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In
mid-October 2001 I stood on the shores of
the Persian Gulf at Jumeirah Beach in Dubai,
UAE. The sun was just beginning to shine
its first rays of the day on the Straits
of Hormuz. I had risen early, awakened by
a combination of jet lag and mental gymnastics
related to the family I was advising. Now,
walking in solitude in the soft beach sand,
I was able to think clearly about my client's
dilemma.
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Dana Telford
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An
Emiriti entrepreneur (we'll call him Ibrahim)
had worked industriously his entire life to provide
a valuable business to pass to his sons. Through
shrewd trading, adherence to conservative financial
management principles and hard work, and aided
by an outgoing personality and endless energy,
Ibrahim had amassed a network of enterprises that
generated many millions of dollars in annual sales.
Now in his mid-60's, he faced the challenge of
passing the mantel of leadership and the responsibility
of ownership of the company to his children.
Two
of Ibrahim's nine sons worked in the business
with him, each managing a separate company. His
eldest son, Salem, ran the smallest of the companies
and his second eldest son, Hassan, ran the largest.
Salem was a devout Muslim and a mediocre businessman.
He was content to run his company so as not to
lose anything and to maintain his comfortable
lifestyle. Hassan was the opposite, lukewarm in
his religious convictions but naturally charming
and filled with the fire of commerce.
The
traditions of Ibrahim's culture and belief system
suggested that he pass the torch of his legacy
and leadership to his eldest son. But Ibrahim
feared the inertia of Salem's natural complacency
would cause him to simply stand still. He would
focus his time on merely protecting the torch
flame from the gathering winds of competition.
Hassan, on the other hand, would carry the torch
forward courageously, using his talents and entrepreneurial
drive to take the company into new markets, create
fresh ideas and earn higher gross margins.
As
the sun rose behind me, warming the shoreline
air, I remembered why Ibrahim had hired me. He
needed someone to help him think through this
pending generational transition, identify possible
options for dividing responsibility and ownership,
analyze those options according to the guiding
principles of the family and suggest the best
possible solution.
I
watched an apparently exhausted sea snake struggle
to swim through the constant crash of the small
waves near the shoreline and thought of what I
would do in his place.
Strategies
for Success in Family Business
Families
rule the world of business. Their firms make up
more than 2 out of 3 companies across the globe
and employ over half of the world's industrialized
workforce. They produce 65% of the Gross National
Product in the United States. Their names are
some of the world's most famous brands -- Marriott,
Disney, Ford, Nestle, Anheuser Busch, Ferrari,
and Levi Strauss.
Family
businesses are leaders in their particular industry
(think Washington Post, Dell, Johnson & Johnson).
When compared to their non-family competitors,
they are more than 5% more profitable, achieve
higher annual revenue and income growth, provide
higher annual shareholder returns and are valued
10% higher by the equities markets. *
Family
business leaders are often the best and brightest
executives in their industries. They run professional,
innovative, aggressive companies that expand the
horizons of productivity and efficiency. J. W.
Marriott, Jr. for instance, succeeded his father
as CEO of the Marriott Company in 1972 when revenues
were nearing US $200 million. Today, in the twilight
of his career, Bill Jr. leads the US $9 billion,
140,000 employee international company. Under
"Junior's" guidance the company grew to 45 times
the size of the company his father passed on to
him.
Family
businesses are also known by many to be a minefield
of complex relationships and competing norms.
Employee/manager relationships in any company
are difficult. Add to the mix a manager who is
your father, or aunt, or owner's son, and going
to work becomes more complicated. Family norms
often run headfirst into the demands of the business.
Issues related to fairness between siblings can
easily spill over into the workplace, increasing
tension and anxiety among employees and family
members. The challenge of passing the business
to the next generation in a fair and logical manner
can cause immense tension and stress.
Based
on these challenges then, it is not surprising
that 7 out of 10 family businesses fail to make
the transition to the second generation. And only
1 of 10 makes it to the third generation. That's
a discouraging 60 + % failure rate per generation
that leads to a number of perplexing questions.
Why
do so few survive the transition from one generation
to the next? And when they survive, how is it
that family-businesses outperform their non-family
competitors? What principles do they follow to
help them overcome family business challenges?
Four
Principles of Family Business
Based
on my research and experience in working with
over 55 families from 13 different nations, I
believe that adherence to four straightforward
and simple principles will benefit any family
business system, regardless of its size, industry,
generation or location.
Form
a Firm Foundation
Forming
a firm foundation means answering three questions;
1)
What do we believe is important and right?
2) What are our objectives?, and
3)
How do we plan to achieve them?
The
best organizations make decisions based on what
they believe to be important and right. In 1982,
seven people in the Chicago area died shortly
after taking poisoned Tylenol products. . There
remained the possibility that more would perish
or be seriously injured if the leaders at Tylenol
didn't act fast. Jim Burke, then CEO of Johnson
& Johnson who produced the painkiller, made the
decision to pull US $150 million of Tylenol from
the shelves of drugstores and pharmacies across
North America because of a J & J guiding principle
that named customers their number one priority.
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Though
more than one of his associates told him
that the decisioin would go down as one
of the worst in business history, Jim adhered
to the principles the company had followed
for nearly 100 years. As a result, more
than four lives were saved and today Johnson
& Johnson sells over US $1 billion of Tylenol
at a 20 - 25% premium to its competitors.
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FOUR
PRINCIPLES OF FAMILY BUSINESS
Copyright,
Dana Telford 2005
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Family
business leaders must identify and prioritize
the guiding principles that they want to form
the foundation of the family's legacy. Guiding
principles are those principles that 1) you want
to teach to your children and grandchildren, 2)
will be just as important 100 years from now and
3) you would stick to even at your own financial
peril. Most importantly, they must be more than
just a nice frame and calligraphy. Leaders must
create and follow a plan to make them useful to
any family member facing an important question.
They should provide guidance and inspire excellence
in every aspect of life, whether related to the
business or not.
Make
it a Meritocracy
Seemingly
at birth we begin to believe in the "Norm of Equality",
which states that our parents should give us gifts,
benefits, advantages, opportunities, affection
and time in the same allotments as our siblings.
The Norm of Equality is deeply ingrained in any
sibling, but is completely impossible. No two
siblings throughout history have been treated
equally, ever. Not even twins. One is born before
the other, thereby receiving more time and attention
than the second; forever throwing off the balance.
Family
business leaders must protect their businesses
from inappropriate family intervention by developing
a meritocracy; a system that recognizes
and rewards achievements rather than birth rights.
Whereas equality means treatment based on circumstances,
meritocracy means treatment based on results.
If
the business is to continue to provide benefits
to the quickly expanding family, it must grow
and remain profitable. As such, it must hire and
keep talented managers and shed family and non-family
members alike who are not achieving desired results.
So often multi-generation family companies struggle
under the weight of a top-heavy organization chart
filled with underachieving family members. In
an increasingly competitive global economy, no
business can afford the risk of burdening itself
with the suffocating overhead of fat salaries
for inefficient leaders.
Communicate
consistently and constantly
Communication
in a family business means two things: information
sharing and openly discussing important issues.
Families are generally terrible in both areas.
Family
leaders too often hide important information from
other family members, including spouses and children.
Some family business leaders withhold financial
and business related information associated with
estate planning and personal assets because they
don't want their children to overestimate their
wealth and believe they will never have to work
hard. Others, particularly in Latin and Central
America, fear that their children could talk too
much about their money and thereby put themselves
in jeopardy of being kidnapped.
While
both are legitimate concerns that warrant careful
consideration, secrets and confidentiality breed
mistrust in any organization. And high mistrust
in a family is a big step towards the edge of
the succession planning cliff. Fall off the cliff
and find yourself looking down at the jagged rocks
of accusation, shareholder conflict, legal disputes
and eventual bankruptcy.
Certainly,
some information is confidential and should be
kept close to the vest, but spouses and children
of family business leaders often need information
in order to make decisions about their future.
Education and career choices, for instance, are
often influenced (and rightly so) by the financial
situation of the family. "Do I have enough financial
security to pursue my dream of teaching disabled
children, or do I need to focus on a higher paying
career?" is an example.
It
is the responsibility of senior family members
to identify what information should be shared
with children and at what age (I am convinced
that children can handle more truth and information
than we give them credit for) and then do it!
Plan and carry out a one day, quarterly family
council meeting that brings the family together
to share relevant information and discuss important
issues. This will give them the chance to learn
about what's going on in the business and allows
family members to ask the delicate, potentially
combustive questions in a safe and predictable
environment. Junior generation members cannot
lead this effort because their questions about
wealth and succession planning in the family is
often misconstrued as greed or impatience.
Put
a Process in Place
One
of my client families was at an exclusive resort
in Thailand the day the tsunami struck. They happened
to be there at the same time as a branch of a
well-known American business family that had just
gone through a terrible, intra-family dispute.
As a result of the dispute, some major assets
of the family had been sold to pay off a disgruntled
shareholder. As my client and a leader of the
other family talked about the family business
challenge, my client asked the other what would
have staved off the crisis. "Some sort of process
to get us to work together, communicate better,
think through issues together and make decisions
together would have kept things together," came
his sad reply.
Beginning
a process that is designed to protect the well-being
of the family, the success of the business and
the education of the shareholders group is a logical
thing to do. But it's daunting because it means
bringing family members together to discuss difficult
issues. And the family members who take charge
of the process are too easily seen by siblings
and cousins and aunts and uncles as having an
ulterior motive, though there is rarely any political
power associated with starting a coalition to
protect the family business. So what's a family
to do?
Find
and hire someone to help you as a facilitator;
someone who is a trusted advisor to the family
and is not easily associated with one generation
or the other. This person could be an attorney,
religious leader, consultant, family friend or
distant relative. Explain to them your particular
situation and ask them to help you begin a process
of understanding future challenges, evaluating
options for alleviating them and deciding on a
long term plan for guarding and enhancing the
family, it's company and the company owners.
Conclusion
In
the end, Ibrahim's dilemma was solved to the blessing
of the whole family. Together we undertook a process
of teaching his children the unique challenges
of family business, opening their eyes to the
fact that the financial and social benefits they
receive from the business are only available to
them because it is growing and profitable. We
then included them in a family business governance
process with the objective of designing a long
term plan to protect and enhance what Ibrahim
was leaving to them.
Over
the course of 9 months we met regularly in workshops,
family council meetings and individual work sessions
with that goal in mind. And in the end it was
not me or Ibrahim who decided that Hassan was
his most logical business successor, but Salem,
the eldest son, who said "what is best for the
business is also best for the family; that I take
over as leader of the family and protector of
our guiding principles and that Hassan lead the
family business, even though he is my younger
brother."
Successful
family businesses, those that enjoy profitable,
growing businesses, educated and committed shareholders
and a healthy, balanced family, apply these four
time-tested principles. When rightly and correctly
integrated into the family and business, they
act as a road map, guiding the business and family
leaders as they work together to improve the well
being of the entire system.
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Dana
Telford is the founder
of The Telford Group, a family business consulting
firm. Since 2001 he has been a facilitator and
guest lecturer at Harvard Business School's executive
education program Families in Business: From
Generation to Generation. Mr. Telford has
been a trusted advisor to over 55 business-owning
families in more than a dozen different countries,
including Switzerland, Saudi Arabia, China, Brazil,
Canada, Kuwait, England, Mexico and the United
Arab Emirates.
He
advises business families on succession planning,
shareholder education and resolving conflict and
helps them develop family councils, policies,
written agreements and goals for improving the
well-being of any "family business system."
Mr.
Telford is also a co-author of two books; the
best seller The Integrity Advantage: How Taking
the High Road Creates a Competitive Advantage
in Business and Integrity Works: Strategies for
Becoming a Trusted, Respected and Admired Leader.
For
more information visit www.theintegrityadvantage.com.
He can be reached at danatelford@earthlink.net.
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