Trends in Family Business and Future Research
The Increasing Presence of Women in Family Business
One of the most important changes within family business has been the significant increase of women in management and ownership. In the past, in most societies, it was the norm for the business to be passed on to the oldest son (primogeniture) upon the retirement or death of the founder. Up until 20 years ago, women were not usually considered to head the family business, especially in countries that had male-dominated cultures. Only if there were no male successors were the women considered. Another barrier to women is if the family business is in an industry that is thought of as more masculine oriented (e.g., automotive parts manufacturing or construction) compared to a more feminine industry (e.g., fashion or services).
In a 2007 survey by MassMutual Financial Group, 24% of surveyed family firms in 2007 had a woman CEO, up from only 10% in 2002. Thirty-four percent of CEOs surveyed said the company’s next CEO might be a woman. According to the study, these are substantial businesses, having $26.9 million in average annual revenues, with some reporting $1 billion in sales. Moreover, the report stated that women-owned businesses were more likely to focus on succession planning, to have a 40% lower rate of family-member attrition, to be more fiscally conservative, and to carry less debt than male-owned businesses. In 1994, according to another survey, 2% of CEOs in family businesses were women. In 2005, 9.5% of family business heads were women.1
In a 2015 study by the consulting firm Ernst & Young consisting of 525 of the World’s largest and oldest family owned firms, 70% of respondents noted they were considering a woman for their next CEO, and 30% said they were strongly considering a woman for the top job. Moreover, 55% reported at least one woman on the board, and 16% of board member are women. In a positive development 22% of surveyed firms stated 22% of their top management is women, compared with only 12.9% average of all firms in general.2
Daughters are now considered to be one the most underutilized resources in family businesses. To encourage the next generation of women to be valuable members of the business, potential female successors should be nurtured by assimilation into the family firm, mentoring, sharing in important tacit knowledge, and having positive role models within the business.
Women considering entrance into their own or their family’s business have a large opportunity. The rate of women CEOs is significantly higher in family firms than nonfamily firms. Experienced and talented women who become tired of bumping up against the proverbial glass ceiling, may consider the family business. The EY survey (2015) reported that 41% of respondents said female family members have become more interested in the family business. This is a very positive development for the success of family firms.
The controlling owner of 150 plus year old Heineken NV is an example of successful woman ownership. Charlene de Carvalho-Heineken was a stay at home mother of five who had no interest in working at what would become the worlds third largest brewer. Sitting on the board since 1988, she inherited a 51% controlling interest in the firm when her father died in in 2012. She, along with her husband have replaced the CEO, and gone on an acquisition drive of other brands (Dos Equis, Bohemia, and Lagunitas). She also had the courage of conviction to turn down a buyout offer from the worlds second largest brewer SABMiller. Her goal is the same as her fathers; to allow the company to prosper and keep it independent so she can pass it on to her children. She is the wealthiest person in the Netherlands.
Gina Rinehart is Australia’s richest woman. She took her fathers bankrupt estate and built it into a large iron ore producer. She is seen as tough and often controversial, and was sued by two of her four children regarding their trust. Her business acumen is not in doubt. She now owns part of a TV station and has expanded from mining into cattle.
The reclusive Grandaughter of the In-N-Out chain of fast food restaurants in the Western United States is considered to be the youngest billionaire in the country. She inherited 50% of the privately held company when she turned 30. When she turned 35, she inherited most of the rest of the stock. The company is valued at $1.3 billion. The firm was started by her grandparents in 1948. She has vowed to keep the company private and not franchise in keeping with her grandparents values. She is very private due to two attempted abduction attempts.3
Another excellent example of women ownership comes from a Columbian manufacturing company whose patriarch chose the second born son to take over upon the founders retirement (the right of primogeniture is very common in Latin American countries). The son was chosen over the daughter who was an engineer, an MBA, and who grew up walking around the shop floor with her father since she was five years old. The son was a playboy with a taste for illicit substances, and not much interest in the business. When business declined, the father replaced the son with the very qualified daughter, and the company has been very successful as a result.
University Education
Stetson University in Florida was the first university to offer both a major and a minor in family business management. Now students are able to study family business at over 100 universities throughout the United States and around the world. There are approximately 100 university-based family business centers in the United States and over 150 throughout the world. The first centers were founded at Oregon State University and Kennesaw State University in Georgia. This was based on demand from many struggling family business owners who needed specific advice about how to manage their business, not the types of businesses that are routinely profiled in Businessweek, in Fortune magazine, or on the financial news channels. The family business centers (FBCs) have various kinds of resources, such as workshops, seminars, consulting, and conflict management tools, to help family firms navigate through the complex issues they face.
The Need for Financial Management
Many of the first-generation entrepreneurial founders did not have a formal university education. However, it is interesting that they strongly encourage their children to gain an education. A significant percentage of students at private universities come from a background of family business. In business departments, students from family businesses are estimated to make up as high as 40% of learners. The business owners may be good at marketing, sales, production, and operations, but many feel inadequate when it comes to reading financial statements and performing complex financial analysis to aid their decision making. As a result, family firm owner-managers rely on the accountant as one of their key advisors. Effective management of the business requires capable financial management and oversight. It would be ideal if a family member could provide these skills. This is another way for the succeeding generation to enter the family firm and add significant value to the business.
Many of the first-generation family business owners who are a part of the huge baby boom generation generation are retiring. They were a significantly entrepreneurial generation and started the majority of the businesses in the United States, many of which are family owned. This has fuelled a tremendous intergenerational transfer of wealth, as families attempt to have a successful succession or sell the family business. This provides a tremendous opportunity for professional service advisors, and it will create increased levels of change and risk for suppliers, who may have a large percentage of their customers with changes in ownership or management.
Family Foundations
Families in business are often philanthropic. As the family wealth grows, it eventually becomes advantageous to create a family foundation to channel the funds through and to provide ways to manage the requests, administer the funds, and assess the desired return on their social investment. Often, the family foundation stays in place long after the business has been sold. Some of the better-known and larger foundations are the Ford Family Foundation and The Rockefeller Foundation. Chick-fil-A founders Truett and Jeanette Cathy created the WinShape Foundation, and they channel their philanthropic efforts in education through college scholarships, summer camp experiences, and in foster care programs. A Cathy family member runs the foundation. The H. E. Butt Foundation is run by H. E. Butt Jr., the grandson of the founder of the Texas-based retail grocery chain that has been in business for over 100 years, with over $11 billion in sales.
Family Offices
One of the faster growing trends among family-owned businesses has been the creation of family offices. The business matures and becomes more complex, with several generations of ownership and multiple families involved, and as it grows and family members’ wealth increases to significant amounts, the need emerges to have a professional family office to take care of the needs of the families. Usually the office is encouraged by the attorney, who becomes concerned about the amount of comingling of the family’s needs with those of the business. Creation of a family office also becomes necessary when several groups of owners with varying amounts of shares, sometimes nonvoting, are involved. The need is also present when the family diversifies and becomes a group of family trusts, corporations, limited partnerships, or holding companies and has members with a variety of different investment vehicles. As the family business grows, its need for professional personal services grows. Family offices normally house the family foundation, and they are where the family often pools its wealth or investment funds for outside investments. Most often, these offices are operated by professional management.
Events such as an initial public offering, an acquisition, or a divesture may increase demands for professional services or cash. When a decision is made to sell the firm, family members often employ the family office as a way to hold the family together, maintain their leverage and power by investing as a group, access financial and legal services at no or low cost, and keep the family legacy alive. Family offices are dynamic and change as the family grows and transitions. Private wealth management and investment firms are now targeting the family office as a key customer.
A more advanced type of family office is a multifamily office (MFO). This is where several families may be under one family office. The Pitcairn family of the PPG fortune (Pittsburgh Plate Glass Company) sold their PPG holdings, and most of the 200-plus family members have stayed in business together through their Pitcairn Trust Company, a multifamily office that manages the Pitcairn family money, as well as those of other families and wealthy individuals. Through the professional wealth management professionals, the firm has been able to generate higher than average returns. The trust often invests in large publicly owned family businesses due to their long-term strategies and above-average financial results.
Family members who are not blood relatives but who are related to the family by marriage (family of attachment) are increasing: 14% of CEOs are related by marriage.4 Another interesting trend is the increase of co-CEOs to lead the family firm. Approximately 9% of family firms have two CEOs, and 3.5% have three or more CEOs.5 Co-CEO’s are rarely seen in nonfamily firms. This shows another difference between family and nonfamily firms.
Nonfamily Management
In the early years of the business, when the firm is owned and managed by the founders, family members and perhaps a few key nonfamily employees operate the firm. When the firm has grown significantly, nonfamily management begins to play an increasingly important role. In later generations, such as a third- or fourth-generation firm, family members have retained ownership yet often outsource at least some of their management to professionals. Between 10% and 15% of family firms in the United States are now managed by nonfamily executives.6 Family businesses have seen much success using a nonfamily member as an interim CEO, if a successor has not been identified or if the individual is not yet ready for the job. It can, however, be difficult to attract top-level managerial talent due to compensation issues such as stock options and the ability to pay competitive wages, compared to nonfamily firms. Most families have an aversion to issuing stock options, since this would effectively dilute family control.
Family firms have realized the need to attract highly effective and productive employees, developing mechanisms for motivation and fostering commitment, especially in smaller firms with several interested successors. In smaller family firms (usually the first and second generations), nonfamily employees have been frustrated by the amount of decision-making control exhibited by the family. There is a decision-making hierarchy: Nonfamily members are allowed to make smaller decisions in their areas of expertise, but family members usually make more important decisions.
Many family firms treat their employees better than nonfamily firms do. Employees feel they are appreciated more and have a more positive work experience at family-owned businesses. Many report feeling as if they are members of the family. This positive work environment is a tremendous source of competitive advantage. The president of a $3-million professional services firm states, “We have to be cautious of the impact to the company and our employees, since most of them have been here a long time. It’s like they’re family.”7
Using Consultants
Another trend is the creation of specialized family business consultants. Twenty years ago, the consultants were primarily former family business owners who had awareness of the issues or accountants and lawyers who had experience with family firms. With the increase in the awareness and importance of family business, with its unique differences and complexities, specialized consultants now offer a wide array of services to family firms. Usually, a generalist consultant is familiar with the family business issues of conflict, succession, and strategic planning. Following the initial meeting and an assessment of the firm, the consultant generally brings in other types of specialists to deal with specific issues. For example, family counselors are used to deal with serious interpersonal conflict. There are practices and techniques of a specialized nature that can only be used by a qualified counselor. The positive impact on the family and the business can be quite dramatic and very effective. When the situation deems, lawyers, valuation specialists, accountants, tax and estate planning specialists, business brokers, or insurance brokers may all be called.
However, family members often show a significant amount of reticence to utilize the services of a consultant. This is especially true among the first-generation family firms, who often have a paternalistic and authoritarian style of management. This inhibition is due to privacy concerns, a lack of awareness concerning how the issues are affecting other family members, and the expense of consultants.
Future Research
Because the academic study of family business is a relatively recent activity, much research work remains to provide better help and resources to family firms, as well as to separate general management type of advice from the specific and particular advice needed to effectively operate a family-owned firm. The most pressing need in family business research is to arrive at an agreed definition of a family business. Then, when researchers carry out studies, the criteria for entrance into the study will be similar and comparable. There is a significant difference between a large business (e.g., Ford or Wal-Mart) and the much more common variety (e.g., small family-owned dry cleaners or local hardware stores). A uniform definition would enable comparison of apples to apples, instead of apples to oranges. The benefit will be more accurate and useful information to practitioners who consult with family firms and to the family firms themselves in the form of recommendations and best practices. A generally agreed-on definition of family business would allow researchers to study important issues and arrive at conclusions with some finality, such as studying the financial performance of family firms and comparing them with nonfamily firms.
Since the domain of family business research is relatively recent, there is considerable research needed in many more areas. Succession has been well studied, yet there are numerous significant topics that have not been studied in a well-controlled and scholarly manner. Much of the early research in the area was conducted as single case studies and often by consultants. Understudied areas include governance, wealth management, the family office, and the intersection of family firms and entrepreneurship.
Good research requires asking the right questions and designing the proper study with a correct utilization of the full menu of research methodologies (both qualitative and quantitative) in order to arrive at generalizable research. The research domain would benefit from the full spectrum of research methods, including empirical research.
The domain would also benefit by being more interdisciplinary. Great advances in knowledge often happen when we expand our research to other fields of study. Most of what is published in family business research has been in business/management and entrepreneurship. For example, a small amount of historians have researched the history of family business and made a beneficial impact. It would be helpful to work with psychologists, sociologists, anthropologists, economists, family studies, and finance and accounting scholars.
Decision Making
If family business members have a better understanding of their own decision-making abilities (or lack thereof) and understand the barriers they face in decision making, the potential exists for improvement in decision-making effectiveness. Decision making is another of the major areas of opportunity for family-owned businesses, along with instituting a board and creating a strategic plan.
Studying the Generations
It will be beneficial for future researchers, practitioners, and family businesses themselves to have a better understanding of the differences among the generations involved in a family business. Each generation makes decisions differently based on their unique goals and objectives. More research should be performed in this area, as a second-generation firm is seen to be different from a first-generation firm or a third-generation firm. As an example, it is vitally important to study the second-generation population because of its prevalence within the family business, the low succession rate from the first generation to the second generation, and the even lower succession rate from the second generation to the third generation. According to Ernst & Young consulting, almost three quarters of family businesses in the Middle East are owned and managed by the second generation and one-fifth are third generation. This is good news for family firms everywhere. More study needs to be done to uncover what the Middle East families are doing to account for the higher rates of intergenerational succession.8
Co-CEOs
Co-chief executive officers (co-CEOs) are family business leaders who share the responsibility and leadership of the firm with one other member. According to the American Family Business Survey,9 an arrangement such as this has become more common in family businesses, with 12.5% of survey respondents reporting co-CEOs. A significant proportion (35.1%) of respondents forecasted that they would have co-CEOs in the next generation. This type of responsibility and power-sharing role is practically unheard of in nonfamily firms. This may be an excellent way to enable a successful succession, foster teamwork, and avoid the loss of any key family members who may have not been chosen for the top job. A close relation to co-CEOs is the concept of a copreneur, which is a (usually married) couple who founded and manages a business together.
Some family firms, when faced with equally qualified candidates for leadership, have instituted a creative solution: a revolving office that may last for a year or two in which the family members revolve in and out of the CEO position. This arrangement has not been well studied by academics; most information is self-reported or anecdotal in nature. However, if workable, it can be an excellent way to avoid family conflict and to prevent family members from leaving the firm.