ViewPoint: How policymakers can help family firms

Old things can be worth supporting. Photo by Jupiterimages/Photos.com / Getty Images

Old things can be worth supporting. Photo by Jupiterimages/Photos.com / Getty Images

All around the world the family firm is the most common form of business organisation. And yet in Europe there has in recent years been a trend from policymakers who want to boost their countries’ economies to help start-ups, because they think the best way to create new jobs is by creating new companies.

Sustaining start-ups is definitely important, but we know that start-ups are only a minority of the firms in any given economy and a low percentage of start-ups will survive even five years. What some policymakers have overlooked is that you can contribute much more to the development of an economy by helping existing firms, which mostly means family firms, to grow, innovate and survive across generations.

Such measures could also have a social impact. Family firms, especially if they have already survived for a number of generations, are often much more embedded in their communities than others. If you create measures to support family businesses you are also indirectly providing benefits to the surrounding community and society at large.

The first thing policymakers need to understand is what a family firm is. For me there are two important characteristics that identify a family business. The first is that you have an owning family which is able to influence the vision of the business. The second is that there must be an intention to transfer the business across generations. This is very important, because a family business is managed with the specific intention to survive across generations and so they take decisions differently from a non-family business.

This difference means that the policies you make for other small or medium-sized businesses are not always applicable for family firms, and might not help them. As a policymaker it is hard to create policies that support family firms if you don’t take into account the distinctive traits that characterize a family firm.

Family involvement causes family businesses to have unique organisational goals, structures and resources that eventually create distinctive management challenges for owners and managers. For these reasons, family businesses require distinctive managerial practices and support initiatives in order to achieve success.

So what issues should family business-friendly policies address? One is growth, because very often family businesses don’t want to grow even though they are able to. They are unwilling because they are often driven by non-economic goals, such as creating a family dynasty and providing some form of altruism to family members, keeping harmony in the family, of course also keeping the business in the hands of the family. These can provide barriers to their willingness to grow.

Another issue is innovation. Family firms are faced with what in my research I call an “ability and willingness paradox in family firm innovation”. This means that they are characterised by greater discretion because of personalized control, low levels of formalization and bureaucracy, long-term investment horizons, patient capital, altruism, and interest alignment between owners and managers, which theoretically makes them far better able to innovate than non-family firms.

But sometimes they don’t because they are less willing to innovate due to a number of reasons including risk aversion, hesitancy to share control with non-family managers, commitment to traditional product lines, and a desire to minimize the need for external financing. Paradoxically, family firms have superior ability yet lower willingness to engage in innovation, and resolving this paradox should be an area of attention for policy makers.

Then succession, especially leadership succession, which is one of the most agonizing experiences that any family business faces, is of course another important issue.

Policies that could help family firms to overcome their resistance to growth and innovation would evidently help stimulate the economy, and create jobs. Specifically, reducing bureaucracy would be a start. Reducing taxes that kick in during successions and damage businesses would obviously help.

Also there could be help to encourage family firms to professionalise, for example voucher schemes for adding non-family professionals onto boards, or to bring in temporary managers who could help them grow and develop.

None of these is particularly new or revolutionary, it is just a matter of changing perspective and tailoring existing ideas to the distinctive traits of family firms. Policymakers need to realise that traditional policies for growth and innovation would not work if they do not leverage the distinctive goals and resources that characterize family firms.

There is an important source of wealth associated with the heritage and tradition of existing family firms that must be preserved if we really want to boost the development of our economies.

Alfredo De Massis is Chair Professor of Entrepreneurship & Family Business and Director of the Centre for Family Business, Lancaster University Management School