Networks - helping drive the UK’s Future Champions

The Government wants to see the power of the UK’s medium-sized businesses (MSB) further unleashed to grow. Policy change can play a key role as John Cridland, the CBI leader, highlighted in the Times. He offers some recommendations that Government should consider to pep up this vital sector of our economy and support our nation’s Future Champions.

The key answer however arguably lies with the MSBs themselves. What can owners do to drive stronger performance? FT journalist Chris Bryant offered a list of success factors that are commonly found in German Mittelstand organisations, acknowledging that the hardest challenge may be to imitate these values.

Being able to act swiftly and decisively is a value that MSBs commonly harness to advantage. Maintaining independence and a long-term focus in another core value plus avoiding debt. Of course, innovation is critical and MSBs are often specialists with strong intellectual property and brands focused on premium markets. The best of these companies generally avoid reliance on a single market and many concentrate on exporting and internationalisation.

Another less recognised but powerful advantage point for Germany’s MSBs is harnessing networks- leveraging their social capital. This can be anything from interacting through groups such as trade associations as well as meeting via informal networks sharing intelligence. FBN International, and its UK chapter the IFB, offer popular meeting points for successful family MSBs. In October over 750 owners and members of the FBN network will gather in London for the 23rd FBN Global Summit to debate the key drivers for “extraordinary performance” sharing knowledge and best practice.

Avoiding the exit route

http://www.ifb.org.uk/How does Germany retain its global market share in manufacturing while other European rivals such as the UK, France and Italy have gradually been losing ground to China and others.  Obvious answers include a consistent focus on achieving productivity gains through investment in equipment and human capital, as well as keeping ahead in product development through R&D and innovation. Successful Mittelstand companies prioritise the continued existence of the company- making necessary investments.

This approach starts with owners who put business growth and continuity as top priority. Eschewing cashing in on their achievements they chose to remain privately owned. These owners provide consistency of purpose and stability; making relatively small liquidity demands on the company they send a signal through their boards that the company comes first. Freudenberg Group is a typical example of this approach; where family shareholders prefer to keep their assets tied up in their successful Eur6bn firm putting family ownership as a high priority rather than letting other people manage their money.

The UK Government’s new focus on mid-sized business expressed through various reviews including the latest one led by Lord Heseltine is a sign that the UK is increasingly recognising the importance of our own Hidden Champions. As in Germany family firms are the most common form of ownership in this sector of the market- their success is thus one of the key planks for driving national growth. To win back a strong position the UK will require a new generation of owners who put the success of their companies above making short term gains through managing a quick exit.

Buffett on keeping businesses for the long-term

http://www.ifb.org.uk/ As a guest at the 2012 Berkshire Hathaway Annual Shareholder Meeting, in Omaha, USA, popularly dubbed a Capitalist Weekend, all eyes are focused on CEO Warren Buffett sharing his 50 years plus experience as the world’s most renowned investor. For starters he spoke of goal clarity; investing in wonderful businesses - his eighty-eight-year-old partner Charlie Munger who was also on the podium, nodded in agreement. Buffett invokes going beyond private equity, with the exit no longer a goal. What could be more ‘beautiful’ he extols than investing to keep businesses for the long-run – in my view a parallel of the family business model.

As a controlling shareholder in many of their investee companies, Berkshire has the freedom to ignore the will
of the market and to focus on making decisions that favour long-term stewardship – another idea Buffett likes. That means committing to support investments that grow steadily in value over time.

Success is measured by a strong recurring cash flow, and an organisation with solid values where employees at all levels do the ‘right thing'. Where mistakes have been made Buffett accepts personal responsibility. If it goes wrong it’s generally not the fault of management as he sees it, but his misjudgement
on the competitive position of an acquired company.

On Board philosophy he invokes directors to think like owners. The main task of the Board; and here he is forceful, is to hire the right CEO avoiding mediocre leaders. Compensation packages for senior executives should lean to being “low” but with a high “stake” in the upside value. He lavishes praise on Berkshire managers who are revered via a song in the company annual video.

But one unanswered question is the Berkshire CEO succession plan; Buffett, 81, is still firmly in the driving seat and is expected to keep going for some time to come. He won’t comment publicly on who the Board might have earmarked to be his successor. But the media speculates that one of his divisional managers Ajit Jain, 60, who has made billions for Berkshire building its reinsurance business is Buffett’s heir apparent. But with applause ringing to the answers Buffett gives to the questions from the floor– he is still clearly loved by shareholders- and deserves to be!

Renewing entrepreneurship across the generations

http://www.ifb.org.uk/ One of the main competitive advantages a family firm can create is developing a powerful entrepreneurial culture, where measured risk taking and innovation are part of the corporate DNA. It’s a theme the IFB has seen crop up again and again during the IFB Family Business Challenges seminars that are currently running across the UK. Owners are concerned about how to maintain innovation and entrepreneurship as a core value across generations. The evidence is when a family business fails to innovate and adapt it often loses its way.

Two examples, one from each side of the Atlantic, demonstrate how family business renewal is achievable.

One well known UK family firm where entrepreneurship was put back into the business is £175m turnover Timpson Group. Only a generation ago its core activity was shoe retailing and the owners had a 'steady-Eddie' approach to business. The incoming generation was more restless and sensed that to be good stewards they had to up the ante in terms of innovation and risk-taking. The business model today thrives on the father-and-son team of John and James Timpson and their ‘upside down’ empowered management culture. The business no longer sells shoes - a decision was taken in the late 80’s to exit this business - throwing up the question what next. Now they offer customers valuable services such as watch repairs, key cutting and dry cleaning.

Third generation US family business Radio Flyer, makers of children’s bicycles and scooters,was faced with a business that was stagnating. To transform the situation Robert and Paul Pasin reconnected with grandfather Antonio’s values. By rediscovering his passion for innovation and pleasing the customer they saw the Chicago-based business recover its former glory. Getting the people culture right was challenging however, with many loyal employees leaving the business. But Radio Flyer has been rewarded and is once again revered by America’s children as a favourite toy. Like Timpson, the firm also wins accolades as a great company to work for.

The art of family business- a hand on the tiller

http://www.ifb.org.uk/ The family business sector has been noted for its steady performance and is arguably coming out of the recession with fewer scars than the corporate sector generally. Such seeds of resilience that exist were sown during good times when family firms grew more slowly than their non-family counterparts; this might have cost them ground by not grabbing every new slice of business, but their caution has helped strengthen the sector’s balance sheets.

In an example of this a recent Financial Times article showed how family businesses have gained an advantage in the world shipping industry and this time it’s the Greeks showing the Germans how it’s done.

When business boomed prior to the recent recession, Greek shipowning families set aside funds to build up cash reserves ready to weather any downturn that struck the industry. Their main rivals from Germany, who mainly rely on investing other people’s money, made risky bets borrowing excessively which put many firms on course to sink into insolvency. Greek family business shipowners have therefore strengthened their grip on this industry by the careful stewardship of their resources and by keeping a tight hand on the tiller.

As every business leader knows a cautious approach to finance is not a sufficient platform for success; new research argues that one of the keys to performance is the behaviour of owners. Experts are beginning to say that the correct governance approach in firms involves the active engagement of owners - this applies particularly to family firms.

Professor Ajay Bhalla, of the Cass Business School, puts down much of the success of the leading German family firm Merck KG, now in its 11th generation, to the family’s hands-on approach. Prof Bhalla also cites other firms (see video) who have gone off track when the family has retreated from active involvement in setting strategic goals and monitoring performance.

Ownership matters

http://www.ifb.org.uk/ It was good to see the report of the Ownership Commission chaired by Will Hutton, which was published yesterday, argue for plurality of ownership models in order to strengthen the economy.

But the Commission does not see any panaceas - no one model is perfect. The economy benefits from diverse ownership types co-existing together, each with its strengths and weaknesses. Within the mix, that includes Plcs, family business, private equity, co-operatives and employee-owned firms, the report highlights the important role that family firms play in promoting corporate plurality, seeing many of the positive attributes of responsible capitalism in family businesses.

The Commission also calls for better stewardship where owners exercise a duty of care in relation to the assets they control. This is a characteristic that the IFB has already highlighted as an important performance lever in the IFB Family Business Stewardship report (2011).

Allied to this the Ownership Commission calls for greater corporate engagement by shareholders as a cornerstone for building responsible ownership, and cites the behaviours of good owners as noted in the Perspectives on Responsible Ownership guide (2007). Active and engaged family business owners challenge the status quo helping to fight the risk of a culture that kills off innovation.

The report emphasises the preponderance of family firms among the UK’s Mid-Sized Businesses (MSB) and calls for the expansion of the MSB sector. The Government has already identified MSBs as an engine for growth to potentially rival the German Mittelstand.

Boosting the performance of the UK’s MSBs however calls for better tools, including a more diverse range of sources of finance and enhanced skills at all levels in the organisation. The Ownership Commission recommends that the Government develops policies that tackle these two issues, supporting the arguments that IFB Representation has long been making on the sector’s behalf.

The Tyranny of the Quarter

http://www.ifb.org.uk/ There are some interesting comments made by John Kay (pictured), one of the UK’s leading economists, in the interim report on the Government’s review of UK Equity Markets and Long-Term Decision-Making.

Nailing his colours to the mast Kay commented in the FT on “the tyranny of quarterly earnings” encouraging investors to treat such reporting with caution and drawing parallels with junk mail.

So what’s the relevance of this debate to family firms? Last year the IFB published its white paper Family Business Stewardship that explored some of the drivers for success in a family business. We found that the best family firms are not only focused on the long-term – usually armed with a clear sense of purpose – but they also vigorously manage the short-term.

Family firms are generally no different than their non-family peers when it comes to managing the business, however where the family business can gain an advantage is by avoiding being a slave to excessive management reporting. Businesses increasingly recognise that there is a cost to reporting- transparency is good- but a surfeit of data is often unproductive.

Owners and their boards can judge performance in the short, medium and long-term supported by the right amount of information - neither too much nor too little, and measure success over the timescale of any particular investment project. Family business owners may also ask ‘where will our business be in 20 years time’ with a reasonable certainty that they will be there two decades later to take responsibility for their forecasts.

Entrepreneurship – ‘If it isn’t broke, break it’

http://www.ifb.org.uk/ How do owners come to terms with selling a successful business? At a dinner co-hosted by Mike Southon, FT entrepreneurship correspondent and Beermat Entrepreneur co-author, the issue was debated by a group of enterprising business people. One of these explained how he was still struggling to come to terms with the void in his professional life following the successful sale of his business a few years ago.

When any family firm faces the same situation how does the family cope with the emotional stresses of deciding a sale, possibly after generations of ownership? Is the family prepared to sell the best business they will possibly ever own? When the family name is above the door the shadow of all who have toiled to build the business looms over their shoulders.

In any family business there can also be a magic glue present –shared values that bind the family owners together. All these factors can create a compelling set of reasons why deciding upon a sale may prove to be the hardest decision the family have ever faced.

Perhaps enterprising families however, should heed the motto of the dinner’s co-host Guy Rigby, an entrepreneurship mentor whose motto in his new book From Vision to Exit is, ‘If it isn’t broke, break it’. Successful family business owners heed this good advice constantly by challenging the status quo, whether they are considering exiting or not. Regularly they ask themselves - why is the family in business together?

Following Rigby’s advice, even if a sale is not on the cards, it is vital in today's hyper-competititve markets to ensure that there is a culture in your firm that embraces change. Finally when struggling to reach consensus on a big decision, such as selling the business, you will need experienced independent directors on your board to offer dispassionate advice.

Responsible capitalism: a contradiction in terms?

http://www.ifb.org.uk/ I was an invited guest at the Prime Minister David Cameron’s speech on the market economy where he invoked a wish to see the rise of popular capitalism with a social conscience. His speech followed close on the heels of Vince Cable, Ed Milliband and Nick Clegg, all of whom have been calling for a commitment to responsible capitalism.

Nailing his colours to the capitalist mast the PM acknowledged that the pursuit of enterprise and opportunity are what lies at the heart of a thriving economy, where the most capable are rewarded for success. At the same time he wants to promote an economy where more people have a stake in the success of their business- this could be by way of share ownership, or as being part of a mutual co-operative. Deputy PM Clegg has talked in a similar fashion wanting to support more of a John Lewis style economy with employees participating in ownership.

But are the market and a social conscience compatible bedfellows? The general media frenzy around pay echoes a popular view that big business has tarnished its reputation, driven by unjustified bonuses and pay differentials and excesses that lead to the financial crisis.

Maybe the key to success lies less in whether employees have shares in their employer, but more about how companies are driven by the right set of values, creating great workplaces.

It won’t surprise readers to hear that family businesses are often the winners in terms of employee engagement and commitment - because the best firms stand out for their clarity of purpose and values. Recent research showed that family businesses inspire greater worker loyalty, and feelings of greater job security and inclusivity than all other employers in the public or private sector.

Patient capital - the elephant in the room

http://www.ifb.org.uk/ I was part of a delegation of family business owners that met with Mark Prisk MP, the Business Minister, on Monday, together with other mid-sized business (MSB) leaders for a roundtable discussion on growing the MSB sector. In the recent Government report on MSB firms (turnover £25 - £500M) family businesses accounted for nearly half, (5,000 firms) making them critical to the success of the sector. The report also highlighted the strength of many of these companies as engines for growth, but also the challenges competing with countries such as Germany with its Mittelstand of mid-sized companies.

One of the lesser known values of MSBs is their belief in the benefits of “patient capital”. At the meeting John Cridland, Director-General of the CBI, which has published Future Champions - its own report on MSBs - described the issue of ‘patient capital’ as the elephant in the room. By mobilising this capital the CBI estimates that there is the potential for MSBs to contribute an additional £20bn to the economy by 2020 creating new ‘national champions’.

Critics could argue that a speed-dating culture has emerged in business where short-termism predominates - entrepreneurs start up ventures, grow them and exit at the earliest opportunity. Quoted Plcs have also been accused of taking short-term decisions driven by the stock market’s focus on quarterly results. Short-termism has become embedded in our DNA.

On the other hand the values associated with stewardship and long-termism have been less fashionable. Successful MSB family businesses often embody ‘patient capital’ values supported by stable ownership that prioritises long-term investment, progressive employee relations and a culture of continuous improvement within their businesses. The MSB Growth review is focusing Government’s attention on this vital part of the economy – and family buisnesses will be at the forefront of this drive for growth.