Sir Michael Hill's handover to daughter Emma shows how things should be done. Photo / Jason Oxenham
Sir Michael Hill's handover to daughter Emma shows how things should be done. Photo / Jason Oxenham
Opinion
There are ways to avoid the pitfalls of family business, write EY's Jon Hooper and Darren White.
Family businesses face unique and complex challenges.
Those familiar with high-profile court cases involving the likes of Australian mining magnate Gina Rinehart, the family of late beer baron Michael Erceg and the bitter sibling rivalry that has ripped apart the business of deceased philanthropist Hugh Green understand all too well the powerful and destructive emotional dynamic that can overlay a family business.
Of course, this is only one side of the experience. At the opposite end of the spectrum is the smooth generational transition at Michael Hill International, where founder Sir Michael Hill announced last week that he was stepping down to make way for his daughter Emma to succeed him as chairman.
And there's Karen Fistonich, daughter of Villa Maria founder Sir George Fistonich, who has been a director of the company for the past 20 years and now chairs its board.
Family businesses are a critical part of the economy, especially in New Zealand, where 97 per cent of our 460,000 businesses are SMEs (small to medium sized enterprises).
A big percentage of these are family-founded and employ fewer than 20 people, most fewer than five.
The recent EY global survey Staying power; how do family businesses create lasting success? found they account for more than two-thirds of all companies around the world and 50 to 80 per cent of employment in most countries.
With this sort of economic impact, it's important to understand what makes successful family businesses tick. In a nutshell, the key elements are succession planning and good governance.
The EY survey indicates most family businesses globally are in good shape. Among the large family businesses surveyed, 87 per cent have identified who is responsible for succession planning, 90 per cent have boards of directors, 90 per cent have regular family or shareholder meetings to discuss business issues and 76 per cent refer to themselves as a family business in their branding.
Succession planning is arguably the most critical issue for a family business. Frequently riven with in-fighting, drama and conflict, it is also the most difficult issue to resolve.
Put bluntly, if the business doesn't get it right, it is unlikely to survive beyond the first generation.
In our opinion, succession should be considered as a process, not an endpoint. The world's most enduring family businesses clearly define who is responsible for succession and work steadily to prepare the next generation for leadership.
In successful family businesses, the preparation process starts early - sometimes in childhood.
Respondents to the EY survey found work ethic, leadership and entrepreneurship to be the most important attributes to nurture in young people, and many successful businesses require family members to have at least three years of outside management experience before being allowed to take up management positions inside the business.
As part of that preparation, many opt for postgraduate study overseas. EY itself offers the acclaimed NextGen programme through affiliated universities around the world.
Good governance is the other key requirement for successful family businesses. For most, this will be a board of directors to which management will be accountable. The patriarch or matriarch of the family will often chair the board, with perhaps only one or two other family members involved.
To provide for broader participation, a formal family charter or family council is a useful first step and might be regarded as essential when a family business moves into the third generation and beyond.
Jon Hooper. Photo / Supplied
Darren White. Photo / Supplied
Introducing some well-documented processes and systems into the business is another step towards accountability, particularly around tax issues, health and safety, banking and communication with family members and other stakeholders. This makes a business easier to value and sell if ultimately this is the preferred exit strategy.
While having a board of directors is best practice in governance, many family businesses don't go down this route. Some simply cross their fingers and hope governance issues will somehow work themselves out, while others, particularly businesses driven by strong entrepreneurs, are reluctant to relinquish control and submit to a board's scrutiny.
But, as the EY survey notes, "A strong board, along with a family that is continuously focused on family governance documents and practices, reduces the risk of nepotism, internal conflict, inequitable allocation of ownership shares and succession woes ... [Directors] are expected to provide more than business intelligence. They serve as coach, counsellor and peer advisor, and they must consider how strategic and operational recommendations, such as succession planning and dividend policy, will affect family dynamics."
Having a formal structure and the usual board disciplines can help avert crisis if the head of the business suddenly dies or is permanently incapacitated, without their intentions for the company being made clear and no process in place to appoint a successor.
When choosing directors, there is no one-size-fits-all solution. The best advice is to find people with the skills and experience that you lack.
It is also important to distinguish between the governance and management functions. A board stacked with family members can be challenging, especially if the business has appointed a professional CEO from outside the family.
Conflict is inevitable in business, particularly in a family situation where complicated relationship dynamics may be in play.
A degree of conflict can be positive if families take a healthy attitude to resolving the issues behind those conflicts rather than either ignoring or simply not recognising their differences.
Families that are good at working through conflict can quickly develop solutions in order to weather changes in the market. Working through differences also tends to make people feel closer to one another, thus enhancing family cohesion. However, if families struggle with conflict, they can delay making decisions until it is too late, hurting the business or missing opportunities.
The other prominent family business issue identified in the survey is sustainability.
Studies have found family businesses are more likely than others to value and implement corporate social responsibility (CSR) and sustainable practices.
More than 50 per cent in the EY survey report a high commitment to CSR practices and an impressive 81 per cent say they are engaged in philanthropy. Also, 85 per cent have a code of ethics compared with 57 per cent of the world's largest companies.
Family businesses create jobs, invest in their communities and give back to society. The world's most successful family businesses have managed to integrate the economic imperatives of strategy and strong entrepreneurial and commercial skills with the family's needs for nurture and care.
Jon Hooper is an EY partner and Awards Leader for the firm's Entrepreneur Of The Year programme. Darren White is an EY partner and head of Family Business Services
