Success, not succession, is the first order of business in family enterprises

30 March 2015

This is the third post in the series of posts timed to coincide with the publication of the new title on Family Enterprises: How to Build Growth, Family Control and Family Harmony, published by Globe Law and Business. Richard L Narva is founder of Narva & Company.

In a 2008 article on family-controlled media companies, Professor Jonathan A Knee, the then director of Columbia University’s Media Project, wrote:

“The prime determinant of how long a family dynasty will endure is how well its business is run.  Nothing is more likely to spur a family insurrection and provoke demands to sell than the perception that the business is not being managed efficiently.  Those who romanticize family ownership are often the same people who encourage policies that will almost certainly accelerate its disintegration.” (Portfolio: 2008)

I think Knee was on to something very important at a time when virtually all of the writing on family business was about succession (ie, how the older generation owners of a family firm pass control to their progeny). To gauge by the number of pages of articles and books about family business focused on succession, it would seem that the views of most ‘experts’ were (and remain) that succession is the primary issue in family business.  I do not agree.

Should ‘success’, not ‘succession’, be the primary focus of families that control operating companies?  In my view, the answer is clearly, “Yes, but...”

Without a successful business, there is nothing for the family to lose when succession goes awry, except a chance to sell the company at a steep discount (the family discord discount) or, worse, an unforeseen visit to the bankruptcy court. For a full discussion of the utility of focusing on success rather than succession, see “Entrepreneurship in family firms: reassessing the fascination with success, failure and succession” by Jennifer Halyk, in Family Enterprises:  How to Build Growth, Family Control and Family Harmony, published by Globe Law and Business.

However, great family enterprises are never just about business success and continued family control is not solely dependent on profits distributed to shareholders. Rather, unless the core values on which the family-controlled enterprise was founded – and which underpin all decision making by managers and owners – are honoured regularly and with deep understanding, great family-controlled companies inevitably decline to the level of their merely good competitors and worse. Adherence to core values is the single distinguishing characteristic that Jerry Pouras and Jim Collins – authors of the classic business book Built to Last – found that truly great companies demonstrate and which their merely good competitors do not. What is true about great publicly traded companies is also true for great family-controlled enterprises.

Collins and Pouras were not writing explicitly about family-controlled companies (although at least half of the truly great companies that they profiled either were still family controlled or had been for at least two generations). What they found in their six-year research study was, in my experience working with nearly 400 family-controlled companies for more than 30 years, profoundly true of such firms. Without regular reference to their core values, family-controlled firms rarely achieve or sustain greatness. In this respect, family firms are indistinguishable from more widely owned companies. But while fealty to business ideals rooted in the culture of the founding family is necessary for greatness, it is insufficient.  Great ideas that are not explained well and frequently to members of the controlling family and employees lose their potency to inspire great performance. Moreover, unlike companies with broad public ownership, the core values of business-owning families may include not only the ‘wheat’ (eg, commitment to quality, focus on employee wellbeing and serving the needs of their customers), but also the ‘chaff’ of an excessive sense of privacy and habitually poor communication about emotionally powerful issues. Such unhelpful cultural norms can preclude the kind of communication about core values that all great companies require to thrive.

The core values of great companies – whether family controlled or publicly traded – must be articulated clearly and repeated frequently; although one need not, as one of my clients did, carve them in granite lintels over the front entrance of its new corporate headquarters. There are in fact numerous other ways to ensure that core values endure, see for example, my article, “Heritage and Tradition in Family Business: How Family-Controlled Enterprises Connect the Experience of their Past to the Promise of their Future”.

Click here for a free sample chapter of Family Enterprises: How to Build Growth, Family Control and Family Harmony and to place your order.