Some of the world’s longest-running, most successful businesses are family firms. Household names such as Walmart, BMW, Koch Industries and Mars & Co have survived and thrived over multiple generations.
And while sound business acumen and entrepreneurial flair have played a critical role in their ongoing success, they would be less likely to be here had they not committed significant time and resources to implement sound governance structures in the early days.
It is this commitment to planning that Ken McCracken, Joint Managing Director Withers Consulting, recognises in every thriving family enterprise.
“Successful multigenerational families are not lucky, they just sit down and do the work,” he says.
“You really do have to face up to the challenge of doing the work for yourselves so that the outcome is one that your family is proud of and can live with for generations to come.”
That sense of pride comes down, in large part, to the values that may be unique to each particular family. “So much of running a family business and sustaining that over generations is having a common set of values, understanding and culture that runs throughout the family,” says Chris Allen, CEO of HSBC Private Bank in the UK and the Channel Islands.
The role of governance
Allowing for those values, the role of governance as McCracken explains is really to answer two questions: ‘who gets what and who decides what?’.
“As the family becomes more complex and the enterprising activities through which their lives are connected become more complex, that can become more ambiguous. Governance is about putting in place the organisation to answer those two fundamental questions.”
In answering those questions, though, it is important to engage all the key stakeholders and communication between those interested parties is vital to any successful governance process.
“A key aspect of governance is that it needs to be a process of developing a shared vision,” says Stephen Skelly, Head of Private Wealth Solutions, HSBC Private Bank, EMEA and Americas.
“It’s about providing an opportunity for all the family members to be engaged so that you have buy-in from all those concerned to whatever long-term plan you eventually agree upon.”
McCracken agrees on the importance on taking an inclusive approach in order to guard against future conflicts.
“Families need to be aware of their collective aims and ambitions because if there is any disagreement on this, roll forward a few years and those cracks can become fundamental issues.”
There are, McCracken says, three key questions to answer before any family business embarks on implementing a governance structure: ‘Why do we want to continue at all as a family business?’, ‘What types of roles do we want family members to have in that enterprise?’, and ‘How do we get organised?’
“These are challenging questions but they have to be answered in the right order. You can’t get organised until you know what everyone wants!” he says.
The four intentions
In his 19 years working with family businesses, McCracken has identified four intentions to describe the different types of families in relation to their business and the roles they play in it.
Families with a ‘creating’ mindset retain a desire to be entrepreneurial and actively involved in starting new ventures, and will accept the risks that are necessary to achieve a satisfactory return on investment.
‘Managing’ families are happy to continue to grow the existing business but want to have family members in charge and working at the coalface rather than bringing in outsiders. As a result, there will be a desire for the next generation to acquire and develop the skills so they can take over the running of the business.
Families with a ‘governing’ mindset accept that future generations may not have either the skills or the desire to continue running the family business and will look to bring in talented outsiders. They do though wish to oversee and monitor what they have and be able to make the big decisions that have financial consequences, or which may affect the family’s reputation.
Finally, ‘investing’ families are motivated by the desire to co-invest with the family with the ultimate aim of getting the best return, and they will hire the best people to help them achieve that.
Knowing your potential
Understanding these four intentions can go a long way to helping families set out a governance structure that allows them to achieve their mutually agreed outcomes. But, McCracken says, there are three questions to answer in relation to the four intentions: What type of family are we now, what type do we want to be and what type are we capable of being?
“The third question can be the most difficult to answer but is also the most important, he adds.
“You need to be aware of the skill set that exists within the family and whether the next or subsequent generations have the entrepreneurial flair or the managing skills that will allow the business to thrive and succeed in the long-term.”
Arriving at a governance structure that works for all the family members and allows for the differing values and aspirations of the generations is a complex process – and one for which there is no single formula, as Skelly concludes.
“There is no one size fits all, and there’s no one recipe for success. The key thing is ensuring you’ve got really good communication and engagement across the generations.”