When outsiders matter to a family business
More than 500 of 791 executives of family businesses in 58 countries expect their company to be handed down to family members, according to the Deloitte Private Global Family Business Survey.
However, respondents to the survey conducted from January to March 2019 are split on giving up partial ownership for the sake of potential financial benefits: 34 percent say yes, 36 percent say no, 30 percent are undecided.
Outside funding can help in growth and innovation, particularly in today’s turbulent business environment. But at the same time, a long-term perspective might be sacrificed to focus on more immediate earnings, leading the family to make unsound judgments.
How can family businesses balance risk and return?
“Consider selling minority stakes to other family businesses or family offices,” says Deloitte Private. “The advantage of engaging with another family is that families often have similar experiences and backgrounds.”
As for succession, 30 percent of respondents say they will pass ownership and management on to the next generation, 20 percent say it should be ownership alone, while 15 percent say management only. Deloitte sums up these figures to conclude that 65 percent plan to keep succession within the family.
“Somewhat distressingly, a large proportion of respondents had neither formal nor informal succession plans in place for key positions within the company,” says Deloitte.
Only 26 percent have a formal succession plan for the CEO position, 19 percent for the CFO, 18 percent for the COO and 18 percent for other C-suite positions.
Only 39 percent have an informal plan for CEO, 32 percent for CFO, 30 percent for COO, 29 percent for other C-suite positions.
“Many family businesses think they can do without a written succession plan for their leaders,” Deloitte warns. “In reality, however, many struggle with the succession process despite their long-term orientation—even though succession is critical for the future of a business.”
Worse, governance mechanisms are also often absent.
Only 35 percent of respondents have formal meetings or councils, while 44 percent have informal ones. (See “Family councils,” March 8, 2019.)
Only 44 percent have family constitutions. (See “Family constitutions,” February 2, 2018.)
Family boards can aid governance. One-third of the respondents say most of their board members are nonfamily or independent outside directors, while one-fourth say board members are mainly from the family. The remaining respondents say their boards are composed entirely of family, or that they have no board at all.
The benefits of independent board members are obvious: offering diverse viewpoints other than those of the often-insular family, becoming a sounding board when family members clash, providing more rational and less emotional advice on sensitive issues such as succession planning or compensation policies.
All these rest on the assumption that outside advisers are highly competent in their field and do not have conflict of interest with regard to the family business.
Meanwhile, 53 percent of respondents have a formal strategic plan for the business, 36 percent have an informal one, 10 percent have no plan at all. Of those with plans, 23 percent have strategies for the next six or more years, 34 percent for the next four to five years, 37 percent for the next two to three years, 6 percent only for the next year.
Younger companies account mainly for the latter, since more established ones tend to plan for a long-term horizon.
Family businesses need to be proactive rather than reactive.
The short-sighted approach “not only tends to spread company resources thinly across a multiple array of initiatives, but may give rise to initiatives that are themselves only incremental in nature,” says Deloitte.
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