Success of family businesses is down to control

Even a thriving enterprise can struggle when it is passed down generations, writes Barry O'Halloran

If television is anything to go by, family businesses have a lot of potential for drama. In the 1980s it was Dallas and the even more appropriately named Dynasty. These days, the Sopranos fill the same slot, albeit with broader definitions of the words "family" and "business".

In real life, family businesses are a bit more mundane, but the latest research shows that they may also be better organisations than the big quoted companies on which the commercial world now focuses.

According to Prof Joachim Schwass of Geneva's International Institute for Management Development (IMD), sentiment towards family businesses has grown on the back of the disillusionment with other corporate structures, which has developed on the back of scandals such as Enron and Worldcom.

"People are seeing managers taking too much money out of their own companies," he says. "The whole issue gets back to values, and when you look at family businesses, the issue of values is something that's really intrinsic.

"They are something that's been there for a long, long time. They have created those values and put a face to them over several generations and lent a credibility to them."

Family businesses are more than mom and pop operations. Some of the names with which consumers in Ireland and throughout the world are most familiar are still partly or wholly owned or managed by members of the founding family.

Benetton, Samsung, Gap, Porsche, Ford, Fiat and Wal-Mart, are all family businesses. But they are not limited to traditional activities such as industry and retailing. They are common in pharmaceuticals, with multinationals such as Novartis and Henkel, and in technology, with mobile manufacturer Motorola and third generation operator, Hutchison Whampoa.

In this country, there are a number of examples - Dunnes Stores and Roches Stores in retailing and Thomas Crosbie Holdings in the media. Retailer Arnotts was returned to the Nesbitt family's ownership in early 2003 after a long period as a listed company.

Prof Schwass, who runs an academic programme in IMD in this field, points out that the essential characteristic of family businesses is that they are passed from one generation to the next.

And it is the three linked issues of ownership, succession and control that cause the most problems for family enterprises. The difficulty is often rooted in their beginnings, he says.

Typically they start life as an organisation run by one entrepreneur, or a small number of them, which grows to become a valuable business that can be transferred to the next generation.

Prof Schwass says that this is normally the critical point in their evolution. A key issue for the founder, who has built up the business and believes that he or she knows it more intimately than anyone else, is ceding control to the next generation, who in turn may have their own ideas on the firm's direction.

For this to work, the founder has to switch from an "I" culture to an "us" view of the enterprise. It's at this stage that entrepreneur-owned businesses fail to evolve into family organisations.

Assuming they get over this hurdle, there is the issue of what happens with succeeding generations. The original founder could have two children. If they have families, and their successors have families and so on, you have a large and disparate group who can all claim to have a stake in the same enterprise.

But the business itself may need to evolve - for instance from a privately-owned company to a plc. Successful family businesses have come up with different answers to these problems.

For instance, Prof Schwass points out that the Fords own 40 per cent of Ford Motor Company, and a family member holds the chief executive role - these days it's William Ford jnr. But 60 per cent of the equity is traded on the New York market, and not all of the management is drawn from the founder's clan.

"There are two basic models around succession," Prof Schwass says. "One is the royalty model, that is, one gets it all. The other is that you share ownership equally among your children."

Italian arms manufacturer Berretta has used the first model for 15 generations, passing on the business to the eldest son. "But you can struggle with that," he says. "Not in every generation is there a physical successor, and not in every generation is there someone who is competent."

Berretta managed it by taking the creative approach and if necessary "adopting" a relative who would not otherwise have succeeded to ownership.

The majority ownership of Henkel on the other hand includes 140 descendants of founder Fritz Henkel. That works because none of them have a direct management role. Instead, its executives are ultimately answerable to a shareholders' committee, which represents family members. Prof Schwass points out that this looks more like a mini plc than an actual family business. But the key to both models is that they have worked. He stresses that family businesses can and do thrive when they plan for succession and avoid the drama.