Family Business Rules

The 21st century business environment is begging for family-owned business, far more than the 20th century.  My client base has always included family owned and operated real estate companies, but recently it has accelerated.  Hence, I have been diving into the unique nature of the family run business.  My targeted reading and research have caused me to consider the broad shifts in the business world needed and coming at us.  One particularly relevant idea from a 2016 article in the Harvard Business Review by Josh Baron caught my attention. We are all witnessing the shift in the business environment, and my own consulting experience, has shown how family run businesses enjoy unique strengths relevant to these challenges.

In the 20th century enterprise thrived on scale, grow bigger faster, get more efficient, find cheaper resources (especially labor) and automate.  In essence, adding complexity reliant on robust systems and processes.  Today, we are accelerating knowledge driven models and businesses.  The key is more about quality than quantity.  Longer term investing and planning is required, as is a focus on adaptability and resilience.  Family run companies generally provide unique environments that are far more welcoming to that new focus.  Consider the following clear strengths of family owned and managed businesses:

1.     In the last century capital was required to build scale and complexity.  In today’s world of a knowledge focus business, we need patient capital that will allow the opportunities of knowledge-based investments to bloom.  We need to shift capital from thinking in quarters to thinking in generations. That adjustment comes from moving away from rigid financial measures to more subjective features that will encourage, and measure, the development of enterprise resilience and value.  Family business offers “captive capital”.  The managers are the owners, they can manage expectations regarding distributions to allow longer-term investment and patience.

2.     The role of organizational governance is also evolving. In larger companies’ decisions are generally delegated to managers who are not significant owners.  Even with compensation plans coordinating with ownership interests, it is not the same as an owner.  In a family business managers and owners are the same and owners are more fully engaged. 

3.     Another governance advantage for family businesses lies in the evolution of business challenges from primarily complex systems and processes to rapid response to the frequent and quick changes in both the specific markets we operate in and the broader world.  In larger, especially publicly owned organizations, the gap between day-to-day decisions and ownership generally results in slower, more bureaucratic and mistake avoidance decision making.  The business world keeps speeding up and getting more complex.  The opportunity for nimble leadership found in family owned and operated companies is far more important in that environment. 

4.     The human resource and recruiting environment of the past has already changed dramatically.  We are moving from hiring a large number of people based simply on paying competitive wages and benefits to recruiting targeted team members that want purpose, a mission and clear values.  Family run enterprises typically reflect the values of the founders or current family leaders.   Those values and the business purpose, beyond simply making more money, can be more clearly defined and practiced every day for it truly is personal.

5.     Today, with ubiquitous media, especially social media, one mistake by a business can go viral harming all stakeholders.  With family ownership the brand or reputation risk may be the same, but because it is far more personal (after all it is family) more attention and care are generally applied, mitigating the risk. 

While not all family businesses enjoy the strengths discussed above, they all have greater opportunity than larger, widely held companies to leverage them. Yes, there are other costs of a family-owned company, yet given, the changes being demanded of us as business leaders, a family owned and operated business presents compelling advantages.