and just totally abdicating and stepping away and just letting things kind of fall by the wayside or disconnecting. And I’m a big sports fan, you see that a lot in sports teams. The owners that are too controlling, micromanaging the team and roster decisions and calling plays and all that kind of stuff, that rarely works. But also you have the absentee owner who’s never in town and not creating any accountability or sense of values. Those teams struggle also.

And I think for family businesses, how do you find that right spot between being too controlling and not trusting people to do work on your behalf and delegating to them, and just totally abdicating and losing control over the business? And it’s hard, it’s a challenge. And we’re hoping that when people are reading this book, it’s helping them to work through that and to get to finding some of that balance.

CURT NICKISCH: Josh and Rob, thanks so much for coming on the show to talk about this.

ROB LACHENAUER: Thank you, Curt. It was a delight to talk to you.

JOSH BARON: Thank you, Curt. It was really fun.

CURT NICKISCH: That’s Josh Baron and Rob Lachenauer, co-founders of BanyanGlobal Family Business Advisors, and authors of the new book, “The Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise.” You can find it at HBR.org.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.

Source Link