FAMILY BUSINESS
The professionalisation of leading family firms.
The importance of family business longevity extends far beyond family owners. Accounting for 70 percent of global GDP and 60 percent of global employment, family firms are among the main drivers of growth and innovation in today’s economy. While strong brands, deep relationships and long-term ownership allow the best performing family businesses to adapt swiftly to an evolving competitive landscape, the family business ownership model carries with it inherent weaknesses. Chief among these is the challenge of maintaining effective leadership over the generations. Indeed, family leaders often postpone or avoid succession planning, and next-generation family members may lack the expertise or desire to run the business. Family businesses also often suffer from suboptimal corporate governance – as studies show that they have less diverse and impactful boards than non-family firms – and often struggle to attract and retain top professional talent. In our latest report, “The Institutionalization of Family Firms”, we surveyed 123 family businesses to understand the characteristics of successful family firms in Asia-Pacific and the Middle East. Outperformance of a subset of these family firms – the “champions” – underscores how introducing formal policies, procedures and professional best practice supports leading family firms’ operations and long-term health. The champions The exhibit below presents the main takeaway from our research: the significant jump in institutionalisation between first- to third-generation family firms and fourth-generation firms and beyond. Each bar in the graphs shows the average institutionalisation score of our survey participants by generation, with the different colour segments of each bar representing the contribution to the total score of the six attributes measured in our survey. Exhibit 1
To enable user-friendly analysis, we combine first-, second- and third-generation family firms (“ascendants”) and fourth-generation and beyond (“champions”) into two groups. In addition to outperforming in aggregate, champions outperform ascendants on each of the six attributes measured in our survey, underscoring the proficiency gap across business functions between these two groups.
So what caused this proficiency gap? Reviewing survey data by attribute, we found the following:
- Professional boards: 34 percent of ascendants didn’t have a board and 21 percent had a board consisting only of family members. Champions were twice as likely to have boards with independent directors and appropriate sub-committees.
- External capital: 55 percent of champions had a public market listing vs. 18 percent of ascendants. Champions were also more likely to have raised equity capital from external investors, including private equity (PE) funds, strategic investors and high-net-worth individuals.
- Monitoring and information systems: Champions monitored KPIs every month on average – vs. quarterly for the ascendants – and leveraged enterprise resource planning systems more frequently. For example, 64 percent of champions used a customer relationship management tool vs. 31 percent of ascendants.
- M&A: 55 percent of champions had in-house corporate/M&A departments vs. 23 percent of ascendants. Champions were more than twice as likely to have completed an M&A transaction.
- Relationships and conflict resolution: Champions had more established relationships with government officials and other business families, and had formal conflict resolution mechanisms in place to diffuse disagreement over the direction of the family and the business.
Bowen White is the Associate Director of INSEAD’s Global Private Equity Initiative (GPEI).