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Ensuring the Family Business Does Not Fail for Family Reasons
Family businesses generally fail for family reasons, according to PwC Ireland’s family business leader, Paul Hennessy.
Why is that and what can be done to avoid it?
Ireland has the fastest GDP growth in the Eurozone, unemployment is falling and consumer confidence is returning. This positivity is reflected in PwC’s latest Family Business Survey, which found that an overwhelming majority (86%) of Irish family business leaders expect growth in the next five years, of which 10% are seeking aggressive growth.
However, global megatrends like the digital revolution are making the business landscape more volatile and competitive than ever. Family businesses are well aware of this, and are sharpening their businesses in response. They’re installing new IT systems, streamlining processes, beefing up boards and hiring the skills they need to professionalise their operations.
But as this Family Business Survey shows, professionalising the business is not enough; the crucial issue is to professionalise the family and the firm – the “heart” and the “head”. This is about family governance, as well as corporate governance. Family firms need to address every aspect of the way the family interacts with the business and holds its managers to account. And the family members need to learn to be good owners as well as – or even instead of – good managers.
This means putting a robust framework in place to govern the family’s interactions with the business. This covers everything from decision-making, communications, dividend policy, to succession planning.
These are often thorny issues that can’t be ducked. So what is the approach? From working with a wide range of family businesses, we have compiled some thoughts on a roadmap to help the family be the strength behind the business.
1. Review Current Governance
Our survey indicates family and business governance has been steadily improving. But governance should be regularly reviewed to ensure it’s fit for purpose, and firms should assess:
- Channels of communication
- Decision-making structures
- How the family members interact with each other and the business.
2. Discuss and Agree Future Plans and Intentions
Per Roy Williams and Vic Preisser’s book “Preparing Heirs”, 70% of intergenerational wealth transitions fail, with many purely due to a lack of openness and transparency. It is therefore crucial to open discussions and agree broad parameters for the future of the family wealth, the business and the family’s role.
3. Define Family Roles and Accountability
Professionalising the family is about putting processes in place to govern how the family interacts with the business to protect the family’s interest and safeguard the firm’s survival. It’s therefore important that the following are clearly defined:
- Family roles – are the right people in the right roles, with the right experience, and what are their aspirations?
- Decision-making process – does this cover both business and family, and is it transparent and fair?
- Accountability – who is accountable to who and for what?
4. Create a Conflict Management Policy
The strengths and weaknesses of a family business are right there in the name: the family. Working with relations can generate much higher levels of trust and commitment, but can also lead to festering resentments and open conflict as the individuals concerned struggle to separate “head” and “heart”.
This year’s survey shows that an increasing number of family businesses have mechanisms in place to deal with conflict, with over three-quarters (78%) of Irish family businesses having at least one procedure. Great, but are they fit for purpose and do they cover areas such as:
- Forums for airing issues and third party mediation
- Passive member engagement
- Reinvestment versus extraction
- Over-riding constitution and commitments to fairness?
5. Plan for Succession
The survey revealed that nearly half (45%) of Irish family businesses have a succession plan for some if not all senior roles but, when questioned further, only one in ten have a robust and documented process. A plan that’s not written down is just an idea, and this is an issue family firms must address with the same commitment and energy they devote to professionalising other aspects of the business.
Three key issues came to light in our survey – generation gap, credibility gap and communications gap. Therefore, a successful succession plan should openly discuss and set out guidance around:
- Future leadership
- Involvement of the next generation
- How the older generation retain a positive influence
- Development and mentoring of next generation.
Based on my experience of over 25 years working with family businesses, it is only by professionalising the family and the business that the sector can be even more successful and evolve from a model based on the “family business” to one driven by the “business family”.
Written by: Paul Hennessy, Family Business Leader, PwC
- The Irish Family Business Survey 2014
- AIB Partnership with DCU Centre for Family Business
- Successful Succession Planning
- Successfully Selling Your Business
Please be aware that all of the views expressed in this Blog are purely the personal views of the authors and commentators (including those working for AIB as members of the AIB website team or in any other capacity) and are based on their personal experiences and knowledge at the time of writing.
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