Keeping it in the Family!

By Lionesses of Africa Operations Dept

We have had great feedback, support and excitement from our first research report produced in partnership with NYU, and in collaboration with ABSA, and of course with the incredible support of our >1.3 million membership. There are so many nuggets that one can take away from this, the South African Women Entrepreneurs Job Creators Survey (here), but the above chart, says it all. In a world where life is not equal, needs must and so we as Lionesses roll up our sleeves and start a business. As the business grows so we recognize that we are not just supporting local employment and through this the local community, but also our extended families. A hobby becomes a business with the arrival of paying customers. We are not quite sure when a start up becomes a Family Business, but we are certain of one thing, soon after the money starts to flow in, so does the family interest and with it the pressure mounts…

Considered by many to be the world’s greatest investor, Warren Buffet talks of family businesses as “The Lucky Sperm Club” and that is certainly true of one lucky recipient, Ana Botín, as she became chairman of Banco Santander (the 16th largest banking institution in the world) on the death of her father, the founder, in spite of ‘only’ owning 2% of the shares (Investors should have checked the small print!).

But it is not all luck. It is said that family businesses last on average 3 generations. The first generation works its bones off, toiling away to build the business and send their children to a University life they never had. The second generation flush from University bring all the new ideas and management theories to the business and take it to the next stage. The third generation, who up until this time have been at the racetrack spending their parents’ money, then arrive…

Sounds a bit unfair to the third generation, and terrible generalization it appears, but according to a study by John Ward, author of ‘Family Business Succession’ (here), 30% of firms survive through the second generation, 13% survive the third generation, and only 3% survive beyond that (that’s a load of days at the racetrack…). The saying being "From shirtsleeves to shirtsleeves in three generations”, so if you do break out from the third generation, you are doing extremely well.

So what are the problems? According to the Harvard Business Review (‘HBR’) here, there are three main issues.

Issue 1: “There’s always a place for you here.” 

Indeed, who hasn’t heard that before…, but this in a strange way creates not a safety net, but an obligation in the children, which results in them joining but not really wanting to be there, or just as bad, it is treated as a ‘fall-back option’. Guess how either of those make your long serving, hard working middle management feel, when the Boss’ kid arrives…

To counter that, many family firms are now insisting that family members spend sometime gaining outside professional experience, having earned a university degree and apply like everyone else.

HBR continue: “At one European firm we know of, family members applying for a job must be at least 26 years old, have earned a master’s degree in business or engineering, speak three languages, and have won two promotions within five years at a non-family firm. And they are given only one opportunity to apply: If they’re turned down, they must go elsewhere.”

…that seems a bit excessive to us, but you get the idea. The ‘kid’ must really want this and she must bring something of serious value to the firm.

Issue 2: “The Business Can’t Grow Fast Enough to Support Everyone.”

Families grow and simple multiplication shows that having three children, each of whom have three kids, each of whom have three… That is a lot of Board Seats…and just one extra child makes a huge difference.

HBR points out that if you have already put into place the solution to Issue 1, this exponential rise in numbers sitting at the Directors’ Dinning Table, will disappear. If you haven’t put at least part of the solution into action yet, perhaps something to consider.

Issue 3: Family Members Remain in Silos According to Bloodline.

So the ‘kids’ follow in the parent’s footsteps, be it in finance, operations or marketing - this as HBR point out, fails “to gain the cross-functional expertise needed for executive leadership”, plus, seriously, who wants their parent to train them and pick up any faults, and which parent (when the child is now an adult) finds giving candid feedback easy. This creates a low learning curve and mistakes, errors and even biases are allowed far too much oxygen.

The solution HBR has seen has been for someone else to be the mentor, a non-family member - but for that to truly work there has to be an understanding that the mentor is safe from any family kickback (think Francis Ford Coppola’s ‘The Godfather.’ How would a mentor feel taking on any such role in that family business - now there’s a serious ‘hospital pass’ in more ways than one!) .

But what if the family business grows faster and further than the family expertise can handle? We previously looked at Kongo Gumi, Japan (here), founded in 578AD (yes!) that was originally a family owned and run business, until they started to recognize that ‘Kaizen’ or ‘continuous improvement’, central to their survival could only happen if they moved away from automatic family succession and pick on merit. Seems to have worked - still going strong 1,443 years later !

LEGO, one of the world’s best known family firms (see here) was founded in Denmark in 1932. The company has passed from father to son (one hopes that Daughters will get a look-in soon) and is now owned by Kjeld Kirk Kristiansen, a grandchild of the founder (and produces 75 Billion bricks a year, so clearly they have thrived!).

So the secret sauce to ‘keeping it in the family’? The answer perhaps lies in the word ‘owned’. That is not the same as ‘owned and managed’.

The current CEO of Lego?

Prior to joining the LEGO Group, Niels B. Christiansen was CEO of Danfoss A/S for nine years. Before that, he was CEO of GN Netcom and held leadership positions in GN Store Nord and Hilti Corporation in Switzerland. He began his career at McKinsey (not a bad CV!). With an M.B.A. from INSEAD and an M.Sc. in Engineering and BA from the Technical University of Denmark, he ticks all the technical skills boxes too! Interestingly, Niels is also a member of the Board of Tetra Laval Group, of Tetra Pak fame - the world’s largest food packaging company by sales. The company is privately owned by the family of Gad Rausing through the Swiss-based holding company Tetra Laval, - so another massive family firm. Again although owned by the Swedish founding family, this is run by an outsider, Adolfo Orive. Adolfo also has all the academic tick boxes covered, but here he started at the bottom after University (28 years ago) and worked his way up, first in sales. He then became MD in Colombia before finally becoming President and CEO of Tetra Pak global in 2019. If you are still wondering who Tetra Pak are - look at your milk carton - they invented the paper covered by a thin plastic sheen that keeps our milk or juice fresh and brings them in a cool €uro13 billion in annual sales.

So three absolutely huge family owned (but not run) companies, where the great families recognized they had to bring in a more professional leadership. The family business through this moves away from being a place that created employment for the founder and their immediate family, to ensuring that the growth and wealth created for the family is now both protected and secured through professionally run growth for the future.

But there is no requirement to bring in outside professional management, indeed far from it as there is no right or wrong - good news for those who wish to stay a family owned and run company, as HBR (here) confirm:

 “They’re frugal in good times and bad.

They keep the bar high for capital expenditures.

They carry little debt.

They acquire fewer (and smaller) companies.

Many show a surprising level of diversification.

They are more international.

They retain talent better than their competitors do.”

Adding: “In a global economy that seems to shift from crisis to crisis with alarming frequency, accepting a lower return in good times to ensure survival in bad times may be a trade-off that managers are thrilled to make.”

As we say, there is no right or wrong way, but what is without doubt succession planning is essential whichever route you take. As PwC, found (here) in 2018 only 15% of family businesses had a "discussed and documented" succession plan in place (in 2021 this had risen to 30%), yet history is littered with failures that spring from no succession planning and the resultant power struggle… 30%?!? Everyone knows they should write a Will - but the family business is different? How?

This has to be taken very seriously. “How to create a succession plan; how to develop opportunities for succession candidates; how to build consensus with the family and leaders on succession plans; and when and how to let go of their own role in the business are all major considerations.” HBR.

This is not something that can be brought in at the last minute, it is a long thought out process that can have terrible consequences if handled in the wrong way and ignored. But in the right way, through good planning, this works - just ask family firms - Walmart, Mars, Samsung, the Tata Group, BMW and Porsche (to name but a few).

Succession planning is essential for the good of the family, and even Mr Buffet recognizes that for all the failings of ‘The Lucky Sperm Club’ it’s nice to keep it in the family as his son Howard will succeed him as Chairman of the family firm, Berkshire Hathaway (equity valuation $443 Billion). 

As the saying goes: “Better to be lucky than good”, but remember, it’s even better to be lucky AND good.

Stay safe.