Key Findings from STEP-IFB Engaging Advisors: Family Business Research

This joint research report from STEP and IFB provides insightful context and information about how advisors see family business clients and vice versa.

While the sample of individuals was small, the summary of findings and implications for this research are important to the field of family enterprise and the further development of advisory services to business families.

The report is a very realistic snapshot of challenges faced by family enterprise advisors and family businesses members. In some cases, the report makes valid points which are rarely seen elsewhere, and includes perspective from all sides on a variety of issues: owners, advisors, skill sets, governance, advice and the referral process.

Even highly educated and emotionally aware advisors should take the key findings of this report into serious consideration when navigating the complexity of family business relationships.

Furthermore, the questions and themes raised in this report are ideal topics of discussion for advisors and their family business clients, and/or as tools for development amongst family enterprise advisors.

A few choice quotes especially relevant for advisors:

“Everybody said they could help but most people did not understand family businesses”

“There is ego, arrogance, lack of empathy and a real lack of real credibility in terms of actually having done [this] before”

“The difference between being a successful owner and family and an unsuccessful owner and family is whether or not you’re savvy enough to choose the right advisors and use them in the right way”

“Family businesses have very little interest in being talked to about tax, accountancy or structuring; it is nearly all soft stuff”

“Advisors need to empower the family to choose who they’re going to work with”

“It is all about the process; if you haven’t got a process then there’s no way you’re going to get to the big decisions”

“Advisors bring two key skills to succession planning: setting objective standards for management skills and acting as neutral observers of individual family members’ strengths and weaknesses”

“The value-add of the outside advisor is to provide insights into the qualities and calibers of the people and come up with hard truths, to be able to hold up a mirror to the people and the family psychological system”

“I think advisors need to get away from the clock ticking”

“It has to be an outcome-based fee structure, not an hours-based fee structure”

“Advisors are not solution providers; they are a facilitator of a solution that works for every individual family”

“Advisors can’t provide solutions; families have their own problems and need to make their own solutions.”

Full Report: STEP-IFB Engaging Advisors: Family Business Research,January 2013

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Re-thinking Family Firm “Failure”

A synopsis of the FFI Practitioner post, Evolutionin Thinking About Generational Transition in Family Enterprises:

 Dr. Pramodita Sharma, Sanders Professor for Family Business at the School of Business Administration, University of Vermont, writes that the commonly used 30-13-3 statistic (referring to the devolving chances of family enterprises succeeding to the next generation) is no longer serving the field of family enterprise because of its inaccuracy and constraint on the reality of family businesses today. Sharma cites a number of reasons why: enterprising families run an 3 to 4 firms in a generation; families are more likely to manage a portfolio or enterprises, either parallel or sequentially; exiting a firm by selling it, going public or closing can be considered successful rather than failed; firms may continue over generations but become controlled by another family or families; and a controlling family may become governing investors rather operational leaders.

                  

Looking at firm survival over time is different than assessing the longevity of a family enterprise (Colli, 2012, as cited by Sharma). The ‘oldest family firm’ lists are focused on family survival over time, whereas the longevity of a family enterprise focusses on the ventures they create or destroy as they work to create value and wealth over generations. She points out that “both the creative destruction of firms and pruning of the enterprising family are integral parts of longevity of an enterprising family” (Lambrecht & Lievens, 2008; Schumpeter, 1954), and that efforts are now more focused on understanding the common practices in family enterprises that survive in the face of time and adversity. One size does not fit all, and the cavalier use of the word ‘success’ has not sufficiently captured the complexity and heterogeneity of family enterprise successes (Gersick & Feliu, 2014; Long and Chrisman, 2014; Stewart et al., 2012).

She poses two important questions which should be considered when thinking about generational transition and would help to lead the way to deeper conversations:

1. What is being transitioned – a firm, enterprise, entrepreneurial spirit, or company name?

2. Why is the transition important?

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Philanthropic Patterns of U.S. Family Foundations

Philanthropy is big business, particularly in the U.S., where family foundations are more common than elsewhere in the world. Of the 200 largest independent foundations in the U.S. in 2007, 111 (55.5%) were family run, with proportionate shares of assets, contributions and donations: $166 billion in assets, $23 billion in contributions (to the foundation by the family), and $11 billion in grantmaking (donations).

The authors of a study on family foundations, Lungeanu and Ward find that family foundation members exercise their influence over a foundation through their positions as members of the Board of Directors or trustees. In nonfamily foundations, board members are not connected through family ties, and the difference affects the donating practices of nonfamily versus family foundations.

Since family foundations include an active donor or donor family, they become more directly involved, either through family control or board control of the foundation, as compared to non-family foundations. But family involvement in a foundation tends to vary according to the generational stage of the family and the degree to which the family controls the board.

They also found that different-sized boards affect diversification of the donating by the foundation, and that family foundations are less diversified in their donations than nonfamily foundations, which they attribute to “general risk adversity.”

Given the impact of family foundations on philanthropic giving in general, it is worth trying to understand the role of a family foundation and its board in its distribution of resources and strategic direction, as the authors point out. However, the above main findings are enough for practitioners to know; it is not necessary to read the article in full.

Source: A Governance-Based Typology of Family Foundations: The Effect of Generation Stage and Governance Structure on Family Philanthropic Activities, published in the Family Business Review, December 2012 vol. 25 no. 4 409-424.

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How Family Enterprises have Changed, and the Implications for Professional Advisors

From the FFI Practitioner Blog, an audio interview with Drew Mendoza, managing principal of FBCG:

Drew will be sharing reflections about how a few of the constituencies of family enterprise systems have changed over the past 20 years and what that means for today’s practitioner. 2014 is the 20^th anniversary of FBCG. He has done over 4500 client intakes and matched consultants with clients.

Transcript:

Q: What is the most profound change for the constituencies of family enterprise systems and of which practitioners should be aware?

·       must better informed, educated now as a result of educational opportunities widely available

·       as a result, there is increased awareness and interest in family and corporate governance

·       they are looking for ways to leverage interdependencies of these different systems

Q: What are a few of the practices consultants are employing today with an impact on future generations?

                  A: Education and next gen development, including:

·       intergenerational meetings, to strengthen a sense of identity for each generation

·       employment and compensation policies

·       career paths for next generation

·       preparing the next generation to be good owners and qualified directors – all of this could fit under shareholder education and next generation development

Q: Of the many constituents (non-family executives, next generation, long-term trusted advisors to the family, leading generation, new advisors to the family, operating owners, non-operating owners), what are some of the engagement practices consultants/practitioners employ today with a diverse client base?

A: We’re always looking for ways to feel heard, channel those communications to reach appropriate decision-makers. We respect the power of educated, informed shareholders who can draw on a common nomenclature, so everyone is using similar words that mean the same thing and working with a common sense of purpose.

Q: What are a few things that have endured that are important for today’s practitioner to keep top of mind? 

A: I would say the interrelationship between the various systems and the constituencies that make up those systems. I would include 1) the constants of procedural justice, so that people feel heard, and there are forums to be heard, and also 2) the importance of family and shareholder education and development.

Q: What thoughts do you have for the next generation, who wants to work in or with family enterprise?

A: It’s important for them to be conversant in the many areas they will likely be asked to consult on, and also have deep expertise in one or two of those areas. These can range from corporate governance, to family communication, to strategic planning, to finance, but also to be very well networked and respectful of the many professions who bring value and support to enterprising families. To not overreach on what you’re really best suited to be helping with.

Q: Do you have any other words of wisdom?

A: There are many professions serving enterprising families and I cannot speak for all of them. There are many independent sole practitioners in this space and I think it’s important for the future of the sector, particularly for consultants and those from 1-, 2- and 3-person organizations to go beyond the focus of their practice, to then also equally focus on their business, to have a strategic plan for their practices and also transition and continuity planning for those businesses.

Full Article 

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