Family businesses are dominated by two different logics. On one hand, they have commercial aims and want to make money, but on the other they have aims related to the family – such as ensuring employment for family members, paying for an ever-increasing family to live and so on.
Reality is more fuzzy, of course, and all family businesses function with a mixture of these two logics. But how do they balance them? And what is the most successful way? A paper called To Be or Not to Be: How Family Firms Manage Family and Commercial Logics in Succession by Prof Sabine Rau of King’s College London and others* examines the question, and suggests that communication and leadership style are the keys to doing it well.
The academics felt that the tensions between the two logics were likely to be strongest at times of stress in family businesses, and that succession is just such a time. And so they studied 21 family-owned German wine-making businesses that were going through generational transition, to find out how they balanced these two logics.
They defined family logic to include such aims as family unity, family continuity, stewardship and tradition. A typical quote exemplifying this was: “The success of the family firm depends on how well family members can work together, and this boils down to the question of how well they get along personally, how good their relationships are”. Commercial logic aimed at improving efficiency, profits, and market status. An example was one family member’s vivid statement that: “All I need is a Polish worker who can drive a tractor straight”.
The academics identified four approaches to balancing family and commercial ends:
1. Interwoven, where commercial and family logics are seen as “two sides of the same coin” and an “egalitarian” decision-making process was followed. “Important decision are always made together as a family – usually at the kitchen table,” said the owner of one such family. Successors had to prove they were fit to take over, studying wine-making and working in other wineries. The eldest son was expected – and groomed from a young age – to take over. In all these firms, he did.
2. Selective, where “the family logic influenced firm behaviour but only at specific times”. “These firms were guided by a family logic only when it did not conflict with a commercial logic,” says the paper. The family head tended to make decisions alone, and family members were under no pressure to join the firm. In all these firms a next gen took over.
3. Commercial, where commercial logic was dominant and “neither family continuity nor family unity was considered relevant in the context of firm behaviour”. These firms tended to have dysfunctional families torn apart by feuds, leading their heads to remove all family logic from decision-making. As one said: “[Except my mother,] all my relatives are crap. The most important thing is that they do not get a cent [when I sell the firm].” None of these firms had identified a successor, and three have since been sold.
4. Detached, where the two logics are pursued independently. “Although they pursued family continuity, they neglected family unity,” say the academics. Different family members had different views about the firm, which led to fragmentation and paralysis in decision-making. Leadership was authoritarian. “Emotions prevent solutions to problems,” said one family head in this category, who was nearly 80, and: “Although I have not yet found a solution for succession, I will continue to grow the family firm.” None of the type four firms had carried out a successful succession within four years of the interviews.
One striking lesson from this research is that even in a small sample of firms from one industry in one country, family firms differ hugely. They are absolutely not homogeneous. Another is that the firms which managed a succession tended to have two things: firstly, a cohesive family culture fostered by good communication, which inculcates shared values and norms across the generations; and secondly, an egalitarian leadership style which takes into account many people’s aims, but also encourages them to accept decisions that go against them sometimes.
Mechanisms that can promote these, such as family constitutions and councils, look like a good idea.
*To Be or Not to Be: How Family Firms Manage Family and Commercial Logics in Succession by Peter Jaskiewicz Katharina Heinrichs Sabine B. Rau Trish P. Reay, published in Entrepreneurship Theory and Practice in January 2015