Successfully running a family business over several generations is a complex performance that requires expertise and flexibility on many levels in the business as well as in the family. So, what exactly are the success factors of family businesses that have survived several generations and even decades? Jim Hutcheson, President and Founder of ReGeneration Partners (USA) provides an overview on the dimensions to be considered.

No one studies family business long without hearing that few outlast their founders, and even fewer survive multiple generations. Yet some family enterprises do endure to surprisingly old age.

Take, for instance, the business experts consider the world’s oldest continuously operated company, Japanese innkeeper Houshi, which welcomed its first guest in 718. More than 1,300 years later, the 46th generation of descendants of founder Garyo Houshi still run this idyllic spa and resort an hour’s plane ride northwest of Tokyo.

Houshi is just one of a number of family firms that have survived for many generations. By studying them, family business experts have learned a great deal about what that feat requires. So rather than talking solely about the reasons family businesses seem to fail so often, it seems appropriate to discuss what it takes to live long and prosper.

Commitment

If you want your business to last for multiple generations, you must first commit yourself to that objective. To make yours one of the truly long-lived businesses requires actively choosing to do so and being prepared to do what that takes.

And the job requires real commitment, perhaps at the expense of other worthy goals. Comfort is likely to be one of the expendable ones. That is because some of the business moves necessary for extended life run counter to the intuitions and wishes of the typical family business leader.

Culture

For a family business to last for more than a few decades clearly requires succeeding generations to continue the mission. For this to happen, a longevity-minded family business leader must create a corporate and family culture that will attract and inspire future offspring.

Start this process by exposing children to the business at a young age. Show them your passion for the business. Transmit to them the inspiration that keeps you coming to work every day. Share what makes working in your family company that best job in the world. In this way you lay the foundation for the passion that long life calls for.

Next, enable and support the education of younger family members so that they can enter the firm with the skills necessary to succeed. In addition to appropriate classroom education, see that each family candidate for joining the company gains significant work experience at a non-family company. This experience gives youngsters the confidence that they can succeed on their own merits.

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Governance

Enduring enterprises exhibit robust governance. No organization exists for centuries or even decades without well-established protocols for making wise decisions. And, just as young family members need experience working for non-family companies, even the most established family firms must include outside viewpoints. That means establishing a governance system that includes a board of directors with a significant number of truly independent outsiders.

Family business leaders similarly should cultivate strong relationships with non-family professional advisors such as attorneys and accountants. The presence of independent outsiders at the highest level of decision making ensures consideration of a variety of viewpoints. Enterprises that look only within for answers are unlikely to live long.

Accountability

Establishing appropriate governance represents only part of the solution. Day-to-day operating polices must also conform to wise practices. The necessary policies cover areas from employment to estate planning. For instance, all family leaders should have valid wills and members contemplating marriage should consider pre-nuptial agreements that maintain family control.

Well thought-out employment policies address when and under what circumstances family members will be employed. Compensation and dividend policies describe how family employees are paid, as well as how family members not working for the company receive dividends.

Two areas of critical importance are buy-sell agreements and shareholders agreements. These documents spell out rights and responsibilities of shareholders, including to whom shares may be sold. Buy-sell agreements ensure the family has the means and the opportunity to purchase shares of members selling them due to death or other eventuality.

All policies and procedures must be enforceable and enforced. That means having clear-cut methods for removing and replacing family members, board members or others who stray from guidelines. Everyone should know that rules are rules, and rule breaking will not be tolerated.

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Clear Communication

The ability to communicate underlies every task in building the enduring family enterprise. No leader can create passion, nurture culture, establish good governance and implement accountability unless he or she can effectively communicate.

Many business leaders view communication as a one-way channel in which they transmit information to others. In fact, communication occurs in two directions. And the most vital part, from a family business perspective, involves understanding the audience that is supposed to receive the message. In short, listen first. Seek to grasp the attitudes and concerns of the employees, managers or others you are addressing. Only then speak.

Once you start speaking or writing, your overriding requirement is clarity. No objective is so worthy, nor any process so powerful, as to overcome murky, unclear explanation. Keep the message simple. Keep it brief. Keep it clear.

Words cannot be separated from actions. Leaders whose actions conflict with what they say cannot command respect. Effective business executives behave in accordance with the principles they espouse. That means not making exceptions to the rules for themselves or their favored heirs, paying themselves appropriate salaries and striving in every way to exemplify the ideals they advocate.

Ethics

No company can expect to endure unless it rests on a solid ethical foundation. Having a sound moral footing for everything you do builds a solid reputation, avoids legal entanglements and inspires people to do their best. A company that seeks long life must act ethically.

What constitutes ethical behavior varies widely from culture to culture. However, one test reliably helps business leaders of any culture test their actions for ethical content. All they must do is ask themselves: Would I want to see a headline in tomorrow’s news announcing to the world what I am doing? This question reliably activates any individual’s inborn sense of what is right and proper.

Creating a family business that can last for multiple generations or even multiple centuries clearly is not easy. The job requires careful contemplation, practical process-building and occasionally ruthless action. But the difference can be between becoming a family business famed for its long life and just another failure.

Tharawat Magazine, Issue 3, 2009