I recently met with several key family members of a 4th generation family owned and operated grocery business. The family was in the process of making some changes to its senior management team and wanted to discuss certain “roadblocks” they were facing in concluding their evaluation of the two remaining CEO candidates.
It should be noted that a 4th generation family owned or controlled business is a rarity. Though 80% of the companies in the United States and throughout the world are family businesses, only 30% survive the founder’s generation and enter into the second generation, 12% remain viable in the 3rd generation and only 3% continue into the 4th generation.
How does a family owned or operated business survive into the 4th generation and beyond? Several factors appear to contribute, as follows (see “Leadership Lessons from Great Family Businesses,” by Claudio Fernandez-Araoz, Sonny Ibal and Jorg Ritter, Harvard Business Review, April 2015):
1. Good Corporate Governance. Corporate governance refers generally to the mechanisms, processes and relations by which corporations are controlled and directed. Governance groups may include, among others, boards of directors, advisory or supervisory boards and committees, managers, shareholders and family councils and forums. Often, the founder’s generation shows a certain distain for formal rules and processes and opts for very loose forms of governance. While appealing at one level, family businesses cannot hope to manage internal talent (both family and nonfamily) and attract the best outsiders without establishing good governance practices that separate the family and the business and ensure oversight from a professional board (see “Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015). Committing to good governance, sound decision-making and professional management practices is critical for the survival of family owned or controlled companies.
2. Continuing Influence of the Founding Family “Ethic.” Though it is important for family businesses to be governed professionally, it is equally important that the family business not lose what makes it special (see “Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015). The people who personify the family identity can assist in the process of aligning differing interests around commonly held values and vision. These people tend to focus on the next generation, as opposed to the next quarter (see “Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015).
3. Finding Good Future Leadership. Decisions about who is right for the highest-level positions in a family owned or controlled company is key to the company’s survival. Studies have shown that it is essential that prospective senior executive candidates are a good “cultural” fit. This, more than any other factor, appears to be the “make or break” element in finding good future leadership. The family businesses that seem to survive into multiple generations appear to find their future leaders early and invest in their development, regardless of whether they are cousins, grandchildren, existing nonfamily employees who show promise, or outsiders with no previous connection to the company (see ”Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015).
4. Disciplined CEO Succession. Failed CEO succession is the single greatest threat to any large business, including a family owned or operated business. Oftentimes, family businesses allow an important family member to chose a successor CEO based primarily on intuition. Family businesses need to make sure that they consider more than one candidate for the top spot, pursuant to a properly structured and disciplined selection process. The CEO selection has to be proactive and strategic. Most successful, multi-generational family businesses give clear preference along the following lines: (a) to family first; (b) internal talent second; and (c) external senior executives third. Once again, culture and personal relationships are the critical elements. Accordingly, internal hires stand the best chance of success (see “Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015).
Studies have shown that large, publicly traded, multi-generational family businesses that incorporate the above factors and practices into their decision-making processes and operations grow faster than nonfamily companies of similar size, are more resilient and outperform the nonfamily companies (see “Leadership Lessons from Great Family Businesses,” Fernandez-Araoz, Ibal and Ritter, HBR, April 2015).