Let's toast the family business
2 Jun 08
Some of the world's biggest brands are still in the hands of brothers, sisters, cousins and aunts
by Ian Harper
Family businesses account for 65 per cent of the total 4.5m private sector enterprises in the UK and produce over 30 per cent of the country’s GDP and employ over 40 per cent of private sector employment, providing jobs to 9.5 million people.
In February, a report from consultants Capital Economics revealed for the first time the true extent of the contribution that family firms make to the economy. It showed that the sector as a whole in the UK accounts for one job in three and employs more people in the
UK than all FTSE companies combined.
The Chancellor of the Exchequer receives from them an annual contribution of £73 billion – 15 per cent of tax revenues.
You might also be surprised to hear that family firms are powerhouses of innovation
and enterprise in the UK and act as a crucial breeding ground for entrepreneurial talent and start-ups.
The family business sector is also highly competitive. It has a combined turnover exceeding £1,000 billion – double that of the private equity sector.
Commenting on the report, Grant Gordon, director-general of the Institute of Family Business, says: “It is no exaggeration to state that the family firm is the backbone of the UK economy and acts as a positive counterbalance to the more short-term approach of other sectors.” But important as they are to the UK, their significance is global as these examples illustrate:
• US agro-industrial giant Cargill, owned 85 per cent by descendants of the founding Cargill and MacMillan families
• Swedish furniture phenomenon, IKEA, is owned by Netherlands-based charitable foundation, Stichting Ingka which was set up by the company’s founder Ingvar Kamprad
• Heineken, the world’s best-known beer distributed in more than 170 countries, was set up by Alfred Heineken, the richest man in the Netherlands. Now Baron Heineken, he is the president of the Heineken board of directors.
• The chocolate icon Mars, known the world over, is owned by the secretive Mars family (including siblings Forrest Mars Jr, president and CEO John Mars, and VP Jacqueline Badger Mars) which is reckoned to be one of the richest in the US.
The UK has fairly low levels of family ownership compared with those abroad. According to estimates made in 2003 by the International Family Enterprise Research Academy (IFERA) the UK is towards the lower end – about 70 per cent. Italy, the highest, has 80 per cent.
Even so, given this level of ownership, it is surprising there is not a greater public awareness of the economic role of family firms. Perhaps this is because their approach is not the one pursued by better publicesd public companies, that of maximising profits and shareholder value.
According to Martin Stepek, chief executive of the Scottish Family Business Association (SFBA): “While business looks outwards to maximise potential, families look inwards to nurture those they love, and in this is an inherent conflict of fundamental direction.
“Family businesses reflect the values of the founder and his or her subsequent family, which makes each family business unique and distinctive in a way a plc can rarely ever be. Thus a family business has a very powerful and influential culture.
“In addition, family relations to each other, to employees, to customers and suppliers, and to their local community are magnified many-fold compared to the same relationships in most other forms of business. Thus a family business is much more of a personal and emotional organisation than most other forms of business.”
Certainly, it does not help that the financial comings and goings of family business are less accessible than those of their stockmarket-listed cousins. But for those prepared to dig deeper, there are rich pickings. In their recent book, Family Wars (2), Grant Gordon and Professor Nigel Nicholson of the London Business School found that there’s nothing so strange as real life.
Our very own Guinness saga illustrates well the over reliance on family and the poor leadership that can result. After a series of poor decisions in the 1970s, financial crisis ensued and a certain Ernest Saunders stepped into the vacuum. But after a bright start and a turnaround in fortunes, Saunders became implicated in a share price rigging scandal arising from the takeover of Distillers. By this time the family had become minor bystanders and could only watch embarrassed as Saunders was convicted and jailed. The firm only survives in name as a brand owned by Diageo.
But this is tame compared to the story of the Gucci family – a dynasty which closed with the imprisonment of Patrizia for 29 years after her arrest and trial over the murder of her ex-husband Maurizio Gucci by a killer she hired. She had previously learned that Maurizio had deprived her children of their heritage by selling his stake in the company.
However, even this pales in comparison to the billion dollar US company U-Haul which was set up by the Shoen family. The book says: “U-Haul is a lesson in the darker side of nepotism. It is a Shakespearian drama in which a spiked cocktail of pungent personalities was mixed with terrible decision-making.”
Gordon and Nicholson say the company's and family's problems owe much to the of errors of judgement of its founder Leonard Shoen – in particular his determination to draw family into the business regardless of aptitude or the views of others.
Sons Joe and Mark had moved behind the scenes to remove Leonard and his other son Sam and take over the company. Despite this, and the advice of the management team, Leonard – persuaded by Joe's determination and vision – duly appointed Joe as chairman. Joe and Mark then set about challenging Leonard and Sam and took control. In the process, they split the family in two. The situation grew increasingly acrimonious – claims, counterclaims and court actions followed and the rest of the family distanced themselves from the business. The company is still run by Joe Shoen.
Of course, conflict is a concept not unknown in business, but in family ones it just seems to be more glamorous and bitter. But what can bring conflict about in the family business? What motivates wives to hire hit-men to liquidate their husbands?
Stepek believes conflicts are potentially everywhere: “The main ones are difference of business vision, difference in ethical values, poor communication based on wrongly believing family members know what each other is thinking anyway, lack of formal hiring policies, discipline procedures, and appraisal/performance reviews for family members, the values conflict between family (egalitarian by nature) and business (meritocratic and hierarchical by nature) including salary levels.”
He adds: “Then there are in-laws who bring a second family into the culture and values of the founding family. This can lead to more conflicting visions and values over the long term. There is nothing sinister or intentional about this in most cases; it’s an inevitable result of marriage or life partnership.”
Then there is the matter of “dynasty” where family businesses move into third and more generations. Stepek says: “More family shareholders become more distant from the business and communication, and keeping the family values, culture and vision unified and consensual becomes much more difficult.”
For Renee Reid, director of the Family Business Centre at Glasgow Caledonian University, the added dimension of family increases the complexity of managing businesses. “Balancing the emotional demands and needs of the family (which can at times appear irrational) with the needs of the business may not always be an easy path,” she says.
Another source of tension is that family business is not confined to the workplace for family members. Reid says: “There is no escape from the business even during social events, holidays and meal times. However it is this closeness which can be its strength as well as its weakness.”
The solution to conflict lies in good governance ensuring accountability between owners, management and family, Reid says. “Establishing effective communication between family members will not only reduce unwanted conflict but will assist family members to create a conflict resolution policy in advance of potentially serious conflicts.”
Of the key challenges facing family businesses succession planning is generally considered the most crucial. Reid says: “Each generation in control of the family firm has the responsibility of not only identifying potential successors, but also ensuring these successors receive appropriate training and development to ensure their best possible chance of success.”
Another vital area, says Stepek, is active government support of family businesses as the key economic strength in a country.
Political support – at least in Scotland – seems to be on the agenda. On 30 April First Minister Alex Salmond, speaking at a reception in Edinburgh Castle attended by more than 100 family businesses owners, policy makers, professional advisors and academics, said: “We are committed to increasing sustainable economic growth and creating the conditions where family business can continue to flourish and reach their full potential. The introduction of the Small Business Bonus Scheme alone will save Scottish businesses up to £165m a year.”
With an eye on independence, the First Minister is fully aware of the opposition he will face from many Scottish businesses, particularly the big ones. So it is vital for him to win friends.
However, winning political support is also a priority for the Institute of Family Business. Grant Gordon says: “We will be calling on the Government to take up the [Capital Economics] report’s recommendations, specifically in the area of taxation and succession planning, to support family business and encourage its growth as a significant contributor to the UK economy.”
There are, of course, other challenges. Three, says Stepek, are access to world-class education on how to best govern, lead and be a part of a family business; training advisors such as lawyers, accountants, and bankers; and helping family businesses communicate openly, honestly and constructively within the family.
The role of advisers is an interesting one as even the most well meaning can create problems. Stepek says: “They frequently fail to appreciate that their main contact – usually the MD or FD – is not the only person who needs to be considered, nor necessarily the person who most influences decisions. There is also a lack of understanding that what is technically best for the business may not be appropriate for the family as a whole, and if it is not right for the family, this often has a major debilitating effect on the business in the long term.
“Best advice comes from understanding the family as well as the business, and a completely open mind as to options for financial or tax proposals. Many professionals approach a project with pre-fixed views on a few alternatives and this approach can be very damaging when applied to a family business.”
According to Renee Reid: “I believe most advisers are aware of the issues and potential for conflict but perhaps struggle with ideas for solutions.”
One professional adviser, David Rutherford of the accountants Cowan & Partners said: “It’s important to recognise any family tensions and to remain independent and be as impartial as possible. This can be very difficult in extreme cases when there is a bad, sad or mad family member. There are many family businesses where their raison d’être is not to maximise profit and there are other – often described as lifestyle – objectives. It’s important for the adviser to understand the objectives of the family or its members and to tailor advice to suit these.”
Another adviser, Andrew Shepherd, a partner in Edinburgh with accountants Johnston Carmichael, says: “I think the problem is that a lot of people are used to giving very specialised advice on a small area, but they forget that this is a family and that you’ve got to take this into account. The risk is that if you plan for a specific area then you can lose sight of the overall picture.”
One example, he says, is where the family members who were directors of the business, were advised to save tax by increasing their pension contributions.
“Not all the family members were directors so the advice led to the directors getting a disproportionate advantage. While it was good tax advice, it was poor advice for the family as a whole.”
Clearly, the role family business plays in our economic wellbeing is huge. But there are other positive characteristics which are no less important and offer some important lessons for all of us.
As concern grows about the impact of family breakdown and divorce on social cohesion and crime, the more progressive values associated with the family business – notably their close association with and positive effect on the local communities where they operate, which contrasts sharply with the values of the footloose PLC – are surely to be encouraged. n
Ian Harper is a freelance business journalist..