Viewpoint: The underestimated double benefit for family businesses

The Lego Group is very aware of the importance of family identity      Picture: Pixabay

The Lego Group is very aware of the importance of family identity      Picture: Pixabay

Family businesses have a significant structural advantage over the widely held anonymous public corporation.  Family ownership gives a values-based, very long-term strategic approach to a business. Indeed, the owning family gives an identity to the business which – when effectively managed and used – has a double benefit.

The first benefit is related to the human side of the business and is outwardly directed. There is an authentic history, a human side to the business which can bring a real emotional benefit to the relationship with clients and stakeholders. In a fast changing world, the value of seeing real people and real stories behind the business is compelling.

We found compelling evidence about the powerful impact the family identity also has on the owning family itself

Here’s an example of how this works. Seventh generation family business leaders Fernando and Jaime Augusto Ayala have put forward their names and personal credibility to bring fundamental change to the Ayala Corporation in the Philippines by introducing a profit model linked to the most critical needs of the country. For example, they successfully restructured the highly deficient water supply of Manila. The brothers say that having “the name on the door” gives the organisation a premium, attracts capital and brings new opportunities.

The second benefit of the family identity is inward directed: to the employees and to the owning family. When the seventh generation of the family owners of the Bavaria brewery in the Netherlands decided to launch a premium product for the first time in their history under the owner's name Swinckels, it was a powerful message to the employees about the long-term commitment of the family to the business.

In addition, in our global research project about leading family businesses with a strong family identity and visibility we found compelling evidence about the powerful impact the family identity also has on the owning family itself. Essentially it obliges the family to ask itself a number of questions, like:

  • Why continue the family business?
  • What value can each generation add to the business?
  • What value can the business add to the family?
  • How can the family identity, values and history make the business more sustainable and successful?

When the first female chairman of the almost 140-year-old family controlled Henkel Group was appointed, Simone Bagel-Trah invited the family to strengthen and renew their commitment as responsible owners. Through a series of workshops for the family and for the business, the family identity and role were clearly defined. The family extended their shareholder agreement from 2016 until 2033 and increased their ownership in the publicly traded business from 53% to 58%.

We found owning families who invited the next generation to explicitly formulate an ownership vision for the next 20 to 30 years were more robust to deal with the challenges ahead. With these businesses, family constitutions were crafted clarifying the mission and the role of the family, often with the introduction of more effective governance structures for the family, the ownership and the business. This process is essential for owning families undergoing generational change. Our research showed that the identity and the role of the family undergo fundamental changes through their lifecycle, such as:  

  • The founder and dominant owner stage of ownership typically show the strongest and most authentic family identity
  • The sibling stage shows an identity differentiation highlighting the need for a shared ownership structure to formulate their own vision and identity
  • The cousin stage, which is characterised by the family split into different branches, typically leads to an identity loss, because the larger and more diverse number of family members tend to have different interests and diverging cultures.
A chart showing the various phases of identity for a family business

A chart showing the various phases of identity for a family business

The double benefit of focusing on and working with the family identity is compelling: externally, the business is presented as an extension to an owning family committed to its truly long-term success by “doing the right thing” as they want to pass on a healthy business to their children.

But the vast majority of families are hesitant to explore the use of their identity for the double benefit of the business and themselves.

The LEGO family business in Denmark has developed an animated video about their history, depicting how each generation experienced challenges and hardship but persisted with tenacity and resilience to build one of the most admired family businesses. Internally, the explicit use of the family identity brings the owning family together in a structured process and provides a platform for meaningful communication with the objective of finding constructive answers to the questions shown above.

But the vast majority of families are hesitant to explore the use of their identity for the double benefit of the business and themselves. Indeed, to do so requires time and work and a well-structured process starting inside the family. It often appears easier to remain discreet and passive.

One family member of a privately owned sixth generation media group told us that he had learned that every family in business already has an identity even when they remain in the background.

But the characteristics of their identity are often defined by the uninformed, partial perceptions of outsiders. Is it not better for the family to define and load their identity themselves rather than run the risk of distortions and misinformation by leaving this in the hands of outsiders?

 

This article is based on the new book: Wise Family Business – Family Identity Steering Brand Success

Joachim Schwass, professor emeritus of Family Business, IMD, and Anne-Catrin Glemser, Associate Director, IMD and formerly research and program development Manager at IMD’s Global Family Business Center