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  1. Wealth
  2. Business
November 1, 2006

Clan-do Attitude

By Spear's

Some family-run businesses turn into global dynasties, others turn into The Simpsons.  John Arlidge on what makes the difference

Family companies are the backbone and building blocks of most economies. The great family banking and shipping firms – Rothschild, P&O and Schroders – sustained the British Empire and today two thirds of the UK workforce work for family firms.

Ford, Wal-Mart, News Corp and Viacom dominate US business. In Italy, the home of dynastic capitalism, there are so many family firms it is hard to know where to start. Prada, Armani, Ferragamo, Zegna, Tod, Missoni, Marni, Bulgari and Versace are all family-owned or controlled – and that’s just the fashion sector.

Among emerging industrial nations it is the family firms, such as India’s Tata, that are growing fastest.

Well-run family-run firms have inherent advantages over public companies. Without having to answer to shareholders, they can act nimbly and are often more creative. Communication is easier because family members are not afraid of telling each other what they think.

Wanda Ferragamo, 85-year-old honorary chairman of leather goods and luxury hotel group Ferragamo, says the family structure ‘propagates fast-paced decision-making. There is a fantastic understanding of each member’s strengths and weaknesses and of ways to complement them.’

The passion to provide for family also creates a deep drive to succeed. ‘We were four brothers and sisters sharing a commitment,’ says Luciano Benetton, founder of one of Italy’s best-known family firms.

‘This is what united us and made us successful.’ Analysis by Morgan Stanley reveals that the 63 family-linked companies in the Standard & Poor’s 500 Index outperformed the rest of the index by more than four per cent last year, while achieving superior results of 18 per cent over the past three years and 106 per cent since 2000.

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But family firms come with troubles that you don’t find everywhere else – complications that develop when work and family co-exist. Just look at the recent surprise announcement that Rupert Murdoch’s 35-year-old son, Lachlan, had stepped down as a senior executive at News Corp, despite being heir apparent to his father’s media empire. His relationship with his father is thought to have deteriorated after Murdoch Snr started a family with his third wife, Wendi Deng.

For every successful family firm, there is an example of a relationship that has ended in break-up – although, thankfully, few ends up like the Guccis, with family members on trial for murder.

What makes some families successful and able to pass on that success to the next generation while others implode? Are there structures – DNA even – that turns some turns families into successful dynasties?

Chris Hancock, head of family business at JP Morgan Private Bank in London – an institution itself formed from the merger of a number of family firms – says there is. ‘It’s about passion, a commonality of ethics, language and culture, mixed with the right governance, long-term stewardship, hard work and discipline.’

Where does good family governance begin? ‘It begins before the beginning,’ says the scion of one family-run global conglomerate. ‘It depends on the ability of parents to raise a healthy child.’

Analysts say that some of the most troubled situations in family businesses stem from siblings who did not get enough love when they were children and are still fighting for it. The only differences between the early family battles and business squabbles are the location – the boardroom, not the nursery – and the fact that huge sums of money depend on the outcome.

Parents have a complex challenge balancing the need to cocoon their young, while also exposing them to the ‘real world’. Some succeed: Donatella Versace’s daughter, Allegra, 19, may own half of the family firm – she is worth an estimated £500 million – but her mother is keen for her to work and live as normal a life as possible.

She lives and studies in London and New York, not Milan and, on a recent visit to London, bailed out of Sir Elton John’s ritzy house party to go to a club with friends. ‘She asks my permission, of course,’ says the elder Versace, ‘but I want her to do what normal teenagers do.’

Once inside a firm, family employees require skilful handling. Making sure each family member has the right job, with the right level of responsibility and no overlap with fellow family members is crucial. Armando Branchini, president of Intercorporate Group, a luxury goods consultancy in Milan, believes that a family-operated business functions best when there are not too many family members in positions of power.

‘There should be at least one business-oriented member and one creative person,’ he says. The best family teams successfully blend artistic and business strengths: business-minded Patrizio Bertelli and his designer wife, Miuccia Prada are the best example.

A safety valve or escape route is crucial for those family members who either do not make the grade or simply do not want to work in the family firm. Analysts point out that those ‘maverick’ or ‘marginal’ family members can disrupt family business and their effect must be minimised by fair and transparent exit options.

Once family members are properly groomed and installed in the family business, what’s next? Are there best practices that families can implement to ensure that they grow and secure a smooth transition from one generation to the next? Management experts say success boils down to five key factors: clear vision, efficient family governance, adaptability, outside consultation, and meticulous succession planning.

Vision comes first. ‘Families that are successful have been able to sustain a sense of collective identity and shared economic and social purpose,’ says JP Morgan’s Hancock. ‘Successful family firms lay down a unique set of values that get to the heart of why the family is in business, how it will use its wealth and what it wants to stand for.’

A crucial part of the shared vision, says Hancock, is to establish the distinction between ownership and stewardship. ‘Successful families enjoy wealth, but they see themselves as transient owners.’

Once the focus and direction of the firm is established, attention turns to family governance. Splits in family-owned groups often happen because of conflicting ambitions among family members and the desire by multiple members to have a say in the working of the business.

The honesty with which family members express themselves can make matters worse, turning rows into full-scale conflict. Establishing boundaries and mechanisms to mediate conflict is crucial.

Anthony Cruz, a company analyst, recommends that families set up a structure to separate family discussions from business matters. Vigorous discussions are fine as long as there is someone in a negotiator role. ‘It’s important to be able to communicate and negotiate but firms need one person able to mediate,’ says Cruz.

Families are naturally conservative, which is good socially but highly risky in business; the ability – the desire – to constantly change strategy is crucial. ‘Every industry, in which a family invests, has a Wal-Mart coming to town,’ says Tim Habbershon, who until recently was director of Wharton’s Enterprising Families Initiative. ‘If a family has instilled an entrepreneurial mindset – one that embraces change – they have an opportunity to adapt with the market.’
A study of more than 200 family-owned manufacturing firms by John Ward, co-director of the Centre for Family Enterprise at Northwestern University Kellogg School of Management, found that firms that had renewed or regenerated their business strategies several times over the 60 years studied had prospered, while many of those that had not changed tack had folded.

The issue of control is crucial. While family firms often out-perform public companies, the ones that do best of all are those with a judicious mix of family executives and independent outsiders.

A recent survey of more than 700 mid-size European and US manufacturers, conducted by McKinsey and the London School of Economics, found that family-owned companies with outsiders as the chief executive were better run than those solely managed by family members.

The best-performing S&P 500 firms have, in recent years, been those where founding family ownership is balanced with independent directors, notably Wal-Mart, Campbell’s Soup and Amerada Hess Corp. These three firms not only beat the performance of family-run companies in general, but far outpaced the S&P 500’s returns by 4.9 per cent in the past year, 21.4 per cent during the past three years and 111 per cent since 2000.

Outside influence also makes scandals, such as that at family-run Italian dairy company Parmalat, which is accused of an $18 billion fraud over the past 15 years, less likely.

Letting outsiders into an often very old family firm can be tough. Luciano Benetton, sister Giuliana and brothers Carlo and Gilberto built an empire that spans 120 countries, with an annual revenue of $9 billion and runs everything from roadside restaurants to cattle ranches.

But last year, Benetton decided it was time to let in the professionals – a seemingly normal step for many companies, but a leap for a family business in Italy. ‘We wanted to guarantee a solid future for our company and make sure it remained competitive,’ Luciano Benetton, 68, says.

Perhaps most important of all is succession. To remain successful, family firms require a strategy that goes beyond the first or second generation. Indeed, it is the third generation where many family businesses can either sell out or flounder, having run out of steam or become so embroiled in family politics that the original aim of the business has been forgotten.

Brian McCann, managing partner at business advisors Hurst and Co, believes businesses need to start planning for the succession as early as possible. ‘Succession planning is a bit like alcoholism,’ he says. ‘People don’t like talking about it or admitting there is a problem, but when they do, looking for help from someone like us is half the battle over.

Only by planning – as much as five to ten years before they plan to retire – can business people ensure that they get maximum value from their companies when they come to stand down.’

When a person starts a business, nurtures it, and sees it grow into a success, eventually letting go can be a difficult, even traumatic, process. Instead of selling to someone they don’t know, they often prefer to hand over to other family members or close business associates; and this is where the problems can begin.

Those taking over, like a son or a daughter, may not possess either the passion or the skills to ensure survival and growth. There are no courses in business school on how to fire your father.

Families, which implement all of these recommendations can, with a bit of luck, prove that you don’t have to come from a dysfunctional Dallas-style family to build a successful business.

Blood and money may be separate but what is good for the bloodline can also be good for the bottom line.

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