Separating Myth from the Reality of Family Business

1. Separating Myth from the Reality of Family Business 717 1797 Joseph H. Astrachan, Ph.D. Executive Director, Cox Family Enterprise Center Research Fellow, Loyola University Chicago Wachovia Eminent Scholar Chair of Family Business 1526 1637 Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

2. Definition • Any business where the family has effective control over the strategic direction of the business; and where • The business contributes significantly to the family’s wealth, income, or identity Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

3. Best practices research ain’t! • Bad methods • Bad samples • Follow at your own risk • Use as a source of ideas, not more • As valid as a source of ideas as worst practices research Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2008

4. The world: Some basic stats • 60 to 96% of all businesses around the world • 45 to 85% of GDP world-wide • 45 to 80% of employment • No data on any North African country Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

5. What are your chances? • 30% Survive per generation • Fewer than 3% survive into the fourth generation Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

6. When to worry Post- Succession ROA 0 14 28 years CEO Tenure Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

7. A premise Family members are almost never fighting about what they say they are. Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

8. Virtuous or vicious cycle Ownership Unity Business Returns Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

9. Myth • Manage your family like of family and your business like a business • Don’t mix family and business • Nepotism is always bad • A succession plan assures successful succession • To date, no research supports these assertions! • However, the importance of family harmony as a succession moderator has been found Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

10. The science of succession: Three keys Research on more than 18,000 companies says: • Board of Directors • Strategic Planning • Family Meetings Diet Exercise Don’t Smoke Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

11. Board research • 3-6 meetings per year is optimal • Boards in less than 50% cases meet more than once or twice a year • 85% of CEO’s who put a board in place said it was their single best management decision • Lack of CEO chairman duality increases performance • Two outsiders to each family member improves performance • Outsides increase financial value (but occupation of board member has no effect) • Board diversity reduces likelihood of strategic change • Outside directors decrease risk of internal fraud Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

12. Culture and governance • History and culture determine what governance will work • Internal legitimacy (must conform to internal expectations, may not work if it violates those too much) • When internal culture is violated the board will have little or no real influence or power Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

13. Myth • Family should spend three years outside before joining the business • The classic successor development and selection model works • Neither are supported, the is research that says the second can be quite wrong • However, a close relationship does enhance successor preparation Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

14. Adult development research Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

15. Myth • Rigid structures are essential • Family councils • Committees • Constitutions • Legal structures • Any inflexible plan • Non are fully supported, for performance or survival Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

16. Earthquake proofing • A family business is like a complex building • Planning for shocks only works if shock absorbers are in place • Systems, mechanisms, and a culture that promotes appropriate flexibility is key • Rapid evolution is enhanced by communication, commitment, and deep, strong, healthy family relationships Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

17. Strategic planning research • Planning is more important than plan • Unambiguous goals are important • Clear measure of success is essential • Culture of commitment to business increases strategic flexibility • ability to pursue new opportunities and respond to threats • Stewardship-oriented organizational culture is best Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

18. Cohesion mechanisms

19. Family emotional • Regular meetings • Family vacations • Family name and history • Interesting personalities • Philanthropic activities • Shared non-financial assets with intrinsic meaning • Homestead, farm, vacation homes, etc. • Birthday calendars • Family newsletter and intranet Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

20. Family financial • Money • Trust and other family distributions, allowances, gifts • Shared or individually provided non-financial assets with nominal non-financial value • Cars, boats, etc • Inheritances • Intra-family lending • Other rules about money in the family • Elevated life style • Educational funds • Healthcare safety net Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

21. Business financial • Dividends • Shareholder agreements • Board of directors • Investing opportunities • Business opportunities • Salaries in excess of market wages • Perks in excess of market Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

22. Business emotional • Quality products • Business and other education • Business meetings • shareholder, informational, strategic planning • Archives, museums, and other artifacts • Written or video history • Plant tours and internships • Corporate Social Responsibility • Philanthropy • Name enhancement in community Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

23. Fair process • Why policies don’t often work • Family constitution research • Attributes needed for decisions to be considered “fair” (Blondel & van der Hayden) • Culture • History • Communication • Voice and involvement Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

24. IPO research • Performance (Astrachan & McConaughy) • Debt as accountability (McConaughy) • Importance of ancillary benefits (Marchisio, Ravasi & Mazzola) • Credibility, continuity, networks Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

25. Stewardship • Ownership is U-shaped for expansion • Family involvement predicts more international expansion • Collective action more important than self-interested behavior • Maximize family wealth • Psychological ownership • Protect competitive positions • Balance with family conflict from risk based decisions Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

26. Serial business families • Families can often organize themselves to have different businesses over many generations (Kenyon-Rouvinez) • Family unity becomes an important family value • Enterprise becomes a second important family value • The transmission of these and other family values are crucial Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010

27. Non-family CEOs • Key findings: • Cultural fit • Statesmanship, build family unity do not divide and conquer • Integrated into company thoughtfully • Great communication skills or someone in that role • Appropriate governance and boundaries in place • Has clear authority and goals • Accept “non-family” • Low ego needs Distribution and replication of this material is strictly forbidden © Joe Astrachan, 2010