Family Firms vs. Their Counterparts – Best Practices for Success

In 1986 a group of multidisciplinary professionals got together to explore family business. Twenty years later that group has evolved into the Family Firm Institute (FFI), an international organization of service providers to family firms.

The 2007 conference, attended by over 450 participants representing more than 40 countries, was an opportunity for professionals who service family businesses to share their business experiences, all with a goal of finding “best practices” for their clients.

Research Says
John L. Ward, a clinical professor of family enterprises at the Kellogg School of Management, Northwestern University, is a founding member of FFI and one of the icons in family business. Dr. Ward is responsible for some of the early research in the field and continues to lecture around the world at places like IMD Business School (Lausanne, Switzerland), Hong Kong University of Science and Technology, Indian School of Business and IESE (Barcelona, Spain). He has written several well-received books on family business issues.

Some of Dr. Ward’s early research addressed the success or failure rate of family firms. His data has been quoted for years, but currently FFI offers slightly different statistics: More than 30 percent of all family-owned businesses survive into the second generation. Twelve percent will still be viable into the third generation, with 3 percent of all family businesses operating at the fourth-generation level and beyond. (Joseph Astrachan, Ph.D., editor, Family Business Review)

The question is always: Do family firms outperform their non-family counterparts?

Measuring Success
We know that some family businesses become Fortune 500 members -“ in fact, it has been estimated that about one-third of that elite group qualify as family owned businesses. While that might be one measure of success, certainly another is longevity like the kind of data Drs. Ward and Astrachan have gathered. The issue is how do you compare the longevity of family versus non-family business? I am unaware of any research that directly addresses that question, but perhaps we can use some common sense.

If we consider a generation to be 20 to 25 years, then we might ask some comparative questions. How many businesses last 20 to 25 years? Forty to 50 years? Sixty to 75 years? Or, 80 to 100 years? If your common sense works like mine, you would reach the conclusion that family businesses fare pretty well against their non-family peers. Interestingly enough, Dr. Ward gave a presentation at this year’s FFI Conference where he asked similar questions, looking for the reasons that family firms might outperform their counterparts. He claimed that a study of 100-plus year old family firms offers several insights into the keys to strategic business adaptability.

We will be watching for more results from Dr. Ward’s research and what it tells us about family business success.

American Family Business Survey
The American Family Business Survey, the seventh since 1993, was released to correspond with the FFI Conference. The survey was interpreted by Kennesaw State University and underwritten by Massachusetts Mutual Life Insurance Company (MassMutual) and the Family Firm Institute. The general conclusion: “Family-owned businesses are stable and optimistic, even in uncertain economic times, their business results justify their optimism.”

This conclusion is supported because the survey found that family business owners are:

  • More optimistic about future growth.
  • Lacking a sense of urgency around retirement and succession planning.
  • Selecting women business leaders.
  • Holding themselves and their employees to a higher ethical standard.
  • Expanding their use of the traditional management toolkit.
  • More unified behind common family values.
  • Placing their trust with family members and key financial advisors.

The survey is the result of 1,000 family businesses contacted in the summer of 2007, making the results timely and relevant. The
report notes: “The performance of these businesses is even more impressive when compared to their primary competitors. Many report growing faster (27.1 percent), and only 15.4 percent report growing slower than their competitors. These figures demonstrate that family businesses have a sustainable competitive advantage.”

For the record, here are a few other key findings of the survey:

  • Within 10 years, 40.3 percent of business owners expect to retire.
  • 24 percent of the businesses surveyed have a female CEO or president -“ up from 10 percent in 2002.
  • 36.6 percent have a written strategic plan.
  • 37.4 percent have buy-sell agreements or other arrangements defining who can own stock and how it is transferred.
  • A spouse is the most trusted advisor -“ up from fourth in 2002.

Best Practices
While it is encouraging to see all the new research in an effort to find out what makes family business tick, nothing to date has changed the three things recognized as “best practices.”

Family Meetings where the family stakeholders can meet as peers and discuss issues of common interest has been a bottom line requirement for family business success. Lines of communication must be established and opened on a regular basis-¦no less than annually. Many families establish a Family Council -“ a family exec board -“ to act between family meetings. If the family is to own and manage a business for generations then all stakeholders need a place to be heard as equals-¦individuals need to move from family relationships to business partners.

Advisory Boards bring a challenge and objectivity to business management. Real outsiders as advisors are a requirement for the board to work and a true board of directors is even better. This group can help separate the family from the business issues. They can mediate big issues. They can add vision and wisdom. And, they can make management accountable.

Family Constitutions are nothing more than an assembly of written policies and agreements -“ both legal and informal. Families that can identify issues, both current and future, and debate their resolution to a consensus, then put it in writing, are highly likely to run a successful business.

As we watch for new insights for family business success, maintaining these three best practices are the most likely strategy for family harmony and business success.

Richard Segal is the chair of the Family Business Council, a membership organization of family-owned businesses. He can be reached at [email protected].