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Keys to sustaining a family enterprise

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The nature of the governance structurehas a key influence on the company’slong-term prospects.

Why do some families have a seemingly uncanny ability to sustain their wealth and enterprise across multiple generations? What impact does the higher incidence of entrepreneurial orientation from one generation to the next and effective governance systems have on the overall sustainability of a family business and family wealth? How do families perceive the importance of these factors?

Juan Roure and Juan Luis Segurado of the Instituto de Estudios Superiores de la Empresa at the University of Navarra in Spain, in collaboration with Kirby Rosplock of Genspring Family Offices and Dianne H.B. Welsh of the University of North Carolina at Greensboro, explore these questions in “Sustaining the Family Enterprise: The Intersection of the Family Business and the Family Office,” a report published by Genspring. The authors explore sustainability, entrepreneurial orientation and governance practices of families who have or have had a family business and family office. While entrepreneurial orientation and governance are vital for sustainability, their findings suggest, families seem to have different attitudes about their businesses and their family offices.

Most respondents consider it more important to sustain the family wealth for posterity than for business, 83 per cent to 60 per cent. While the business creates an engine for growth and prosperity, preserving wealth provides a safety net, capital to fund future business ventures and to pay for family members’ education and careers, as well as the opportunity to focus on other activities such as philanthropy. However, most families agree that the following three factors contribute to sustainability in general:

Entrepreneurial values and

work ethic

While wealth can be lost, a family with a deep-rooted entrepreneurial tradition and strong work ethic can bounce back from hardship to create a new business.

Family cohesion over time

Families identify the importance of keeping the family united and building consensus to foster harmony, mitigate conflict and enhance the likelihood of staying together and/or managing the family wealth.

Strong family identity

This encompasses a sense of purpose and mission, as well as a strong stewardship principle.

Families are more inclined to take risks, be proactive, be innovative and act competitively in their family business than in their family office. Indeed, many respondents point to entrepreneurial orientation in the family business as indispensable to grow, compete and adapt to the ever-changing business environment, thus contributing to sustainability over time.

Family offices, the authors write, tend to be less entrepreneurial than the business. As such, in family offices ‘‘change is more incremental and gradual,’’ with ‘‘a greater priority to preserving wealth rather than growing it.’’

Together with entrepreneurial orientation, governance emerges as a contributing factor to sustainability. Governance practices provide deeper insight into the complexity and different approaches within the family businesses. Some families desire to formalise and codify when, how and by whom decisions are made through structures such as family constitutions, family councils and boards of directors. Other families prefer to limit rules and structures to afford flexibility and freedom.

The authors conclude that, when it comes to governance, families need to strike a balance between structure and flexibility as the family grows and evolves in complexity. Such balance may enhance their ability to sustain the enterprise.

They seek to identify which types of family and business governance mechanisms — for example, boards, councils or committees — are most widely adopted by family enterprises. They also explore whether families perceive governance as influential to sustainability.

The family enterprises in this study implement governance in their businesses and family offices in the following ways: Of all the family businesses surveyed, 66 per cent have a board or advisory board, 6 per cent use audit committees and another 6 per cent use investment committees. Forty-eight per cent have a board or advisory board for their family office, 44 per cent use family councils and 32 per cent have an investment-management committee. More than a quarter of the family businesses have no formal governance structure at all, with 20 per cent of family offices having no governance in place.

With regard to respondents’ perception of how governance contributes to sustainability, 49 per cent believe that governance practices affect the sustainability of the business more than managing the family’s wealth, which was chosen by 32 per cent.

While the reality of family enterprises and family offices is incredibly varied and complex, the authors highlight some factors and best practices on how family enterprises may achieve sustainability. Approximately half of respondents perceive the role of entrepreneurial orientation as paramount to sustain their business, strengthening a family’s ability to adapt, innovate and compete.

Family offices tend to assume change on a more gradual basis, through the exploration of new investments and business opportunities. As such, respondents perceive them as being more focused on wealth preservation than on wealth growth. At the same time, 49 per cent think that governance structures help families make strategic and timely decisions that affect their futures more than managing the family’s wealth, which logged 32 per cent.

Many family businesses today are a far cry from their modest origins. Understanding the factors that have allowed them to succeed, evolve and thrive for generations is an appealing lesson in the context of today’s uncertain business environment.

© 2013 Instituto de Estudios Superiores de la Empresa, IESE Universidad de Navarra

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