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JA N UA RY 2010

o r g a n i z a t i o n

p r a c t i c e

The five attributes of enduring family businesses

The keys to long-term success are professional management and keeping the family committed to and capable of carrying on as the owner.
Christian Caspar, Ana Karina Dias, and Heinz-Peter Elstrodt

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Family businesses are an often overlooked form of ownership. Yet theyare all around us—from neighborhood mom-and-pop stores and the millions of small and midsize companies that underpin many economies to household names such as BMW, Samsung, and Wal-Mart Stores. One-third of all companies in the S&P 500 index and 40 percent of the 250 largest companies in France and Germany are defined as family businesses, meaning that a family owns a significant share and caninfluence important decisions, particularly the election of the chairman and CEO.
As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder, for example, may insist on running the company even though they are not suited for the job. And as the number of family shareholders increases exponentiallygeneration by generation, with few actually working in the business, the commitment to carry on as owners can’t be taken for granted. Indeed, less than 30 percent of family businesses survive into the third generation of family ownership. Those that do, however, tend to perform well over time compared with their corporate peers, according to recent McKinsey research. Their performance suggeststhat they have a story of interest not only to family businesses around the world, of various sizes and in various stages of development, but also to companies with other forms of ownership. To be successful as both the company and the family grow, a family business must meet two intertwined challenges: achieving strong business performance and keeping the family committed to and capable of carryingon as the owner. Five dimensions of activity must work well and in synchrony: harmonious relations within the family and an understanding of how it should be involved with the business, an ownership structure that provides sufficient capital for growth while allowing the family to control key parts of the business, strong governance of the company and a dynamic business portfolio, professionalmanagement of the family’s wealth, and charitable foundations to promote family values across generations (Exhibit 1).

Family Family businesses can go under for many reasons, including family conflicts over money, nepotism leading to poor management, and infighting over the succession of power from one generation to the next. Regulating the family’s roles as shareholders, board members, andmanagers is essential because it can help avoid these pitfalls.
Large family businesses that survive for many generations make sure to permeate their ethos of ownership with a strong sense of purpose. Over decades, they develop oral and written agreements that address issues such as the composition and election of the company’s board, the key board decisions that require a consensus or a qualifiedmajority, the appointment of the CEO, the conditions in which family members can (and can’t) work in the business, and some of the boundaries for corporate and financial strategy. The continual development and interpretation of these agreements, and the governance decisions guided by them, may

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Web 2010 Family business Exhibit 1 of 3 Glance: For a family business to be successful, fivedimensions of activity must be working well and in synchrony. Exhibit title: Five dimensions Exhibit 1

Five dimensions
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Business and portfolio governance Corporate governance Dynamic portfolio evolution – Business portfolio – Capital composition, structure – New-business development

Family Family forums Family policies • Family services
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Ownership Shareholder agreements Holding...