Dare to Be Different

Building credibility and trust with family members is a process that begins well before the succession of the founder, as the successor demonstrates consistency in actions and words. Successors who have problems with this early in life might have to work hard to rebuild that trust. Jean Moran's pathway to credibility at LMI Packaging Solutions was not easy. Jean was handpicked by her father, Chester Sykes, to lead the business he had founded in 1967, Label Makers, Inc. Nevertheless, she had to establish her credibility with siblings who had varying levels of interest in and commitment to the company. Jean didn't fully comprehend it at the time, but every time she set herself apart from her siblings, she deepened her sense of who she was. Every time Jean went to work with her father, she differentiated herself from her siblings and potential to be the successor.

Jean had no idea that her reward for acting responsibly would one day be leadership of the family business, and that the family was already testing her physical, emotional, and intellectual capacity. The tests continued until she faced the ultimate test of her credibility: Do the tough things that were needed for the longevity of the business and still keep the welfare of the family front and center.

Throughout the book, I've argued that it's the differentiated leader who is most likely to lead the family business successfully. In this instance, an undifferentiated successor might have said, “I can't fire my brother. It will cause too much turmoil in the family.” But the differentiated successor discerns when to sacrifice for the sake of the larger objectives of the family enterprise. The business and family legacy won't survive if the hard family decisions aren't made. Too often, successors resist holding siblings accountable, fearing family friction. Appearances may reflect unity, but the unity is a myth, built on the premise of avoidance: We won't talk about anything that puts us into conflict. We won't talk about difficult things. The undifferentiated leader tends to respond instinctively to familial emotional outbursts. He or she may seek to placate family members rather than stand in the presence of the conflicted family emotion and do what's right for the family and the business with empathy. In addition, she becomes a participant in the family drama, rather than leading the process of attending to the underlying emotions of the family. For example, when a family shareholder directs emotionally charged criticism at the CEO, the undifferentiated response will be to either lash back or ignore it. The differentiated response is thoughtful engagement that seeks to understand the perceptions behind the emotion as well as address the relationship. “Let's have a conversation about this, because I would like to understand this. If there is something important for me to know, I need to learn it.”

This differentiated response takes humility, character, and a strong sense of self, what I've called “internal credibility.” Without that, a leader reacts out of fear and insecurity. She fears she won't be liked. She fears critique. She fears she will make the wrong decision. She fears the family crisis will become all-consuming and distract from the daily operations. Successful leadership in a family business depends on an emotionally neutral approach to family crises. That is difficult to do.

Jean Moran did not shrink from confrontation. This demanded managing her emotions so she could manage the ensuing familial maelstrom of emotions. Jean presented her siblings, who had stock in the company but were inactive in the business, with a plan to buy them out. Rather than acquiesce, they unleashed their true feelings: “This business would be doing so much better if our husbands were running it.”

“It was good…all this stuff they had never told me,” Jean says, “but all this ugliness was on the table, and I walked into the adjacent room and cried like I had never cried before.” Through tears came revelation. “I thought I was doing it all for my family. I wasn't doing it for them. I was doing it for my need to be loved.” She had created her own mythology that she could make her siblings love her through her work. Then it hit her. She didn't need to earn her family's love. She already had it. The epiphany led to freedom. No longer did she lead to be loved; she did what was best for the organization as well as the family. “Everything turned around that day: my life, the business, my relationship with the family.”

Heart and Soul

“If you love them you stay in the game. They're family. You never walk away.” The seminal advice Jean received from her mother underscores the reason family businesses achieve success over the long term.

Family businesses are stereotyped as old-fashioned, rife with conflict, lacking scale, and burdened by backward thinking. The prevailing bias is that they can only do well when they behave like public companies. However, the opposite is true. Family businesses comprise approximately 75 percent of all American businesses and account for over half of American jobs, and produce 78 percent of all new jobs.¹ They make up 35 to 40 percent of the Fortune 500 and S&P 500. Family businesses have a myriad of areas where they outperform public companies, including higher financial performance, lower risk profiles, longer survival rates, and higher human and capital investments.²

The same holds true in Europe. Research by Herman Simon in his book Hidden Champions showed that of 500 mid-sized European firms that dominated their markets, 75 percent were family-owned businesses. These businesses have revenues below $4 billion and a low level of public awareness, but they were number one, two, or three in the world in their market, or they were number one on their continent in market share.

Why is this?

They are close to their customers so there are high switching costs (the costs of switching to a competing company); they tend to compete on quality, total cost of ownership of the product, high performance, and consultation with the customer; they earn their leadership in the market through performance rather than pricing.³ As a result, family businesses have higher margins of ROE, ROS, & ROA.⁴

Miller and Lebreton-Miller in their book Managing for the Long Run cite that the primary reason family businesses are successful is they have continuity as a goal and are willing to sacrifice for it.⁵ Because they are invested in a mission, they relentlessly pursue their core capabilities, exercise stewardship, and foster lengthy executive tenure. They have a connective tissue that can't easily be severed. Intently focused on building community, family businesses have a tribal mentality, where loyalty, duty, and obligation (both to the family and to the mission of the family business) connects the enterprise to a purpose greater than profit. The tribal mindset does not preclude an outward focus on being good neighbors and partners. Family businesses are highly respected in their communities. This is true of “mom and pop” businesses and of behemoths like Nordstroms and Ford, where the family ties, albeit diffused, still carry influence. Families who work together toward a legacy tend to stay together—and their businesses tend to thrive. The glue to all of this is the family, which the generative successors must handle carefully. Successful successors cultivate this.

For most family business shareholders I meet, dividends are a piece of what they expect out of the business. However, they are more connected to the legacy and power of what the family does for the community, its employees, and its customers. With legacy as the focus, family members tend to be more committed to the success of the business and less concerned about dividends.

Family businesses most often take the long view. They are patient, willing to invest for the long term, and remain steadfast during economic downturns.⁶ They have a broader perspective, have a more comprehensive approach to prosperity, and honor values beyond earning money. They also may take a more personal approach to business based on trust.

“We've known since the 1930s,” says Bella Hoare, a partner and one of the eleventh-generation owner-managers at C. Hoare & Co. bank, “that we're the last deposit-taking banks from the era, standing as a family business; we've had 80 years of being unique.” Bella's cousin, Alexander Hoare, adds, “And we are the most profitable bank in the country.” When most European banks were troubled, they made a fortune, with a return on equity of about 10 percent. The partners of C. Hoare understand a basic principle that is the lodestar for successful family businesses: Businesses are the apparatus for economic transactions, but they don't drive the wealth; people do.

One of the bank's more charming rituals occurs every summer, when Alexander Hoare lays out the bank's entire balance sheet on one sheet of paper and sends it out, with a personal note, to all the bank's customers. Such service reflects the bank's corporate values, “which are derived from our personal values,” says Alex, “and are unique in this industry. Instead of trying to maximize our profits, we treat customers as we wish to be treated; we have seven partners and treat our charitable trust as an eighth partner, so we can give away 10 percent of our net profits.”

The values carry through in unique ways. Bank staff members found a nanny for a customer within 24 hours; quickly wired cash to a customer's daughter stranded in remote South America; and helped deliver a calf. Because they know each customer personally (or, at least, are familiar with the customer's finances), the Hoare cousins personally approve (or turn down) every major loan to a client, delivering their decision within hours of a request. While C. Hoare & Co. provides the same retail clearing services as the larger clearing banks, it competes on dimensions where it has the clear advantage: relationships, flexibility, care, independence, and speed of service.

Successful family businesses recognize that the family—not the business—is the golden goose. Many organizations flip this model, but not C. Hoare & Co. It has a large and prolific family golden goose: “Because we are in the eleventh generation, we have over two hundred living cousins in our database. Our normal hiring procedure is to find the best cousin around at the time.” Seven Hoare cousins sit on the partners' board of the bank, each “enjoying” unlimited personal liability, which means they are personally on the hook for every asset the bank holds, right down to their cufflinks. Family partners share a mutual and sacrificial commitment that locks them into the family's fortune (or fate). Each partner is “all in,” entirely invested in the family business and enjoying its success.

Family Assets

Author and business management consultant Peter Drucker famously compared profit to oxygen: “If you don't have enough of it, your out of the game. But if you think your life is about breathing, you are really missing something.” Family is what money can't buy in the family business; family gives the business a reason to live, and a joie de vivre. When your family name and legacy is at stake, then there is a greater sense of responsibility for its future.

Mike McKee, CEO of McKee Foods, maker of Little Debbie's snack cakes, calls on the moral capital of his family business to sustain the family legacy: “When a family's values, virtues, norms, practices and identities mesh well with evolved psychological mechanisms.” To put it more simply, Mike says, “A strong moral capital is when everyone in the business sings from the same songbook. They know the values, believe in them, and live by them. As a result, cooperation trumps selfishness, employees are more engaged, change is met with speed and agility, talent is retained, and the business develops a strong offensive against intruders.”

Family businesses can be nimble and demonstrate strength in the face of market downturns (contrary to the popular misconception that they are weakened by nepotism and tolerate perpetuate incompetence). They have the advantage of being able to more quickly seize opportunity, and reinvent themselves with each new generation. But this is largely predicated on the unity of the family.

Research by Pieper and Astrachan⁷ has shown that, for long-standing family businesses like Taittinger Champagne and C. Hoare & Co., there are four main aspects to the sense of cohesion of the family that keep them together across generations. The companies in their study survived for over 200 years and continued to thrive (often in industries different than the original). They do so by remaining simultaneously attentive to both the financial as well as the emotional well-being of the business and family members.

Specifically, there are four driving forces behind their success: business financial (the financial success of the business); family financial (the use of family financial resources to help each other); business emotional (the sense of pride, identity, and status that family members derive from being associated with the business); and family emotional (the basic sense of connection members have to each other).

While Pieper and Astrachan found that all four of these components are prevalent among family businesses that survive 200+ years, the most interesting of their findings is that financial variables alone are insufficient for the sustenance of a family business across multiple generations. In order to persist from generation to generation, family members must be connected to each other and to a sense of pride in their economic enterprise. They must embrace what it means for the stakeholders. Financial markers, while basic, alone cannot provide longevity. The intangibles that do not appear on a balance sheet—pride, loyalty, and sacrifice—often keep the family business in the black. Over the generations, these families have learned to protect the golden goose. If the family is the economic engine of its business, trust is the family's currency.

Successors who protect the business at all costs (and sacrifice family relationships in the process) lose sight of the next generation. They operate out of a fear of the family. Certainly, the business is important, but what's going to prevail—the family or the business? Protecting the business at all costs, a successor risks losing the family, and then what does a successor really have? Successful generational family businesses have learned that protecting the business at all costs is a Pyrrhic victory that detracts from the family legacy.

I'm obviously not saying that successors shouldn't invest in the business. Without reinvesting in the company, the company (and the legacy) dies. But a hyper-focus on investment without consideration of the family members whose assets are being invested can lead to diminishing return. Sam Schwab, a CEO of a substantial apparel and retail firm, recently spoke with me about the complexity of not sacrificing the family for business gains. He says of a new business venture: “I could have asserted that I should have a much more sizable ownership stake based on my role and contribution. I spearheaded the growth and new businesses we entered. But I looked down the line and thought, ‘What would the impact be on my relationship with my siblings and cousins 20 years from now? What model would I be setting for the relationship between my own children when they grew?’ It wasn't worth the additional money to jeopardize those relationships moving forward. I was confident and preferred that collectively we could grow and succeed together.”

Not all family business CEOs think like Sam Schwab. I am aware of a $500 million business that over the last 50 years has reinvested all its profits into the business. Share values have gone up significantly, but members have no liquidity; they are paper rich and cash poor. One family member took a second job at an accounting firm over Christmas so that they could afford to buy gifts for her children. I can only imagine the resentment that built and the impact that would have on their relationships with family members working for the business.

As startling as this scenario sounds, this mentality is prevalent among family businesses that continue to perpetuate a particular aspect of the myth of the founder: protect the business and increase its financial capital at all costs, even at the expense of the family's well-being. They are not able to separate themselves from the business and its success. Bill Wrigley Sr. could never stop working because The Wrigley Company was his life; the business consumed him, and he carried its burden, up to 18 briefcases full of its weight, wherever he went. When it comes to the businesses they create, many family business leaders have a singular mindset: “It's me against the world, and my business success has to prove my worth against all competitors.” Such a competitive mindset reflects the American ethos of the rugged individualist. It is undoubtedly helpful in the founding of a business. But for a business to succeed through generations, this mindset must evolve into a more collaborative approach that values family morale and buy-in as much as financials.

The successor needs to make sure that the return on investment is both financial and emotional. The greater the emotional return, the lower the pressure on the financial return and the more the family can take the long-term view. The challenge for the successor is to hang on to the values passed on through the myth while stepping out of the shadow of the founder. It is then that the successor will be most authentic to him- or herself and to those whom he or she leads.

How Competition Can Cripple

When the competitive spirit becomes too much a part of the family culture, it can cripple a business. The founder of one family business I studied had his two sons compete to run and own the business (five years each) to show who was the better candidate. To this day, they have not been able to completely repair the damage. Apart from the antagonism it creates, this kind of “may the best man win” mentality is overly simplistic. It fails to factor in a myriad of important variables, such as luck and timing. It fails to realize that the long-term success of the family enterprise will require these brothers to work together and compromise.

Most family business cultures are not this blatantly competitive, but leaders must be vigilant against the development of an “us versus them” mentality, especially among successors and cousins who haven't spent a lifetime collaborating and negotiating. This mentality can show up in a variety of different ways. For instance, a family branch can compete against another family branch; or family members working within the family business can compete with family members working outside the family business. Competition becomes especially gnarly when family members become hyper-focused on what is good for the individual—and not what's good for the whole. A healthy family can balance these competing priorities.

Unhealthy competitiveness (when members focus on “I” versus “we”) tends to surface when a business values financial success above all else, and money becomes the only measure of success. A telltale sign of poor health in a family business is when the talk excessively revolves around money and its distribution. When relationships are strained or nonexistent, financial capital fills the vacuum and relationships disintegrate. Family members in the business may feel that shareholders outside the business only want money and more of it. Shareholders may perceive that the family members operating the business are living on easy street, enjoying the good life. Preoccupation with money and perceptions surrounding it creates an antagonistic environment. When this happens, the successor has significant work to do to build a sense of connection and trust among family members.

Sharing leadership with siblings, cousins, and other distant relatives demands creating commonality. Ivan Lansberg describes the process:

Although the myth of the founder helps establish this shared dream, it most often is identified, developed, and passed on through conversation. One successor who stepped into a family business rife with strife, between the family members working for the business and those who did not, sat down with each shareholder individually and had a conversation about the problem. He said, “The past is the past. We can't change it. But what can we do moving forward?” In attempting to find out what was important to each family shareholder, he built a shared vision for the family moving forward. This successor knew that successfully running the day-to-day operations of the business was not enough. To build a foundation for future generations, he needed to build family unity.

From the Founder to the Family

The true heroes of family businesses are those who diffuse their success among the family base and create businesses with momentum, which change and adapt and have impact on their employees as well as their communities.

The challenge for successors is to shift the focus and the base of the business from the founder to the family. For some successors, the groundwork for this model is already established. Massimo Ferragamo's mother translated her iconic husband's singular vision and talent to her children in such a way that all of them felt that they were carrying his work and his spirit forward. Massimo says, “She was able to establish a harmony between the business [my father built] and all of us that has become the foundation of our family.” As his mother led them, so Massimo, the youngest of the Ferragamo siblings, seeks to lead, “not by authority but by example.”

Working with the family is the ongoing challenge for the leader of any family business. It's often messy, but the family business can thrive when the family leader cares for the true golden goose, the family. He or she must govern the family as intentionally as running the business itself. Lansberg writes, “The greatest challenge any newly anointed CEO faces is turning stakeholders into followers…He or she must cope with family members, especially siblings and cousins whose support may be vital to control the enterprise…”⁹ The process of feeding the family is, in essence, caring for the relationship: “I need to build a relationship with you so that I can understand what is important to you and build a shared vision for the family moving forward.” Leaders are “weavers of a shared dream” so that a family can be unified about where they are going and what they are doing with their assets. When they have this shared dream, they can do amazing things.

The fear of many successors is that they will get sucked into the black hole of family needs, away from the day-to-day business. If a family business doesn't have strong governance and the right advisors, this can happen. But the most successful successors make sure that family practices, governance, and advisors are in place to pay attention to the needs of the family. When the family is attended to, it will operate so well as a unit that the successor can be totally focused on what the business needs.

Leaders need help. If a leader tries to run the business and govern the family, he or she will exhaust him- or herself and do both poorly. A successor who has differentiated him- or herself from the founder knows he or she doesn't need to lead everything, especially not the family. He or she just has to believe that the family is important enough to pay attention to it, devote resources to it, and raise up other leaders to attend to it. A differentiated leader prioritizes care of the family and facilitates the process of family care.

When Jean Moran fired her brother and was on the verge of a confrontation with her brother-in-law for leadership of LMI Packaging Solutions, she wisely suggested hiring outside consultants to clarify the issues and suggest a solution. Doing so led to an outcome that allowed everyone to win. “We got it right this time,” Jean said.

Family governance is not triage, a reaction to family crisis. Rather, leaders provide primary care for the family and ensure its health by putting practices into place that minimize crisis and create opportunities for the family and the business. It's a synergy, with the family working so well that a leader can focus on what the business needs. Dave Juday of Ideal Industries, along with his daughter Meghan, the family council chair and a group of dedicated family leaders, convinced family members to take a share of the dividends and put them in a fund for shareholder development. A portion of every dividend declared goes into this fund, which family members can use for continuing education to help become better stewards of the family business legacy. For example, if a family member aspires to a role of leadership in the family or on the board, he or she will create an Individual Development plan, from which specific action steps will be identified. Once the plan is approved by the group, activities in pursuit of this plan will be funded. It's not a giveaway, and because the dividends fund it, it does not take away from the company. Perhaps the strongest family value is valuing the family, because doing so pays huge dividends for the company.

Family practice boils down to good communication. As Jean Moran simply puts it, “You stay put and you keep talking.” When the talking gets difficult, when ideas and personalities conflict, it's time bring in coaches so that all the family, as Mike McKee says, “sings from the same songbook.” The larger the family, the more complex family conversations become, which is why the practice of conversations must be developed. The practice of conversation helps families prepare for the tough conversations before they arise.

Clarity in communication, open emotional expression, and collaborative problem solving are some of the characteristics of a healthy family—what Froma Walsh defines as “family resilience.” According to Walsh, resilience involves a good communication process along with two other domains of family functioning: belief systems and organizational patterns.¹⁰

When differentiated successors transition the business culture from being egocentric to system-centric, they build resilience into the family. Egocentric mythologies cannot build a strong base for family functioning, because they tend to foster an ideology centered on one powerful individual who maintains tight control of the empire. The hero is strong and the family is weak.

In contrast to this, a strong family belief system serves as a credo and the source of its resilience—the heart and soul. According to Walsh, “Resilience is fostered by shared beliefs that increase the options for effective functioning, problem resolution, healing and growth.” A belief system binds the family together while liberating the creative energies of its individuals. These beliefs unify the family in times of suffering when they influence the family view of and approach to crisis.

The organizational patterns of a resilient family are not the rigid, bureaucratic, and hierarchical grids typical of an egocentric system. Resilient family businesses are responsive and flexible, its members connected, with fluid roles, open feedback loops, and direct communication. They can quickly utilize social and economic resources at their disposal. To be resilient is to move forward the family legacy—and not the myth of the founder.