Family constraints have their benefits

My Financial Times column 12/13/10

One of the keenest criticisms of modern business is that it places unreasonable burdens on families. Demanding employers and the proliferation of always-on communication devices, such as the BlackBerry, plunder whatever morsels of family life remain. Children are left to scratch out their own emotional educations when both parents must work to sustain a middle-class way of life.

And yet just last week, the latest round of investment in the fast-growing Brazilian bank BTG Pactual revealed that alongside the private equity firms and sovereign wealth funds were four families: Britain’s Rothschilds, Colombia’s Santo Domingos, Italy’s Agnellis and Panama’s Mottas.

It seems paradoxical that the micro-problems of making a living while raising a family seem to be intensifying while the macro-benefits accruing to families that pile up wealth over generations seem to be expanding. Technology was supposed to threaten elites by making information and networks freely accessible. Yet families, those most impenetrable of secret societies, remain as strong as ever in the business world. What can the managers of non-family businesses learn from their success?

Randel Carlock and John Ward, professors at Insead and the Kellogg School of Management respectively, have studied family businesses around the world and report their findings in a new book, When Family Businesses are Best. The best family businesses excel at two things: balancing emotion and reason; and retaining a long-term perspective.

“Families are about love and emotions, and businesses are about making money and accomplishing tasks,” Prof Carlock told me from Hong Kong, where he was lecturing to groups from Asia’s many family-run businesses. “These two systems operate on completely different views of the world. So if a family is to run a business they must become ‘professionally emotional’.”

Non-family businesses can fool themselves into thinking that they only make decisions based on reason. A chief executive can initiate a merger telling the markets it makes hard financial sense, says Prof Carlock, when all along it’s about his ambition. Family businesses do not have this luxury as any confusion between reason and emotion can destroy not just the business but the family as well. Consequently, they are compelled to find ways of acting that are more emotionally mature.

The recent feud and resolution between the L’Oréal heiress Liliane Bettencourt and her daughter, Françoise, demonstrated how toxic family relationships can become when poorly mixed with business and questions of inheritance.

Profs Carlock and Ward argue that family businesses exist to achieve four kinds of goal: a financial one; a social one, linked to a family’s reputation and legacy; an emotional one, achieved only if the business strengthens rather than frays family relationships; and a spiritual one, linked to how we create meaning in our lives. “Public companies focus 99 per cent of their time on the financial goal,” says Prof Carlock. “Very few CEOs get bonuses based on their company’s reputation or how they make people feel,” he adds, unless the achievements are tied directly to financial metrics such as customer or employee retention.

Another way to think about it is to ask how many CEOs spare a moment to consider the effect of their behaviour on employees 20 or 30 years in the future. The founder of a family business may consider exactly this when he holds his newborn grandchild. Profs Carlock and Ward call this sense of long-term responsibility “stewardship”, a desire to create a business that is important to one’s family, employees, customers and community for many years to come.

One of Prof Carlock’s favourite examples is Beretta, the Italian firearms maker, which has been owned by the same family for 500 years. It is still headquartered in the Lombardy valley where it was founded and employs both traditional, local craftsmen and the latest technology to make its guns.

Similarly, Cargill, the Minneapolis-based multinational, is 90 per cent owned by descendants of the families that founded it in 1865. One of the secrets of its success has been the family’s detailed attention to governance, balancing the needs and interests of the family with outside expertise to deliver financial results.

Pictet, the family owned Swiss private bank, has clear criteria for family members wanting to join its management, partly because if it gave preference to underqualified sons and daughters, it would struggle to hire the best people to fill other positions.

The lesson from all these companies is a classic tale of constraints leading to better decisions. If your employees are your family, and your shareholders your grandparents, it forces you to make decisions of far greater emotional depth than if such ties did not exist. And such depth of consideration tends to lead to much stronger businesses over the long haul.



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