Family businesses and the entrepreneurial conundrum

A few weeks ago, Family Capital was talking to a senior manager of a multi-billion dollar family business. He said some frank things, including that his job felt like working for the government. He added that it was bureaucratic and unimaginative - although he wasn’t about to leave. The pay was too good, he said.

Unsurprisingly, he’s not going to tell the world who he works for. But his sentiment raises the issue of entrepreneurship at a family business. Does a family business, which grows to be a dominant force within its sector inevitably become bureaucratic and lose its entrepreneurial spark?

In many cases the answer is yes, despite what big family businesses might say. That’s because, big businesses, whether family run, or not, will inevitably lose the entrepreneurial spirit they had at the beginning of their existence. The founder, who had the vision to start the business, and the entrepreneurial risk-taking to get it going, will begin to fade into the background when the next leader, or group of leaders come to the fore.

Of course, often the second generation of leaders will be equally as entrepreneurial as the first, but by the time it reaches the third generation, much of that enthusiasm tends to be replaced by bureaucratic tasks and monotonous targets.

That’s largely because big businesses with the advantage of economies of scale can continue to dominate their sector for years after the initial wave of enthusiasm and entrepreneurship. A good example of this is Tetra Laval - the massive Swiss-based packaging and processing company. Today, the company is the biggest in its sector in terms of revenue and looks set to continue to be so for many years yet.

But in its past, the company was perhaps one of the most innovative and entrepreneurial businesses in the last 100 years. Tetra Laval was the company that evolved from Tetra Pak, which was the brainchild of two exceptionally innovative generations of the Rausing family. But now, owned by the third generation, the company has settled down to its bigness, and even the current senior managers of the group, all non-family, might admit that it isn’t quite as visionary as it has been in the past, despite its continuous achievements and strenghts.

With this in mind, a recent report from the IFB Research Foundation on UK family businesses and entrepreneurship offers some useful advice to family businesses when it comes to trying to stay entrepreneurial. The authors, a group of UK academics, reckon that family businesses can achieve higher performance through entrepreneurial orientation by following some prescriptive guidelines. These include:

  • Align the entrepreneurial orientation of the firm with the entrepreneurship of the family;
  • Involve the next generation to increase entrepreneurship and innovation;
  • Put entrepreneurship and innovation front and centre;
  • Involve women on the board to increase profitability; and
  • Consider establishing an operations board in addition to the main board of directors.

But, perhaps the most interesting, and indeed, contrary piece of advice the report authors suggest, is that family CEO tend to be more entrepreneurial than non-family CEOs.

Here’s what the report says: “Some 85 per cent of family firms are open to appointing a non-family CEO in the future but this could undermine family business entrepreneurship. When the CEO of the firm is a family member, family-level entrepreneurial orientation is significantly greater and this is positively associated with firm performance.”

Maybe it does all comes down to leadership in the end...