by C. Caspar, A. Dias, H. Elstrodt
The keys to long-term success are professional management and keeping the family committed to and capable of carrying on as the owner. Family businesses are an often overlooked form of ownership. Yet they are all around us–from neighborhood mom-and-pop stores and the millions of small and midsize companies that underpin many economies to household names such as BMW, Samsung and Wal-Mart Stores.
One-third of all companies in the S&P 500 index and 40% of the 250 largest companies in France and Germany are defined as family businesses, meaning that a family owns a significant share and can influence important decisions, particularly the election of the chairman and CEO.
As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder, for example, may insist on running the company even though they are not suited for the job. And as the number of family shareholders increases exponentially generation by generation, with few actually working in the business, the commitment to carry on as owners can’t be taken for granted.
Indeed, less than 30% of family businesses survive into the third generation of family ownership. Those that do, however, tend to perform well over time compared with their corporate peers, according to recent McKinsey research. Their performance suggests that they have a story of interest not only to family businesses around the world, of various sizes and in various stages of development, but also to companies with other forms of ownership.
To be successful as both the company and the family grow, a family business must meet two intertwined challenges: achieving strong business performance and keeping the family committed to and capable of carrying on as the owner. Five dimensions of activity must work well and in synchrony:
- harmonious relations within the family and an understanding of how it should be involved with the business,
- an ownership structure that provides sufficient capital for growth while allowing the family to control key parts of the business,
- strong governance of the company and a dynamic business portfolio,
- professional management of the family’s wealth, and
- charitable foundations to promote family values across generations.
Family businesses can go under for many reasons, including family conflicts over money, nepotism leading to poor management, and infighting over the succession of power from one generation to the next. Regulating the family’s roles as shareholders, board members and managers is essential because it can help avoid these pitfalls.
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