Family-owned businesses
Family-owned businesses can come with a unique set of considerations. Family members who work with each other must also consider their familial relationships, which can complicate issues that may be more straightforward in a non-family-owned business. As an OD consultant, it is imperative that you understand and are sensitive to the roles that family members may play in supporting the organization. You should also gain an understanding of family systems theory.
In this Assignment, you will examine the similarities and differences between family-owned and non-family-owned businesses and how these differences may influence your ability to understand organizational issues.
To prepare:
Watch the video about family-owned businesses titled Family Businesses Are Here to Stay, and Thrive. Consider the similarities and differences between family-owned businesses and traditional (non-family owned) businesses.
Submit a 2- page paper written in APA format and style, that discusses the following:
Governing the Family-Owned Business Program Transcript ANGELA HERRIN: Welcome to today’s Harvard Business Review webinar. Governing the family-owned business. I’m Angela Herrin, Editor of Special Projects and Research at HBR. And I want to thank all of you for joining us today. And I want to thank Northern Trust for making this discussion possible. In any company, governance is critical to long-term success. But the governance of a family business is even more complicated. And the lack of effective governance can be a major cause of problems. Both in family relationships and in the operating side of the business. Harvard Business School’s Christina Wing has studied and worked with numerous family businesses, and she’s seen the mistakes that companies can make. And she’s also identified those practices. She is with us today to talk about how family business at any stage can establish effective business systems governance. Christina Wing is a senior lecturer teaching in the Technology and Operations Management Unit at Harvard Business School. She currently teaches first-year TOM and first year leadership and corporate accountability students. She is the co-leader of family and business executive education program at Harvard Business School. Christina, thank you so much for joining us today. CHRISTINA WING: Thank you. ANGELA HERRIN: Christina, you’ve made family business a focus of your research and your work. Why did you focus on that area? And what’s so different about these companies that you feel demands a different approach? CHRISTINA WING: Well, family businesses kind of encompass everything. As you said, there’s an emotional element. There are all types of different governance elements. There’s different structures, and they span many generations. So with the standing of many generations, some of the issues can compound. But it’s a very exciting space to be in. And that is where a lot of our entrepreneurs start. ANGELA HERRIN: So one thing I wanted to ask you about is that you’re the co-leader of a HBS program focused on family business. And can you tell us a little bit about that program, and how you build out a week of working with family business? CHRISTINA WING: Well, I mean, at HBS, we use the case method. And we think the best way to learn is for interactive discussions. So the most important thing for building out this program is getting a broad group of people. So we take 15 families from across the globe, and put them through a rigorous seven day program where they attend classes with all different types of Harvard Business School faculty. And then we have what we almost call therapy sessions in the afternoon where they break into just their Governing the Family-Owned Business 2 family and have a little bit of a joint talk with what’s going on, how they felt about what they learned. And as we all know, it’s sometimes easier to learn when it’s not exactly about you. But an anecdote that you’re getting from somebody else. So the program, the way we think about it, is we think that there are three things that you need to kind of do in the families. That is you have to understand the family, the business, and the ownership structure. And you really have to have a clear goal. ANGELA HERRIN: So you mentioned that this is a global program, are there challenges that are different outside the US? Or is there a different focus on family business outside the US? CHRISTINA WING: Well, outside the US, the family businesses tend to be larger. We do have some very large family owned operated businesses in the United States. But internationally, there’s a much higher percentage of them. And they stay within the family much longer than they tend to in the United States. What’s interesting is no family does it the same way. And so although there are common mistakes in issues and things that come up, there’s not one model that fits all. I’d say that they all get in the room and they’re happy to see that some of them have the same problems. And then in many cases, there’s slight differences depending on where you’re coming from. ANGELA HERRIN: You’ve already started to describe the fact there’s a lot of components and challenges here. And some of the confusion may just be over the very definition of family business. So you use a framework that defines family office, and the family operating company. Can you take that apart for us what you mean by that? CHRISTINA WING: Yes. So we actually even struggle with how we name our program because it is confusing. And we believe at Harvard that families and business folds into many categories. One could be that they’re the majority owner of a large operating company, and they actually work in that company. Another side of it is that they still have that company, but they have a family office that manages other wealth that they’ve either taken out of that company or other stages. And also then the last would be that they create these family philanthropic giving. So what’s confusing is you need to kind of understand the difference in the role of the family, the role of the business if they still do it, and what ownership each person has. In the slide you’re looking at, I put the three circles because that overlap is kind of where all parts come in and decisions are made. But also where tensions come out. ANGELA HERRIN: So you and I talked earlier the fact that governments you think can really help a lot. You acknowledge in advance that tensions are going to arise, and that there’s going to be– there’s a concept of governance here that you can really set up a structure or you can restart a government structure or process. So let’s talk a little bit about how you think about governance. Governing the Family-Owned Business 3 CHRISTINA WING: OK. Well, I think to get to the governance, you have to kind of decide what role you’re playing. And so what we have up right now is this being a family member. And so when you break it down, and you think about being in a family business, and or separating out the operating company from the family, what are the goals of the family? What should the family be involved in versus what should the company be doing? And so for this discussion, I think we should separate out an operating company versus a family office structure. So in terms of governance, most operating companies aren’t just made up of family business members that are only serving family business members. Therefore, your stakeholders are fourfold. They are your employees, they’re your customers, there’s the society, and there’s the shareholders. So the operating company level, it’s really important to set yourself up for success long term across all of the stakeholders. In the family office, it is the family’s money that’s being managed to cross, hopefully, many generations. And you can have a family council. You can have a family board. But you should still have professional management. So where governance comes into play is you have to know there’s a difference between ownership and control. And so you can be a big owner of the operating business as a family member. But not necessarily be in control of the daily decisions or whatnot. And similarly for the family office. So those things need to be decided in advance. Otherwise, as you go further on, people naturally are going to have different views, different timelines, and everything. And you’re going to start to go awry. ANGELA HERRIN: So you have this– you set out here on this slide an idea of have family goals. So that’s something that we in the family office these are the kinds of questions you’re going to be asking each other. Right? CHRISTINA WING: Well, so exactly. I mean, one problem with families that are in business, and both in operating business, and then share a family investment office let’s call it is when are you just family? When do you go on a vacation and not be upset about the contract the business lost or something else? When do you have a minute to be family? And so you need to decide that that’s your that’s your number one priority. Listen, the families that come to our program, they all say that’s their number one priority. But it doesn’t always come out in the actions that they take. And so it’s a good place to start and remember we’re family first. That doesn’t mean all family have the same qualifications to be involved in the management of either the operating company or the business. So I think that the basic principles that you learn in preschool about the playing nicely with each other, being kind, understanding what’s going on, are all the things that a family member needs to do and regardless of your role in the business. ANGELA HERRIN: Now you also make the point that there’s a lot of stakeholders in the family business. It isn’t just the family members. Can you talk about what you mean by that, and how you think they interact? CHRISTINA WING: So governance is a protective tool to keep you on the rails. But it’s not something that you can rely on without other structure, and understanding, and respect. I think that what we have seen is the families that do the best and survive the test of time, over many generations are the ones that they make they make a lot of mistakes. But they fix them, they change, and they move forward. And in order to be sustainable, hopefully, past the third generation– we had a family last year in the program that was in their 15th generation of operating this textile company. And theyhave done every type of work. Every type of textile work over that many generations if you can imagine. And it’s about pivoting, it’s about understanding things, it’s about being forward thinking. It’s also about understanding, most importantly, the consumption. So when you think 15th generation, imagine how big that family is now. Well, they set really early rules around the seventh generation about how many people could work inside the business, who could have an impact, how things kind of go in and out. And those structures, just like corporate governance structure, enable you to stay on the rails, make good decisions, and keep moving forward. Lack of governance, which typically if you think about entrepreneurial companies, you don’t have time to put a lot of governance in. It ends up biting you later on. And so these family businesses, the most important thing to remember is these are big businesses. They need this kind of governance. And all family members aren’t qualified. ANGELA HERRIN: So take apart some of the issues that you raised just on this slide. What do you mean when you say generation plans? CHRISTINA WING: So generation plans mean that really strong family businesses do have rules about how many family members can work in the company, where they will start, how it will evolve, and what kind of control they can have. And that leads to other investors that are outside the family feeling more comfortable. It also leads to people being able to retain and hire employees that aren’t going to feel like the minute a family member is of age, they’re going to get put ahead of them. And so the generation plans make a lot of just importance around retention. They also make it a very substantial dig in into how you think about the money that’s going to be needed, and what you can invest in. ANGELA HERRIN: What he mean? CHRISTINA WING: So think about if you have a business, and you have a bunch of people that don’t work in the business and don’t really understand it, but they’re used to getting $10 a week. Suddenly they want $15 a week, $20 a week, but they don’t understand what the business is doing. Reinvesting in the business. So having even an annual meeting among the family ownership and saying, we’re investing in this time horizon. So in a generation planning, it’s we’re not taking money out of the business. We’re putting money in. Go get your own jobs. Go do other things. So it’s kind of letting the business continue to grow. And that goes around the wealth plans. These businesses create great wealth. Great cash cows. Great opportunities. And I congratulate many of the families and business in that they do so much for their society. However, they also make a lot of their family members very wealthy. And in doing that there comes a little bit of entitlement at times. And so theAnd so the constant education Governing the Family-Owned Business 6 around wealth plans– what does it mean? How far does a dollar go? And how hard is it to earn it? Are really important things that will keep family business sustainable. And so then if we touch on the next, which is structural, it’s really hard for some people to accept that they’re not good at everything. And so a lot of times, family members do believe they can be good at every role. And or if they were really good in the operating business, let’s say we’re selling it. They suddenly think, well, of course I’ll be good also in the family office of investing. Not necessarily the case. So it’s the importance of understanding the structure of having family versus non-family, and putting the best people in the best jobs. And then the last one here is consumption analysis. ANGELA HERRIN: What does that mean? CHRISTINA WING: People spend. You make a lot of money. You spend a lot. And I think that sometimes when you end up receiving a lot of money that you didn’t have to struggle to earn as much as some others, you don’t realize how quickly and easily it is to spend it. And you don’t really understand some of the things you spend money on require more money to keep them going. A lot of the toys. And so we do have a lot of families that come in and want to talk about the family toys that have been purchased. And how those get used, and what you do, and the consumption around that. And the best families that survive all this, are the families that really talk about things, and have guidelines. And it sounds like I’m bureaucratic. I’m absolutely not. But what I am is I’m pragmatic. And if you put a group of people together owning a bunch of assets, there’s always going to be somebody that feels like they’re getting the short end of the stick. So developing these rules upfront, understanding what’s going on, knowing the trade offs. And frankly, what you see is as they get into later generations, they tend to simplify. Simplification is almost better. Many families that make it to generation five or six, have almost lost the business and all their wealth before. They kind of button it up. ANGELA HERRIN: Now a couple of listeners have already started asking. When you began to talk about generation plans, they want to know how companies deal with the issue well who’s going to rise in leadership? How are they going to deal with training? Who’s going to get a shot at being an intern? Can you talk a little bit about that? CHRISTINA WING: Well, I mean, depending on the size of the business and the family’s beliefs about family running it versus owning it, it makes all the difference in the world. We see a lot of issues where one family will have three children. And which child is going to be the one tapped to run it? And are they pitted against each other? Is it the first born? Is it this one? And what I can tell you from firsthand experience, the more clarity you have upfront from the person that is the current CEO, which normally is the founder, around what they’re looking for, what the growth plans are, all of that, will make it work better. A lot of times, a lot of families are on a trajectory to bringing in outside talent. And so if they have three family members that are qualified, they will start to sprinkle in outside talent as well to kind of round out the management team. And put other people in the running also for those roles. In terms of training, education for family businesses, there’s no age that’s too early to start. I have some families that jokingly, say don’t quote me, say we believe in child labor. We started our family very young. As young as the kids are, we get them involved in the business. Understanding it and understanding how hard it is. I’m a big believer in that also. So I do think families should work together. And there are rules. But I don’t think somebody that is day one out of undergrad should be put in a role that leapfrogs everybody else. It kills the morale of the company. So it takes time, patience, and everyone is customized. ANGELA HERRIN: So do you see families that actually have some governance rules around what kind of training and education will be available to family members who want to go into the business? CHRISTINA WING: Most of the families that I’ve done a lot of work for have very strict rules around this once they get to a certain size. When they’re still more entrepreneurial, there are a lot of issues. And it’s a fire drill every day. And they don’t have it spelled out. Sadly, many of those end up selling instead of keeping them because the stress of who is going to run them is too great. The companies that have gotten bigger and survived it, they have very clear rules. And their rules typically are that family members start at the bottom. They start at the bottom learning the product, learning how it works, learning different divisions, working collaboratively on their way up. And then there is always rules for family members that have never been involved in the business but want to do some other part. Sit on the family council. Philanthropic giving. Things like that. But the ones that allow people to parachute in and out willy nilly are the ones that don’t end up working. ANGELA HERRIN: So you started talking about outside– some of the other challenges. And we talked a little bit talking about outside talent. You and I actually had a conversation earlier where we were talking, and I said, gee, I’m not sure if I were an executive would I want to go to work for a family owned business. So talk about the challenges around outside talent. CHRISTINA WING: Working for a family business can be amazing. And it can be just scary because of exactly what we just said. You could be a very talented person, and think, all right, in any given moment somebody is going to leapfrog me. The ones that get it right are the ones that from the beginning are aware– once they’ve decided to bring in outside people, they are aware that in order to attract and retain them they need to be managed like other professional businesses that aren’t majority owned by a Governing the Family-Owned Business 8 family. And they do that very effectively by setting out these paths, and having people on the management team that aren’t family members. I think that where the challenge really comes in is when there’s poor decision making because the family members are fighting each other and people don’t know who to go to, who’s in charge. If you have a business with an organizational chart like other normal businesses that aren’t majority owned by a family, it works the same way as those businesses work, which also has challenges. But at least there’s a pecking order and a process. And these family owned businesses, as I said at the beginning, many of them end up taking outside debt or other equity investments. They then become managed much more professionally because the group of actual shareholders has changed. So those are growing pains that people have though in those moments. ANGELA HERRIN: So the next book talks about succession issues. And it’s already coming up among the questions. In fact, one person listening says, look, I have 110- year-old business. And we’re finding we have a succession crisis. So talk about this whole issue of succession. And I think people are approaching it from both ways. When should the founder leave? What should the founder do in terms of here’s why I want to have happen? And then how does the company proceed? So it’s a lot to unpack. CHRISTINA WING: It’s a lot to unpack. I mean, founder issues are similar in family businesses similarly to any entrepreneurial business when is it time for the founder to move on and bring in different management? I think with family business is the tricky part is that typically the founder has a handpicked family member that they have been grooming for this role. And that can go on for many generations. And then suddenly that founder also might change their mind that that person is not the right person. The best way to deal with it is quickly and swiftly. Because if you don’t talk really quickly with your family member, you end up losing them as a family member, and you end up hurting the business as a whole. And so this is where it typically leads to many founders staying too long because it’s easier to stay than to make the tough decision of telling the person that is feeling entitled to being the successor that they’re not going to be the successor. I’ve seen it be effective and actually really ineffective when other investors get involved. I think when you have brought in outside capital and then they get involved, it adds to the drama. And so the best and the most hopeful thing– and whomever wrote in this question, you’re already thinking very wisely. If you’re even aware it’s an issue, is that as the founder that you take it and you own this, and you work with your management team, and you make a quick, swift decision. And 110 years in business is a long time. Times have changed. Probably there are a whole host of people that would be great leaders of the business. You’ll have to decide if you go with an outside person how you want the family to communicate with the new outside person running it. And that’s
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