Leading a family enterprise demands attention to continuity in order to nurture resilient, sustainable wealth.
As enterprising families expand across generations, they often stray from their entrepreneurial wealth creation roots to a more risk-averse wealth-protection mode. This evolution is natural given that successful families have more to lose, more stakeholders to satisfy, and often a decrease in entrepreneurial drive and/or opportunity.
However, if maintaining shared family capital across multiple generations is the goal, wealth protection mode is not an ideal strategy and may have some unintended consequences. It may be demotivating for owners, particularly the next generation. It may also be out of step with the competitive reality of the marketplace. And perhaps most worrisome, it may fail to leverage the unique competitive advantages of operating and investing families.
For these reasons, the John L. Ward Center for Family Enterprise at Northwestern’s Kellogg School of Management advocates a growth approach – one tailored to the unique needs of a family enterprise. In conjunction with Egon Zehnder and PwC, the center has produced a series of white papers to educate family enterprise leaders on the challenges they may face – and solutions that can lead them to sustainable wealth.
To grow and preserve continuity, a family enterprise must take special care to address its unique makeup. To foster the process, consider the following key topics:
The Family “Why?”
Start by asking the big questions that shape the family goals. Why does the family enterprise exist and what is its mission? Answering these questions can help articulate a family’s shared purpose. Purpose may include wealth creation but is typically much broader, encompassing ideals such as serving as a good employer, giving back to communities where enterprise assets, customers and family reside, and developing family human capital. Closely related to purpose is mission, or what your family does to realize its purpose: What does the family see as its mission? Is there a mission statement that that resonates with family members and other stakeholders?
As part of the exploration of mission and purpose, take time to address the topic of values. Values may address the types of wealth, or “capital,” most important to the family: financial, human (health, talents), intellectual (education, experiences), social (relationships, community, stories, life lessons), and spiritual (faith). The family’s values may link to pursuit of ESG (positive environmental, social, governance impact) objectives and promotion of DEI&B (diversity, equity, inclusion, and belonging.)
Don’t limit the discussion of “why” to just the workings of the business. Thinking in terms of broader purpose can be more inclusive to the family and provide an opportunity for longevity beyond the life of a business asset.
The Family “Who?”
There are two important but different “who” questions a family enterprise must address. The first is a leadership question. Who is making decisions regarding purpose and mission for the family? The participants in the decision-making group should be considered and revisited to ensure they represent the stakeholders, which may evolve and change over time. The second question might be better phrased as “for whom?” Who are the constituents of the wealth—whether operating businesses, family systems/members, or the broader community? How do you define family? Clarifying this element of the “who” may be more challenging than it appears, with family enterprises growing more complex (including investing and private-equity arms, for example) and the definition of family being broader and more fluid than in the past. And, it is useful to acknowledge that buy-in of non-family stakeholders, including senior management, may be key to success. Their voices count, too.
Consider taking the most inclusive possible approach to the “who” questions. If your goal is generational continuity, include the younger generation in the "who" as you seek to define your growth strategy. Inclusivity is important in seeking to establish an enduring family enterprise system; indeed, it will take effort on everyone's part to reach alignment.
The Enterprise “What?”
When it comes to growth and plans related to growth, a family enterprise faces important choices. The key concepts to address are:
1. Definitions and motivations
Definitions of growth may include both financial and non-financial considerations such as:
Enterprise value enterprise profitability
Enterprise breadth (diversity)
Impact (industry, community, otherwise)
Promotion of certain sectors or priorities (healthcare, education)
Financial distributions to owners, job creation and satisfaction.
2. Strategic and financial context for growth goals
- What assets are available to invest in growth (equity, debt capacity, access to co-investors)?
- What is the strategic/competitive positioning of current assets (including operating and investing assets)?
- What are core capabilities/differentiators to leverage?
- How do the family’s current holdings align with the family’s future vision?
These are just some of the questions a family enterprise must ponder to understand the framework for growth.
3. Options to drive growth
- Core businesses, adjacencies, new businesses, sales of legacy assets (to fund growth), real estate, growth-focused liquid investments, direct private equity investments, co-investing, are all options to drive growth
- How does each serve the family’s purpose, mission, values, and financial objectives?
- Do they fit the family’s preferences (organic growth, acquisitions, debt reduction)?
The Enterprise “How?” Part I (Governance)
Governance structure and process are critical for effective continuity and growth-related decision-making and should be adapted over time to support the evolution of enterprise assets. So, while the concept of good governance is evergreen, its implementation requires iteration as to structures and mechanisms. Governance applies broadly to three areas: family governance, operating entity governance, and investment governance, as well as the mechanisms to coordinate decision-making across these areas:
1. Structures in which assets are held:
- These create the governance framework and governing bodies for assets, including boards or committees that oversee family offices, family partnerships, individual investment assets, holding companies, trusts, and individual operating entities.
2. How decision-making is structured and executed:
- Because some families provide a forum for all in the ownership group to voice opinions while others consolidate control, it is important to determine which decision-making structures best fit your family.
- What structures/processes are in place to evaluate implementation effectiveness of the growth strategy?
- How are division of responsibilities and decision rights defined?
5. Communication and development:
- How can multi-generational dialogue on continuity goals, including as related to wealth, be developed and promoted?
To investigate these important topics, map out your current asset holding structure for purposes of broader family education as well as evaluation of effectiveness. Define the roles and responsibilities of each governance body related to family assets, including how it coordinates and aligns with other related bodies. Make sure key stakeholders (e.g., family, non-family executives, board members, professional advisors) have visibility into the broader family assets and governance to ensure coordination and opportunity for objective input into design. And articulate the skill sets needed for effective governance and implement processes to ensure preparation of NextGen governors with these capabilities in mind.
The Enterprise “How?” Part II (Human Capital and Operations)
Finally, take the time to consider how the family enterprise will ensure it has the right talent and operations in place to ensure the vision is executed.
The issue of human capital can be especially complex since family dynamics also play a role in the discussion. There will typically be a more diverse range of motivations, capabilities, and future growth potential within a family than a business team, and this must be taken into account when assessing talent for the family business and broader enterprise. What skills are needed to support the family’s growth goals? Who among the family demonstrates needed interests and skills?
Family firms feature different relationships among employees, shareholders, and the board than a public company; for example, in a family firm many employees are also shareholders, and their parents may sit on the board, creating potential tensions and conflicts. Roles also exist beyond the business for which to consider talent, such as those in governance and philanthropy. Finally, emotions and family relationships play a large role, as decisions can’t always be made based purely on what’s best for the enterprise.
Indeed, a family enterprise may consider many tricky questions such as whether to allow family members to work in the enterprise at all and, relatedly, how to determine roles, compensation, appointment/promotion criteria, career paths, reporting relationships (such as family members reporting to one another) and others, as previewed above. Is family employment best for the family and business? How can the family retain, promote, and incentivize family employees without creating issues related to nepotism, “free riding,” or objectives driven exclusively by money? What compensation structures make sense and how do these compare to those in non-family firms?
And don’t forget to consider non-family members. It can be challenging for family firms to recruit and retain best-in-class talent, in part because of perceived limited advancement opportunities and fewer financial incentives (no equity and potentially lower total pay). Moreover, family business cultures are often unique, which can pose multiple challenges. Key questions include: Is our enterprise attractive to outside candidates—why or why not? How can the family leverage a unique employee value proposition to attract non-family talent and balance potential downsides of working for a family enterprise (e.g., less equity compensation, limited access to top roles filled by family, etc.)? What pros and cons do our policies, processes, and culture present for non-family employees?
In addition to having the right talent, a best-in class operating model also includes process, technology, data, and controls. Key success factors for your operating model include requirements definition, right-sized processes and controls, robust data management and reporting, automation, upskilling/training of personnel, regular reassessments and proper governance, all anchored on the family’s strategy, purpose and mission.
Conclusion: The Path Forward
There is a reason we see few families who demonstrate the rigor we outline here to plan for generational continuity. These often-overlooked steps can be difficult, and many families just assume "growth is good" without putting in the time up front to dive deeper into the “why,” “who,” “what,” and “how.” Those must be defined and continually reassessed so you can drive alignment and execution, along with proper measurement and communication.
Even more specifically, while continuity is a stated goal for many – “we want to be family-owned forever” is something we hear often – the process to proactively define specific growth goals and develop plans to achieve them is less clear. Common reasons for this gap include lack of unified, centralized leadership to champion this planning, and lack of a governance structure to oversee the work. In addition, families may shy away from this effort because they fear lack of consensus regarding the growth plan.
By considering the key questions of why, who, what and how, a family enterprise can make important strategic decisions that serve the goals of the family, whatever they may be.
This article is a summary of the white paper Get Continuity Right in Your Family Enterprise: How Leading Family Enterprises Create Resilient and Sustainable Wealth, by Jennifer Pendergast, Heather O’Keefe, Jonathan Flack, David Novick, Belinda Sneddon, and Danielle Valkner. Click here to download the white paper or click the button below.