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How to Measure Your Family Business

Family business research is scarce at best. So when new data comes out, it is always good to see how your family enterprise compares. It’s not that there is a right or wrong, but there is research that suggests “best practices” for family firms. We will look at more on that a bit later. First, let’s take a peek at the new survey results.

New Survey
This new study is titled “In harmony: family business cohesion and profitability.” The survey and database are different than those of the past. It was produced jointly by EY (Ernst & Young Global Limited) and Kennesaw State University’s Cox Family Enterprise Center. It is the “first-ever global survey of its kind… The database consisted of 2,400 of the world’s largest family businesses from the top 21 global market.”

The survey “…takes into account the responses of 1,000 of the world’s largest and oldest family-owned businesses.”

The report is preliminary and can be found here.

The conclusion reached by the researchers is that family cohesion leads to business success – profitability. I strongly recommend that you review the report for more detail, but allow me to share a few of the findings:

For each of the following advisers, please rate the degree of trust you have in them.
Parent rated highest at 75 percent, followed by a tie at 70 percent for spouse and accountant/auditor. While there are other advisers listed, it is notable that the least trust of those motioned is clergy at 44 percent.

Please rate the extent to which you agree or disagree with each of the following statements. Members of this family…

  • Are proud to be part of the family – 84 percent
  • Care about one another – 81 percent
  • Are often engaged in dysfunctional conflicts – 21 percent

Again, there are other questions asked, but this represents the two highest and the lowest responses.

Do you refer to the fact that you are a family company in your corporate communications (e.g., your advertising, website, social media, press releases, etc.)?

  • Quite often or always – 51 percent
  • Somewhat often – 25 percent
  • Never or rarely – 25 percent

As the title suggests, the findings of this preliminary report point to the interrelationship between the family and the business being “cohesive” leads to profitability. While that conclusion may not seem obvious, it is not inconsistent with findings of the past.

Summary of Old Surveys
Data from the past haven’t reached that conclusion directly, but if you read between the lines perhaps you could draw similar inferences. Data over the years, collected sporadically and predominantly in the U.S., have pointed toward successful family businesses formalizing processes in the areas of governance and planning for both the business and the family.

In successful family businesses, the governance process (how decisions are made) is formalized with a real Board of Directors that includes true outsiders in order to bring experience and objectivity to the table. The Board process provides a platform for discussion and debate, and it creates a buffer between the kitchen table and the boardroom table. It should also offer transparency and inclusiveness.

Families formalize their decision making by creating a Family Council – kind of an executive committee. The council is charged with being the go-between for the business and the family. The council can also be used to adjudicate family disputes or to implement a Family Constitution. The family at large should also hold annual family meetings to communicate and discuss family and business matters and promote planning that involves all the stakeholders.

chart

A Family Constitution is a series of policies and agreements executed by family members. Some of them are legal, like a Buy/Sell Agreement, Stock Redemption Plan or Employment Contract. Others can be less formal agreements and might include Vision/Mission Statements, Entry/Exit Policies, Code of Conduct, Company Asset Usage Policy, Outside Business Policy, Compensation Policy, and so on. Naturally, family meetings should be the format to communicate openly and address any issues, as well as updating the constitution as needed.

In the planning arena, successful families address: Business/Strategic Planning, Succession Planning and Estate Planning. This planning is coordinated, communicated and updated regularly. It becomes necessary to divide the three systems at work – family, ownership and management – when doing proper planning. But it also becomes necessary to be sure that the planning outcomes work for all three systems or conflict and potential failure will result.

Conclusion
Family business research provides a helpful tool by which to measure your company. Being aware how other family enterprises navigate the potentially turbulent waters can only make you smarter – and taking appropriate action makes you wiser.

It is always recommended that you use a skilled professional to help you tread those troublesome waters. Those professionals have the tools to help you navigate the course and reach your destination.

Richard Segal

Rick Segal is the principal at Segal Consulting. He holds an Advanced Certificate in Family Business Advising with a Fellows status from the Family Firm Institute. Rick is the founder of the Family Business Council and its affiliated study group. Reach Rick at [email protected] or by visiting www.segalconsulting.biz