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.

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.

UK family businesses as world class exemplars

http://www.ifb.org.uk/ At the PwC Private Business Awards many of the Britain’s 'hidden champions' were on parade and family firms gave a powerful show of strength by clinching the main award. The awards demonstrated that the UK’s private business sector is not short of world-class exemplars. The firms competing are committed to growing and want to raise their brand profile to attract better talent to help win the race.


UK home appliances brand Dyson was lauded as the Private Business of the Year. The company, which is transitioning into the second generation, has become a market leader by focusing on design and innovation. Dyson recognise they play an important role in the rural Wiltshire community where they are based, and their values have helped keep employee turnover relatively low.

The Family Business Award, presented by the IFB was won by Samworth Brothers which has values that revolve around a constant respect for people, quality and profit. Supported by a commitment to training they have created a performance culture that has driven their success.

And recognising the importance of exemplary leadership Paul Drechsler, Chairman and CEO of another family firm, Wates, was awarded CEO of the Year. Paul is passionate not only about the business, but also the family, people and communities that the business supports and depends on.

Other exemplars awarded include Monsoon, the International Business of the Year, where Peter Simon has led his family business back into private ownership, regaining full control over their destiny. Performance has been outstanding since the company regained independence. Their Accessorize brand has been powering international sales which have grown strongly across 68 countries where they trade.

Murdoch lessons: Business before family

http://www.ifb.org.uk/ Family business has been at the top of the news for the wrong reasons recently with the News International scandal. The events surrounding the despicable phone hacking practices at the News of the World demonstrate that any organisation that does not embed their values throughout the organisation can face the loss of the whole or part of their business as soon as trust breaks down. A look at the News Corporation website lists pages of compliance policies in box ticking fashion, but fundamentally values are about people’s behaviour that rules alone can’t dictate. The responsibility of leaders, such as Rupert Murdoch and his son James, is to set the example through their actions that others will follow.

The questioning in the media about leadership in this family controlled business will go on. Responsible owners put the success of the organisation ahead of their own personal interests, and it is understandable that there are calls for a new CEO at News Corporation and that the board revisit the family’s role in management. This could be a good time for the Murdoch family as owners, to make a bold move and change their roles, leaving strategic management in the hands of their team of professionals, to become cultural ambassadors for the business. The family’s principle role would be to take responsibility for embedding strong values throughout the organisation in order to rebuild the trust of all stakeholders.

Family business: The Freedom to Lead

The debate over the demise of Cadbury which was once a great British institution has not died out in the news. Another family business brand Timberland was also sold this week by a family who decided that they were no longer the best stewards of the business.

Family firms who have stood the test of time and fought against the odds, require a unique and sturdy set of genes to survive. They need a clear purpose, strong values and great leadership supported by good governance. If that was not difficult enough they also have to manage the process of generational transitions. Strong leadership establishes clarity of vision and values; this is arguably the starting point for effective stewardship as we set out in the IFB's new report Family Business Stewardship.

Most successful family business owners say time and time again how the freedom to decide is one of the key attributes in achieving success. They can use their independence to make decisions to invest and innovate, where the returns may not be visible in the next quarter.

Of course, shareholder loyalty should never be unquestioning; the best stewards stand back and take a dispassionate view of their organisations. With a board supported by a small group of challenging non-executive directors the right questions can be asked.

The best of family firms are working day in day out to ensure that their owners are well educated for the long journey ahead, with the knowledge and questioning skills that are required to be good stewards of their organisations. To succeed, where others such as the Cadbury and Timberland gave up the fight, is highly demanding. The reward can be great when measured in pride in seeing the name above the door of a successful business where the owners retain their independence and freedom to lead.

Business leaders and good stewardship

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www.ifb.org.uk Ken Costa, Gresham College Professor and Chairman of Lazard International, addressed an IFB Forum this week on the need for business leaders to act in a morally, spiritually and financially responsible fashion. Leaders who act as good stewards develop the people they are chosen to lead—the opposite of old-fashioned coercive leadership.

Speaking at a meeting hosted by Saunderson House in London, Costa, who is also author of God at Work, emphasised the importance of values and how leading up to the financial crisis society had arguably been sidetracked by self serving principles. Adam Smith’s system flourishes best where it focuses on delivering profitable enterprises, long-term sustainability and retains a strong regard for impact on communities. To remain healthy capitalism has to remain a servant and not become the master.

Capitalism however requires checks and balances to help to regulate the behaviour of the human actors involved.  The rebuilding of trust is an important factor in emerging from the crisis – indeed you can’t operate the capitalist system without a strong degree of trust.

Family firms have a strong role to play and the best of them have avoided the traps of the crisis by not chasing short term gains. A minority were lead astray by leaders who borrowed heavily following the fashion of the times. On the other hand many of the best family businesses are largely detached from both the debt and equity markets and take the long term view.

Costa sees a strong confluence of emotional and patient capital at work in business families, citing Harrods as an example. Successful family businesses are able to leverage their emotional and financial capital and deliver a robust performance.

Family business entrepreneurs: the pros and cons of family support

http://www.ifb.org.uk/ The recent sell-out IFB Next Generation International Convention on entrepreneurship was a tremendous success as 185 young delegates from 25 nations listened to inspiring speakers on starting up companies, intrapreneurship in an existing business and emerging social enterprise models. The consensus seemed to be that today’s young family business members want to make their own mark in the early stages of their careers, either by working in a non-family company, or increasingly by setting up their own business. Choosing the entrepreneurship route is becoming more popular; it gives the young person more independence and is a great way to prove yourself, at a stage in life when there is often little to lose.

One of the most active questions discussed was the pros and cons of having “family support” when starting a new business. Advantages include access to capital, ready-made networks, other support that the family (and perhaps its business) can provide and the pressure to succeed. On the downside many felt that using family resources including funding could lead to a lack of independence and thus a loss of freedom for the entrepreneur.

Lara Morgan, founder of toiletries success story Pacific Direct, told the story of how she broke away from her father’s firm at 23 and never looked back eventually selling her business for £20M. She argued strongly in favour of having full control over one’s destiny without anyone looking over your shoulders. Others argued that family entrepreneurs should welcome family support. If a family member starts a new venture family capital and networks can be invaluable; but if the family are investors care needs to be given to the governance system that should give the entrepreneur the freedom to manage, with a good board in support.

Strengthening the family business corporate brand

http://www.ifb.org.uk/ Sir Michael Bibby, chief executive of Bibby Line Group was the final breakfast speaker at the Next Generation Forum in 2010. His comments underlined the importance of the family business corporate brand as a magnet to help recruit and retain employees motivated to perform at their best. Sound values at Bibby including a focus on the long-term, quality operations, trust in people and support for communities, is part of what makes people “feel like they work for their own business” as Sir Michael puts it. By promoting a strong sense of goal alignment employees are selected both for their skills and whether they share the values of the business.

These insightful comments echo throughout the family business sector. Each family business works to reinforce the foundations of its corporate brand; underpinned by the origins of the family business, the reputation of the firm is carefully developed and shaped over time. Good stewardship leads to employees being more motivated, with retention increasing as they align withthe underlying sense of mission and values of their organisation.

Developing trust with consumers
Consumers are also savvy and want to know about the organisations behind the products and services they buy; convincing them for example that the business has sustainable and responsible sourcing policies can be a powerful differentiator in favour of the family business corporate brand. UK family business company brands such as C&J Clark, Wates and Bibby Line Group are examples of organisations where a strong corporate culture underpins successful business practices developing trust with their customer base.

In 2011 part of the IFB’s work will be to find out more about how these and other family firms have found a winning formula.

Family ownership and the life cycle of firms

http://www.ifb.org.uk/ Why are there significantly more large family-owned businesses, as a percentage of all companies in Continental Europe, compared to the UK? A study by Professor Julian Franks, of London Business School, has come up with some fascinating findings.

Professor Franks’ analysis of the top 1000 firms in France, Germany, Italy and the UK showed that 12% of large British firms are family owned compared with 40-45% in the major European economies. Analysing the life cycle of family firms from 1996-2006 showed that only 50% of firms in the UK that were in family ownership at the beginning of the period remained so a decade later, whereas in Germany the figure is 75%.

Image via WikipediaFranks explains that the cause of the UK exception is an ‘outsider’ system where the private benefits of family ownership are smaller, the opportunities for risk diversification are greater, raising equity is more expensive and the market for corporate control is more active. The study also observed that in the UK family ownership was likely to be concentrated in industries with less need for external capital.

The study implies that in the UK owners of large family businesses lean towards the shareholder value model, whereas on the Continent the family business stewardship remains more entrenched and is more favourably dealt with by the markets. The study concludes that family business does bring diversity to a modern economy, and providing owners generally are prevented from abusing their position for private benefit that we should promote a debate in the UK on how to encourage more owners of large family firms to retain control.

I believe that if we are to see lower attrition rates for large family firms we may need new approaches to policy, for example in relation to the protection of minority shareholders. But our culture may also be a significant factor and there needs to be more understanding of the real benefits of the family business stewardship model to the UK economy. This is the topic of new work being conducted at the IFB and a key theme of our national conference next year..watch this space.