Relatively Speaking
Family Business Survival: Understanding the Statistics "Only 30% PDF Available Here
by Craig Aronoff
Perhaps the most quoted statistic in the world of family business is this one: 30% of family businesses make it to the second generation, 10-15% make it to the third and 3-5% make it to the fourth generation. Thousands of newspaper, magazine and journal articles have reported this statistic (although almost never cited its original source). The marketing materials used by the burgeoning family business consulting industry are rife with those numbers.
Indeed, we don’t argue with the numbers. We just have a few quibbles with how they are presented. The meaning of the statistics is hard to fathom without defining family business (when we use the numbers it means family business leadership and control, therefore excluding such successful ways of “making it” as transfer of ownership to employees, becoming part of a roll-up, cashing out to a competitor’s strategic acquisition, or even a carefully planned gradual liquidation of a business in a dying industry). Another small quibble is that, in fact, 30% make it “through” the second generation, not “to” the second generation. We know these things because the original research leading to these conclusions was conducted about fifteen years ago by our own John Ward on Illinois manufacturing companies. The numbers have been replicated globally both by research and experience.
But we have a very serious argument with how the statistics are used. A brochure we received recently from a family business consultant is typical: “Only 30% of all family businesses make it to the second generation. And a meager 5% make it to the fourth generation.” There is a judgment implied in descriptors like “only” and “meager.” Generally, people using these statistics imply, suggest or out-right state that the numbers indicate a sorry state of affairs. But how do we know whether a 30% “make it” rate is bad, good or just plain normal?
I was speaking at a family business conference in Monterey, CA over a decade ago. On the morning before the presentation I was visiting Monterey’s magnificent aquarium, (supported largely by the Packard Family’s foundation whose family business -Hewlitt-Packard - arguably failed to “make it” to the second generation). At the aquarium I learned that it takes 250,000 starfish eggs to produce one mature starfish. I wondered whether that was good, bad or just plain normal, and if there were starfish survival consultants bemoaning this horrible performance and offering their services to help fix the problem. Only a small percentage of humans live to be 100 years old. Is that percentage good or bad? And how can we judge?
One way to put family business performance in perspective is to compare what we know about family businesses with other kinds of businesses. As we have often reported previously in the Family Business Advisor, most such comparisons give the edge to family firms. So maybe their survival rate is higher too? But how to compare? Because publicly-traded companies with dispersed ownership naturally turn over share ownership, one cannot speak of a “survival” rate that includes an ownership dimension, and if we can’t include consistency of ownership across generations, we are not talking about family business. How can so many people use terms like “only” and “meager” when comparisons are impossible?
I found an opportunity for comparison by accident (as I had learned about starfish eggs). In 1996, the Dow Jones Industrial Average ( DJIA) celebrated its 100th anniversary. Its 30 companies represent the largest, best capitalized paragons of U.S. industry. And yet, only one company originally included remains on the list today.
I did some quick arithmetic. A hundred years at 25 years per generation represents four generations. About a third of family businesses survive in each generation. With 30 companies on the DJIA, and a one-third survival rate defined as continuing on the DJIA for four generations, we would predict that one would still be around. The “survival” rates of the companies comprising the DJIA and of the Family Businesses in general turns out to be the same!
The single company from the original list that survived the century is General Electric. GE is generally considered to be one of the best managed and capitalized companies in the world. Recently, its market value has been surpassed by Microsoft, but it is valued at about $360 billion, and has assets of $356 billion, over $100 billion in 1998 sales, shareholders equity of $38.9 billion and $9.3 billion in profits (for a 24.2% ROE). CEO Jack Welsh is considered among the best in the business and GE is famous for providing other major companies’ CEOs.
According to statistics, your family business has the same chance of survival as General Electric. Does that suggest that a four-generation, 3-5% survival rate is “meager”? It suggests to me that, rather than bemoaning family business survival rates, we should judge them as somewhere between normal and extraordinary.
Indeed, given the strengths of GE, I’m wondering what strengths family businesses have that allow them the same probability of survival as this admired industrial giant. What do family businesses have that most of the DJIA component companies lack?
What distinguishes family businesses, of course, is family. Adding family values, loyalty, pride, cohesiveness, meaning and all the other strengths of family to business ownership and management seems to provide sustenance not available to other enterprises. Given an economy that chews up and spits out whole industries, technology evolving at unprecedented rates, Wall Street probing every niche to “unlock” financial value, global competition, instantaneous communication which makes secrecy much more difficult to use as a competitive advantage, the alternative opportunities open to well-educated offspring of business-owning families, competition that drains margins as distribution channels are re-engineered, and the social and cultural pressures that make successful family life increasingly challenging, I believe that a 30% generational survival rate among family businesses is incredible testimony to the positive power of family when applied to business. I believe that these oft-cited statistics offer yet another reason to celebrate family businesses.
And besides, no one other than those of us who seek the repeal of death taxes has taken on the specific task of improving overall “survival rates” for family businesses. Those of us who work with and for family businesses, seek to help one family at a time to achieve its goals.
Which, oddly enough, takes me back to starfish. A story is told of a father and a daughter walking on an isolated beach at dawn. As the sun rose, they came upon a galaxy of starfish left by the tide and, for the most part, still alive. The young girl immediately began to throw the creatures back into the sea. “Don’t bother with that,” said her father. “There are too many. You can’t save them all. It won’t make any difference.”
“But I can save some of them,” she said without pausing in her work. And she didn’t even know that each starfish she saved took a quarter million eggs to produce.
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August September 2009
Family Business Boards: Demystifying the Process
By Stephanie Brun de Pontet & Jennifer Pendergast
Longtime readers of The Family Business Advisor® know how often we point to an independent board of directors as a critical ingredient to long-term success in a family business. Yet by most accounts, the vast majority of family businesses still do not have independents on their boards, and many never use the board they have in any sort of oversight or governance capacity.
Why does this pattern persist and what can we do to remedy it? First, let’s review the basics of business governance and then we’ll tackle some of the most common concerns we hear about from families when we broach the topic of setting up an independent board.
So what is governance anyway? A “governance entity” is usually a few individuals who represent the welfare of a larger group by providing oversight and broad strategic direction in a way that protects both the interests of the individuals and the group as a whole. In a business setting, a board of directors is the governing entity, providing oversight of management to ensure that the interests of ownership are protected.
In a family-controlled business, where management and ownership overlap, the interests of management are aligned with those of ownership—perhaps diminishing the need for tight oversight. While some argue that this is why a family business doesn’t need a board, this view is shortsighted. First, it is likely that over time not all owners will be involved in the management of the business, creating some possible tension between “inside” and “outside” owners that independent board directors could help alleviate. Second, while the overlap of management and ownership may reduce the need for oversight, the additional overlap of family relationships in a business context increases the emotional complexity of certain key decisions (from compensation to succession planning) that would be beneficially impacted by the presence of trusted independent board members.
Quoting the introduction of the Family Business Governance book by Aronoff and Ward: “A business that is well governed is free to work toward the highest and best objectives of business—maximizing profit, improving strategy, creating jobs, fostering employee development and serving all stakeholders, including shareholders, employees, customers, suppliers and the community.” As these are goals most business owners would hold dear, what are some of the common objections we hear to setting up an independent board?
Business owners fear that setting up a board will somehow rob them of the control and authority they enjoy in their business.
While the role of independent directors is to provide business leadership accountability that is distinct from family accountability, it is important to remember that directors in a business serve at the pleasure of the owners. Directors who have been recruited in a thoughtful manner and oriented to the needs of the business have no desire, nor any authority, to “take over” your business or even dictate how the business should be run. These individuals are usually selected for the wisdom and experience they can offer that is deemed relevant to your business’ needs. Directors are there as a resource for the chief executive—optimally, they are a sounding board to provide advice and insight when the company is faced with key strategic decisions.
Business owners may feel intimidated by the formality and accountability that come with a board.
While the work required to prepare for quarterly board meetings may feel daunting when you have never done it, it is an excellent way to set aside the necessary time and mental energy for strategic business leadership. Too often we see brilliant business people get bogged down in the details of managing their businesses, and they do not ever invest in the time needed to lead their businesses. As a result, the business fails to grow and evolve at the rate it otherwise could. An effective board of directors can help keep the business leader focused on the key strategic issues that should be his or her priority.
There are those business owners who actually want a board but feel overwhelmed by the process. Where would I begin, they wonder. Who would I ask?
While it may feel intimidating to set up a board of directors from scratch, if you break up the process into smaller steps it can feel manageable.
First, convene an owners meeting. All owners must be in alignment about what they want from a board and about their shared vision for the business (so they can clarify this for the board).
Second, determine the needs of the business going forward—are you facing a period of growth? Do you have to make a strategic change in your use of technology? Understanding the near-term needs of your business will help you determine the skill sets you want in your directors.
Third, draft a prospectus (typically about a three-to-five-page document) explaining why you are seeking outside board members, detailing a bit about the business (including the family’s involvement), explaining what you are seeking from a board and what you anticipate the time commitments to be, and clarifying compensation.
Even if you have already identified director candidates, it’s essential to complete this process. It ensures that the ownership group is on the same page concerning the purpose, role, and profile of the board. This document will help you recruit appropriate independent board candidates, and by constantly referring to it the entire ownership group will be reminded of why you are making this commitment to good governance.
Conclusion
Developing an independent board is a significant step in the life of a family business. In our experience, boards can be one of the most powerful tools in ensuring the longevity of the family business. Keys to a successful independent board include:
· Ensuring that all owners understand the role and responsibilities of the board and are ready to incorporate outside thinking into business strategy and oversight.
· Clearly specifying expectations of directors in advance of hiring them.
· Seeking directors who understand family business and have dealt with the major strategic issues your business will face.
· Committing the time and energy required to use the board effectively (prepare materials in advance, including a structured agenda, and actively facilitate the meeting to ensure input from all directors).
· Ensuring that owners provide ongoing input to the board on their vision, values, and goals for the corporation, and providing opportunities for board and owner interaction.
For more detailed information on the why’s and how’s of putting together a board, consider purchasing Family Business Governance available at www.efamilybusiness.com. Be on the lookout for an invitation to participate in the FBCG audio conference on boards scheduled for later this year.
June July 2009
Are Family Businesses Better Poised to Survive the Current Economic Crisis?
Some Hopeful Signs from the Auto Industry
Stephanie Brun de Pontent, PhD
The current economic crisis has impacted most businesses. The automotive sector has been particularly hard hit with a perfect storm of problems both old and new, which could bring down industry giants as well as countless smaller businesses that supply these companies. The stresses that North American auto manufacturers are experiencing due to the current credit crunch are coming on the heels of major sales declines in light trucks and SUVs due to a spike in fuel costs, along with a manufacturing cost structure that has long put pressure on the U.S. “Big Three.” The decline in auto sales also extends well beyond the U.S. market—companies around the globe are being impacted. While all this is largely discouraging, it may be of interest to note that among the larger players in the automotive industry, those that retain a meaningful affiliation with their founding families may be better positioned to weather this storm.
The best-known example of this is the Ford Motor Company, a publicly traded firm still largely controlled by the founding family’s descendents through super-voting shares. Though the family owns less than 3% of the outstanding stock, they control 40% of the voting rights—giving them tremendous authority on key decisions. Many institutional holders of Ford shares have taken issue with this arrangement—yet to date the family has held firm. In addition, many employees still value and respect the family legacy, providing the business with a powerful ally, which may be particularly critical to the company’s long-term survival in these turbulent times. In fact, during a recent visit by Bill Ford Jr. to a plant in Michigan, UAW Vice President Bob King was quoted as telling his people: “I hope everybody to the core of their being really appreciates Bill Ford and the Ford family, because as many other manufacturers were running away from existing facilities—running away from legacy employees, running away from urban areas, going to the South, and in many cases going overseas—Bill Ford and the Ford leadership team under his leadership decided to keep jobs in Dearborn, Mich.”
Despite this powerful endorsement, Ford remains plagued by many of the same issues as its two domestic rivals. However, it is widely acknowledged that of the three, Ford is in the “best” financial health. In fact, though it supported the government’s financial bailout, it has still elected not to take any federal money. Allan Mullaly, the current chairman, expressed confidence that the company had the financial stability to avoid bankruptcy certainly through 2010. That is not a glowing assessment, but it is certainly more than can be claimed by either Chrysler or GM.
In fact, Chrysler may soon cede 35% of its ownership to enter into a strategic alliance with a foreign auto manufacturer with important family ties in a position of relative health in this crisis. While American car companies have been fighting for survival for the past several years, Fiat Group automobiles turned a profit in 2007 for the first time since 2000, putting Fiat in a stronger position at the outset of the current downturn. Much of the credit for the turnaround of this family-owned Italian icon, producer of Fiat, Lancia, and Alfa Romeo automobiles, has gone to nonfamily CEO Sergio Marchionne and a strong team of nonfamily executives. Marchionne may seem an unlikely pick to turn around Fiat, as he grew up outside of Italy and was not involved in the industry prior to working at Fiat. Yet, Marchionne’s outsider perspective is one of the reasons cited for Fiat’s success.
When Marchionne joined the company in 2003, the business was in turmoil. Gianni Agnelli, the industrialist credited with building the company, died in 2003. When his brother Umberto died a year later, Gianni’s 28-year-old grandson John Elkann became leader of the family. Marchionne joined the Fiat board and became CEO under Elkann, following four failed CEOs in three years. With the support of the board, Marchionne shook up the Fiat culture quickly, firing 10% of the white-collar staff. Following the management changes, Marchionne focused on revamping the product line—which has helped to keep Fiat in a position of relative strength, even in these trying times. In fact, some of the new technology innovations developed under his watch are a large component of what may be driving the alliance with Chrysler.
A third example comes from a supplier to the industry. Magna International, Inc., the largest auto-parts manufacturer in Canada, still largely influenced by its legendary founder Frank Stronach, is posting major losses and anticipating a dismal 2009. However, this company is in a far better position than almost any of its rivals, in part because it has built up large cash reserves and has mostly avoided debt since the company nearly went under in the late 1980s due to excessive expansion. As with many family businesses, once burned, lesson learned—a lesson that may enable the business to emerge from this current downturn stronger than ever.
While certainly these three examples are very large companies and their size alone may offer protection, the reality is that large and small businesses are at risk today. Though some of the specific family-business advantages these companies have cultivated may differ—from strong employee loyalty to a willingness to make changes and innovate to a healthy balance sheet—the common theme to all these begins with the presence of a steady and long-term view that starts from the family. The lesson we can all learn from the struggling auto industry is that the ability to manage for the long term, a characteristic we often find in family businesses, may provide the right balance of stability and flexibility that is particularly critical for survival in these difficult times.
To Come Full Circle
By Shelly (Tarson) Wolfe
The phrase to “come full circle” is the first thought I have when thinking about my family’s business in 2009. The economic climate is tough, but for some, hard times bring opportunity. We may not recognize this at first, but the time to begin a new career, or to pursue a long desired dream, may be right now. For many it will also be the time to begin a business of their own. That was the case with my grandfather, Francesco Taurrazzo, aka “Frank Tarson” over seventy-five years ago.
An immigrant from Italy, my grandfather began our family business during the Great Depression. It began simply as one man mixing bleach in a bathtub in his home on Burnett Ave., and delivering it to housewives on the north side of Syracuse. At the time he was an out of work auto-mechanic with a wife and six kids to feed, and he was determined to provide for them. Tough times demanded hard work, and he was the quintessential entrepreneur.
My father, Bob Tarson, grew up with this work ethic, and joined his father in the business when he was very young. In his early twenties, my father added paper products to the growing list of laundry items, and the business, known as “Tarson Supply”, grew from there. My mother, Joan, joined the business when she married my father in 1954, and her ideas and skills propelled the small company even further. She added swimming pool chemicals to our product line, and set up our first tiny store in the late 1960’s, right next to where my father grew up.
Our business grew rapidly after that, and now many people recognize the name “Tarson Pool & Spas”. We have six pool stores in central New York, along with “Tarson Paper & Janitorial Supply”, the business that started it all. During the current economic climate I think about how my grandfather persevered, and turned hard times to his advantage. I know my family must now do the same to compete in a world that is so different from where he began. It is our strength as a family that has seen us through to the fourth generation, and keeps us evolving and changing with the times. I don’t think he could have predicted it, but I know my grandfather would be proud.