Transcript Paradoxical Problems for Business Families

The Paradoxical Problems
for Business Families
Chicago Estate Planning Council
January 21, 2010
Clinical Professor of Family
Enterprises
Kellogg School of Management
JOHN L. WARD
1-847-475-3000 phone
fax 1-847-475-3024
[email protected]
www.JohnLWard.com
The Family Business Consulting Group
International
Atlanta □ Barcelona □ Chicago
Geneva □ Milan
First, some background…
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Family Businesses
Dominate Western Economies
95%
Firms
65%
Employment
55%
GDP
25%
Public Markets Cap
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“Shirt Sleeves to Shirt Sleeves”
Padre Bodeguero
Hijo Millonario
Nieto Pordiosero
Pai Rico
Filho Nobre
Neto Pobre
Förvärva
Ärva
Fördärva
La première génération la crée
La deuxième la developpe
La troisième la tue
Erwerben
Vererben
Verderben
Theseus
Pericles
Alcibiades
Haveli ki umar saath saal
“The children of the children are
indifferent.”
- Shakespeare
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“Generations pass while some trees stand, and
old families last not three oaks.”
- Sir Thomas Browne,
Hydriatophia, 1658
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Shirt Sleeves to Shirt Sleeves
I must study politics and war that my sons may have liberty to study
mathematics and philosophy, geography, natural history, naval
architecture, navigation, commerce and agriculture in order to give
their children a right to study painting, poetry, music, architecture,
statuary, tapestry and porcelain.
John Adams
Paris, 1778
Let us now return and explain the genesis of the democratical man. An
oligarchical father has a son whom he brings up on narrow and
parsimonious principles. The young man tastes the honey of drones, and
sedition is engendered within his soul. A struggle ensues, the unnecessary
desires prevail and the young man becomes an impartial devotee of
pleasure in all its forms and consequently a follower of democracy.
Plato
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What are the Challenges?
Nepotism
Letting Go
Sibling Rivalry
Cousin Differences and Indifferences
Financial Freedom
Attracting Non-Family Management Talent
Changing Business Conditions
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The Fundamental Dilemma
FAMILY
•
•
•
•
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BUSINESS
Policies
Purpose
Process
Paradox
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Oxymorons
FAMILY BUSINESS
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Paradox
“The test of a first-rate intelligence
is the ability to hold two opposing
ideas in mind at the same time and
still retain the ability to function.”
F. Scott Fitzgerald
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The Family Constitution
• Family Statement
– Family Values
– Family Mission
– Family Principles/Beliefs
• Family & Enterprise Protocol
– Pledge to Enterprise Continuity
– Policies & Procedures
– Rules on Governance (Charters and Bylaws)
– Roles, Responsibilities and Expectations of Members
• Owners’ Charter
– Rules of Ownership (Contract)
– Value-Added Contribution of Ownership
– Vision of Ownership
© John L. Ward and Daniela Montemerlo, The Family Constitution, 2005
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The Seven P’s of Highly Effective Family Constitutions
• Positive: They were motivated to draft their family agreement mostly for positive, not
defensive reasons.
• Philosophic and Principled: They articulate the specific values and beliefs that underlay each
family agreement policy.
• Personal: They write a family agreement that is uniquely theirs – not replicating a general
template or adapting other family agreements.
• Process and Project Driven: There is a blend of attention to the process of the decisionmaking and also to making concrete, discernable policies.
• Participative: A large percentage of the family was actively engaged in the formulation and
oversight of the family agreement.
• Professional: They appreciate that each domain – family and business and ownership – has
inner functioning logics that must be respected.
• Paradoxical Resolutions: The family agreement offers to balance or, better, to create a winwin synthesis as having a “family first” versus “business first” orientation. The family
believes the welfare of the business and family are greatly enhanced by the existence of the
other.
© John L. Ward and Daniela Montemerlo, The Family Constitution, 2005
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YET,
Family Firms are More Profitable
Ward:
26% vs 21% ROIC
( 5 years)
Anderson-Reeb:
5 – 10% S&P 500
(10 years)
Morgan Stanley:
+16%/yr vs. MSCI
& 18.5% ROE vs. 14.1% ROE
(5 years)
Pitcairn US:
30% Premium MV/BV
(20 years)
Denison-Ward:
Culture of 200 companies
FB 1000:
+35% ROIC
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(2006)
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…and Continue
FBs:
20%  50 years
S&P 500:
15%  40 years
McKinsey 1000: 14%  37 years
FB 1000:
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30% > 100 years
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The Reasons?
• Purpose
• Strategy (2/3)
– Quality
– Unconventional
– Long-Term
• Culture (1/3)
– Personal Values
– Time Orientation
– Frugality
• Prudence
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The Family Business Paradigm
For the Family Firm
For the Non-Family Firm
The purpose is continuity
The purpose is maximizing near-term share price
The goal is to preserve the assets and reputation
of the owning family
The goal is to meet institutional investor
expectations
The fundamental belief is that the first priority is to
protect downside risk
The fundamental belief is that more risk promises
more return
The strategic orientation is adaptation
The strategic orientation is constant growth
The management focus is continuous incremental
improvement
The management focus is
transformation
The most important stakeholders are customers
and employees
The most important stakeholders are shareholders
and management
The business is seen as a social institution
The business is seen as a disposable asset
Leadership is stewardship
Leadership is personal charisma
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Best Places to Work
• Founder Businesses
34%
• Family Businesses
26%
• Partnerships
16%
• Non-Profits
12%
• Associations/Co-Ops/ESOPs
4%
• Widely-Held
8%
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The Beretta Case:
The Paradox of Tradition and Innovation
with
The Benefit of Strategic Tensions
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Dilemmas in Strategy
The House of Beretta: Prudence and Audacity
• Tradition
Innovation
• Military
Sport
• Design
Large Scale
• Craftsmen
• Acquisitions
Technology
Start-ups
Systematic Creativity
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Managing Paradoxes: The Case of Beretta
(continued)
• Bold but not Departure; Evolution and Innovation
• Money and Hearts
• Eye to Past; Focused on Future
• Independence and Responsibility
• Personal Freedom and Close Family
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Strauss-Elite Co. Values
Daring
+
Caring
Passion
+
Responsibility
Teamwork
+
Each Person Counts
Our Tradition is Change
New Ideas; Old Ideals
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Contradictions Inherent in Family Enterprise
Culture
Family Firms achieve both
stability and flexibility
Strategy
Family firms pursue
strategies competitively
appropriate and
consistent with the
family’s personality and
values
Governance
Family firms see
governance as
accountability and as a
value added resource
CONTRADICTIONS
Succession
Family firms
believe
succession should
be organized and
entrepreneurial
Ownership
Relationships
Families in business
see cohesion and
independence as
essential
Family firms believe
ownership should be
close to the business
and respectful of
distance
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Paradoxes
Tradition
and/or
Change
Prudence
and/or
Risk
Liquidity
and/or
Growth
Familial
and/or
Professional
Roots
and/or
Wings (for the next generation)
Commitment
and/or
Freedom
Collectivity
and/or
Individuality
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“Celebrating 100 Years of Innovation”
─ Michelin
“As a company, we have believed in the
same values for 125 years, even though
we have changed the business every
five years.”
─ Whitney MacMillan
Former CEO, Cargill
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Fundamental
Family Business Governance Dilemmas
1.
Family Membership:
Inclusive vs. Exclusive
2.
Family Participation:
Representation vs. Merit
3.
Voting Process:
Confederation vs. Federation
4.
Governance Evaluation:
Development vs. Eligibility
5.
Board Diversity:
Sympathetic vs. Rebel
6.
Family Voice:
United vs. Freedom
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Fundamental
Family Business Governance Dilemmas
(continued)
7. Family Board Relations:
Close vs. Not Too Close
8. Transparency to Family:
Open vs. Closed
9. Constitution Form:
Adaptable vs. Stable
10. Constitution Enforcement:
Moral vs. Legal
11. Family or Business Oriented: Family First vs. Business First
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“How wonderful that we have met with a
paradox. Now we we have some hope of
making progress.”
Niels Bohr
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Approaches to Resolution
• Compromise
• Balance
• “Portfolio” Concept
• Polarity Management
• Third Dimension
• Mission and Indefinite Vision
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Paradoxes are to be managed, not solved like
problems…
Beware of a false sense of concreteness –
certainty, finality.
Don’t demand clarity, but be an active listener,
build trusting communication and empathy to
the other side…
Greg Page, President
Cargill
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