The Global Challenges Facing Family Enterprises

When family enterprises first began to be recognized as a unique type of business organization, it was widely assumed that because each enterprise represented a specific family culture and was influenced by a regional culture, they would have little in common. However as increasing numbers of family enterprises venture beyond their home markets, the integration of regional and family culture begins to play a bigger role in the development of a family enterprise. When we know more about different regional business cultures we can better understand family business cultures.

Kelin E. Gersick, a Management Fellow at the Yale School of Organization and Management and Professor Emeritus of Organizational Psychology at the California School of Professional Psychology, has for 35 years been dedicated to family business research. Based on his studies of family enterprises worldwide, Prof. Gersick has identified some common challenges that family enterprises face in an increasingly globalized business environment.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

Key Traits of Contemporary Family Enterprises Worldwide

1.The aging of a remarkable generation of wealth generators. The late 20th century saw the rise of an outstanding group of entrepreneurs who set up and developed their own businesses and built up the infrastructure for future business and economic growth. Private enterprises in China have also undergone radical changes during the past two decades. Today, intergenerational succession is imminent for many family enterprises around the world. As this remarkable generation of wealth generators grows older, they are realizing the many differences between themselves and the younger generation. Globally, family wealth often does not stay solely in the hands of the older generation but flows from the founding generation to the younger generation.

2.Unprecedented business opportunities and sources of capital in multinational markets. Ten years ago globalization was a hotly debated topic, but today it is widely accepted as an irreversible trend. The current debate is not about settling on a precise definition of globalization but rather identifying its possible effects. It has clearly played a prominent role in the development of capitalization, commercialization and e-commence. It has been responsible for continuous and radical technological innovations. For example, containerized shipping, which has grown by leaps and bounds in the past two decades, has made effective international logistics and transportation possible. Demand homogeneity is seen in various sectors. Family enterprises must follow the tide of globalization and enhance their global competitiveness in the areas of capital, HR management and leadership.

3.The transition of power from the old to the new dynasties. The world has experienced a grand transformation with the rise of new dynasties that are not from families with long-established roots. For two centuries wealth was concentrated in northern Europe, then the US, and now new centres of wealth are emerging, including Russia, India, Brazil, Indonesia and China. As the world wealth map gradually changes, family businesses around the world will also be subject to change. Chinese family enterprises are now finding their own ways to establish intercultural and intergenerational succession and transformation. Therefore, it is necessary for family business entrepreneurs to develop an international perspective and learn the latest management systems and philosophies to ensure the sustainable prosperity of their family enterprise.

The Two Most Critical Global Challenges

There are two significant differences between successful and unsuccessful family enterprises. First, a successful family enterprise often boasts more efficient development and utilization of family human capital, which in turn guarantees a smooth intergenerational succession. If the founding generation is willing to break away from long-established practices and hierarchies regarding corporate governance and leadership it has a significant impact on whether the enterprise is mining all potential sources of family talent to maximize the effectiveness of corporate operations.

Second, a successful family enterprise often boasts more effective structure and processes for governance. The success or failure of a family enterprise is determined not by its operations alone but also, and more importantly, by its governance. Effective operations can lead to enhanced corporate competitiveness and optimized resource management. However a family enterprise can stand out from others for its effectiveness and excellence in family and corporate governance, strategic planning and leadership development.

The Family Circle: Tension between the Modern and the Traditional

It appears that the greatest tension is between senior and junior members of a family enterprise, especially during the succession process. Junior family members’ new management philosophies and HR management ideas come into conflict with the old-fashioned practices of senior family members. What should they do to alleviate the tension between them, and seek the best solution for sustaining family continuity and family business prosperity?

In most Asian family enterprises, senior family members, as the founders of the business, play a decisive role in their enterprises. In most family enterprises around the world, the family expands as follows: Seniors–Siblings–Cousins.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

However, junior family members have a very different view. They advocate that every descendant of the founding family should have his/her own small family unit, which, as shown in the following diagram, is represented by an independent triangle around the family legacy. Each small family unit comprises the family descendant, along with their spouse and children. Each chooses a life style, education and career path, as well as personal interests, entirely at their own discretion. In the meantime, each small family unit also carries part of the family heritage (the blue area of each triangle). In summary, while inheriting some family traditions, the descendants also pick up many new ideas, practices and orientations.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

This is family. People may marry someone from a different culture, or they may travel to a new place to learn new things. In other words, a family is by no means a simple pyramid but rather a complex network. Some families have recognized and taken advantage of this complexity. Typically, such families are open to and embrace new perspectives, and welcome newcomers from outside of the family community. By contrast, some strongly resist any changes and firmly cling to a single structure: as a member of the family, you must act in accordance with the family traditions; otherwise, you will be expelled from the family.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

Today such old-fashioned families face huge challenges. Even family enterprises in the Middle East with a “tribe-like” structure, which used to render stringent restrictions on cross-region businesses, are finding it impossible to escape globalization. The same is true for family enterprises in the rest of the world. To achieve greater growth, they need to keep up with the times and introduce new models and patterns.

Family Networks

  • A successful family network has adequate boundaries and a sense of family identity. Family culture in China can trace its roots back to Confucian culture, which still exerts an influence on contemporary business leaders. Chinese culture and Chinese families attach great importance to balance. It is important to keep a balance between the preservation and continuity of family heritage on the one hand, and the openness to new ideas and newcomers on the other.
  • A successful family network finds authority in effective collaboration, not in autocratic hierarchies. Two or three decades have passed since the founding generation of Chinese entrepreneurs successfully established their family enterprises. However, today’s younger generation would be unable to replicate their success. Family enterprises today should develop a cooperative network that mobilizes the unique strengths of every manager in corporate operations, finance, strategy, values, external networking and family communication. It is important that family enterprises retain such managers and avoid relying on any one person to replicate the success of the senior generation.

Business Circle: Governance Demands Professionalism

The first generation entrepreneurs and enterprise founders tended to establish companies with highly centralized leadership. Most preferred a patriarchal system, made themselves the lynchpin of the organization and enjoyed sole authority in the enterprise. Today, however, centralized leadership has become a bottleneck that hinders the future development of these family enterprises; the probability that the second or third generation will have the same vision and competencies as the founding generation is quite slim.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

When decentralized authority comes into play, the situation can become more complicated. Family enterprises jointly founded by several siblings are a typical example of this. For some companies, especially those in Latin America and China, the elder brother in the family calls the shots, and a pseudo-parental relationship exists within the family. The elder brother plays the role of the father in taking care of his younger sisters and brothers. In northern Europe and the United States, sibling-partnership-based family enterprises attach much importance to sufficient egalitarianism and advocate shared authority instead of giving all power to a single person. The model of “first among equals” represents another mainstream sibling partnership in the world. In this version, family siblings assemble a leadership team to lead the family enterprise. The head of the leadership team has the final say for most decisions but doesn’t claim supreme authority over the family and the enterprise. In fact, the leadership team may reach an agreement in advance to specify the scope of authority for the head and make clear that some decisions are subject to discussion and approval by the whole team.

The governance structure of a family enterprise that has adopted a centralized style of management may be of less significance while the founding generation is in charge. However, when power is passed to the second generation, this may no longer be the case. Second-generation entrepreneurs lack the experience of having grown with their family enterprise, therefore they cannot simply hire a professional manager to handle all corporate issues nor can they expect a high degree of loyalty from all employees. Therefore, to improve the governance of their family enterprises, second-generation entrepreneurs must rely on more effective procedures and systems, such as a board of directors, family governance council or trust, to address issues such as the allocation of rights, methods for communication and cooperation among family members, and business development models.

A Blueprint for Family Heritage

1.Education and benchmarking. Today many family enterprises send junior family members to top-tier business schools to learn modern business operations and the latest management philosophies. But combining these new ideas and practices with their family traditions ends up as a big challenge. An open platform for family members to exchange knowledge and experience is needed, but it is particularly difficult for Chinese family enterprises to build. Chinese family enterprises place a strong emphasis on maintaining privacy and face. It is hard for them to take on board the successful experiences of others, let alone share their own failures. However, if family enterprises with similar backgrounds or business scopes can learn from each other and promote short-term personnel exchanges, they will realize a tremendous benefit.

2.Enhanced governance structures. A listed family enterprise may have a very complex governance structure that includes a board of directors and audit committee, as well as holding companies, trusts, councils, subsidiaries, foundations, and family offices. Each of these is closely connected with the family and needs effective governance, well-established values and development objectives. Furthermore, appropriate procedures should be developed to define the roles and authority of the board of directors, family governance council and council of owners, and to promote mutual communication among them.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

3.Increased tolerance for transparency and discussion. External and internal transparency are both needed. The older and younger generations should be encouraged to jointly brainstorm about innovative ideas, though this can be a great challenge for family enterprises. In most cases, intergenerational communication is difficult as junior family members are impatient and senior family members are reluctant to accept new ideas. If these problems can be resolved, it will enable a family enterprise to enjoy a brighter future.

Source: Prof. Kelin E. Gersick’s Speech at the 2nd China Family Heritage Forum 2013: Global Challenges to Continuity in Family Enterprise, June 1, 2013.