How Family Strategy Can Increase Family Cohesion and Business Connectivity

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Family-owned businesses which install a family charta with binding rules are economically more successful. Moreover, a family constitution strengthens the “family peace” (emotional cohesion) and increases the relationship of the family to the company (emotional ownership). This is not due to higher returns but also due to the fact that the shareholders feel better involved in the company and are there for each other. Those are the core findings of the study “(Regulated) Emotions in Family Firms” by KPMG AG Germany and the Friedrichshafen Institute for Family Entrepreneurship (FIF) of the Zeppelin University, for which 85 family-owned businesses were asked and 14 individual interviews were conducted. The study examined for the first time how the emotional ownership of German entrepreneurial families to their businesses is structured and to what extent the individual family members stand together. These new discoveries are a continuation of the research into the “emotional factor” in family businesses.

Great link between family and company

According to Dr. Alexander Koeberle-Schmid, a specialist for family strategy at KPMG, the great advantage of a family constitution is that it ensures clarity and transparency and families know what to do when disagreements arise. In addition, it strengthens the family emotional cohesion because the shareholders work together at formulating the family charta. 87 percent of family firms with a constitution and five or more owners say, that they come to a consensus even when they had different opinions. This is only the case in 71 percent of families without a constitution. Regarding emotional ownership, 93 percent with a constitution say, that the firm is an important part of their life, in relation to 85 percent without a charta. Those results confirm that intensive discussions in a protected environment lead to a high degree of trust, openness, and attachment. This is even confirmed by those shareholders who were first skeptical of developing a family charta. Thus, the family constitution ultimately acts as a great link between the family and the company. Companies without a family charta are more susceptible to crises. They tend to agree less on aspects such as self-understanding, regulations and decision-making bodies.

Furthermore, the study shows that a family constitution also has an effect on the economic success: Half of the entrepreneurial families with at least three shareholders and a charta had an annual return of more than five percent. For those without a family charta, most (48 percent) had an annual return below five percent. The reason is, according to Koeberle-Schmid, that the charta also regulates many areas of management structures within the company like an advisory board, management succession, profit distribution, and the process of selling shares.

Three steps towards a family charta

When elaborating and establishing a family constitution, a three-step approach should be followed according to Koeberle-Schmid, who already advised successfully numerous entrepreneurial families in the development of their family strategy:

1. Identify the individual needs

On average only one-third (35%) of the surveyed entrepreneurial families have a family charta. As a rule: The higher the number of shareholders, the more frequently – and more importantly a family constitution gets. This is because the cornerstones of management are usually defined in the family charta.

2. Develop the family charta together

The charta should be elaborated jointly by the family owners through workshops and with the help of a consultant. This can take between six to twelve months – after all, a guiding culture has to be defined, which is morally binding and partially results in legal documents like shareholder agreements. In addition to visions and missions, structures are to be defined, succession rules to be made, strategy and business models, roles and plans to be developed. To sum up, by developing a family charta, shareholders find answers to the following questions: Where do we come from as an entrepreneurial family? Where are we? Where do we want to go? What are the guiding principles? What makes us stand out? How do we make decisions? What bodies do we need? And who will take on which tasks for how long?

3. Living the family charta

A family constitution is never definitively completed. It has to be put into practice, has to be lived. Yet families with a charta should not step into the “fatigue-trap”, because cohesion and solidarity have to be maintained constantly. Furthermore, a family charta should be reviewed and adjusted regularly. After all (shareholder) structures and economic conditions can change.

Family council and managers also make sense

Missing core (family) values may cause a company to falter. For this reason, it may be useful to install a family council and/or a family manager in addition to the family charta who is responsible for joint events, training, and social engagement and if needed also for conflict management. About half of the respondents agree to this, but only less than a third actually have a family council and/or a family manager installed.

The study shows further: Almost two-thirds (65.5%) of the respondents consider family days or weekends to be useful. As a rule: The larger the circle of shareholders, the more frequently entrepreneurial families fall back on a family council, specific rules for the handling of conflicts and special communication modes such as family newsletters or family video conferences.

Shareholders are rarely concerned about money

Since part of the entrepreneurial families are often shareholders who are not directly working in the company, especially those family members working in the business face the challenge of satisfying the other family shareholders. For this reason, the study also examined the question, what the individual shareholders make more satisfied or happier.

In the first place, was the desire to be able to actively participate in the company – sometimes even a simple advisory mandate or the function as a family manager is sufficient. The second place was the desire to be involved in important business decisions. A well-functioning flow of information follows on third place, fourth place among the influencing factors is the possibility of being able to contribute through foundations or family days. The financial aspect, that is, the profit distribution towards the owners, is interestingly at the end on the fifth place. Contrary to the assumptions, it is only in the rarest cases that money is the main motivation to the members of family enterprises.