Family businesses account for 64 percent of U.S. gross domestic product, generate 62 percent of the country’s employment and account for 78 percent of new job creation. They’re the backbone of their communities — heavily invested financially and otherwise, leading initiatives and donating to local charities.
Many were created post-World War II and are into their second to fourth generations of family management. Research has shown the business will fail unless the family, the owners and managers can live in harmony and stay focused on growth. Sadly, only about 13 percent survive to the third generation.
Given such a low success rate, there’s a need to help family enterprises thrive in a rapidly changing competitive environment through evidence-based research and practical takeaways. With that in mind, here are four tips, gleaned from Weatherhead’s Center for Family Business recent presentation with nationally respected family business expert Joe Astrachan, who shared insights from 40 years of working with family-owned companies.
“Any time you have family together in an environment where things need to get done, you have the makings of a world war,” he cautioned. “But that same energy that can create an explosion, when harnessed properly, can be like a nuclear reactor creating nearly unlimited amounts of energy.”
That family synergy can be its greatest strength or greatest weakness. Here’s how to make it the latter:
- His research of more than 18,000 companies says the three keys to successful succession are a board of directors, strategic planning and family meetings. The average peak performance of CEO tenure is 14 years; after that, CEOs are more likely to discount threats to the business and/or become more risk averse. Many family businesses have the same leaders for 20 to 25 years, compared with public companies, where the average CEO tenure is six years.
- The board should play a key role in driving the succession plan, aiding communication, adding credibility to selection and helping ensure appropriate boundaries to the post-incumbent departure. And there must be systems in place (accountability) to recognize and remove successors who are not working out. Ideally, the family, company and governance structure are strong enough that the company can weather three failed successors in a row.
- Longevity of the family business hinges on family cohesion. It’s cohesion vs. governance that matters. It’s a virtuous or vicious cycle, “love your family, it doesn’t matter the returns, you’ll want to stay with them; and if you can’t stand the family, it doesn’t matter how much money is being made, you’ll want to leave,” and that often causes irreconcilable conflict. “Solve structural problems with structural solutions and solve relationship problems with relational solutions,” he advised. “Doing the opposite inevitably makes problems worse and cements conflicts in place.”
- Develop a culture of how to manage conflict to build and maintain cohesion. Ensure adequate meeting time based on the number of people and items to be addressed to ensure everyone’s position is heard.
These proven practices can improve the odds of successfully leading the family business through generational transitions and ensuring long-term survival, prosperity and a sustained and committed, cohesive family. ●
Laura Bonnet is Director, Center for Family Business at Case Western Reserve University’s Weatherhead School of Management