Family businesses are an overlooked form of ownership. Yet, they are all around us. One-third of companies in the S&P 500 index and 40% of the 250 largest companies in France and Germany are defined as a family business. A family business means that a family owns a significant share and can influence important decisions.
As family businesses expand their entrepreneurial beginnings, unique performance and governance challenges are encountered. The generations that follow the founder may insist on running the company even if they are not suited for the job. And as the number of family shareholders increases exponentially generation by generation, the commitment to carry on as owners cannot be taken for granted. Less than 30% of family businesses survive into the 3rd generation of family ownership.
Almost all companies start out as family businesses but only those that master the challenges intrinsic to this form of ownership endure and prosper over the generations. To be successful as both the company and the family grow, a family business must achieve strong business performance. This is achieved by putting in place the 5 Dimensions of Activity together and in synchrony.
The 5 Dimensions of Activity
The Family is at the very core of the family business and its sustainability. There should be harmonious relations within the family and an understanding of how it should involve with the business.
Ownership is maintaining family control while providing fresh capital for business. There should be an ownership structure that provides sufficient capital for growth while allowing the family to control the key part of the business.
Clear rules and guidelines in Governance serve as an anchor to enabling family businesses to get on with business strategies. There should be strong governance of the company and a dynamic business portfolio.
- Wealth Management
Beyond the core holding, families need strong capabilities for managing wealth. There should be professional management of the family’s wealth.
Charity is an important element in keeping families committed to the business. Charitable foundations promote family values across generations.
Learning the Ropes in Sustaining Family Business
Keeping family members committed requires putting in place the 5 Dimensions of Activity. Each dimension carries within itself a sustaining mechanism and an approach on how to manage each dimension. The sustaining mechanisms and approach to management are 2 critical elements in which each dimension is anchored on. Application of each dimension without the 2 elements is like a sail without an anchor. It remains unstable and without direction.
Let us take a purview of the First Dimension: The Family.
The Family is the very core of the family business and its sustainability. There must be a harmonious relationship and a good understanding of how it should involve itself in business.
A sustaining mechanism that should be put in place is the establishment of oral and written agreements that address issues and permeating the ethos of ownership. This creates a strong sense of purpose that contributes to the sustainability of the family business.
Supporting the Family is best approached using the meritocratic leadership where leadership is by able and talented persons. There should be an owners’ board that represents the family and approves the appointment and an advisory council that provides strategic guidance to the board.
Companies should have a good understanding of the sustaining mechanisms and the approaches to management that is most suitable for each dimension. Making this an integral part of the family business ensures the continuous commitment of each and every member to the goal and purpose of the family business.
Interested in gaining more understanding of all 5 Dimensions of Family Business Activity? You can learn more and download an editable PowerPoint about Family Business: 5 Dimensions of Activity here on the Flevy documents marketplace.
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