As part of their latest Special Report on Family Business, The Sustainability Board Report sat down virtually with German Herrera of Egon Zehnder to better understand the dynamics of family business and their approach to sustainability.
German works closely with family members and owners to create an environment conducive to driving the best people decisions, including leadership succession and governance across generations. He also works closely with boards and CEOs on succession strategies, recruiting, assessing, developing and retaining leadership talent.
TSBR: What do you consider are the fundamental differences between family businesses (FB) and non-family businesses (NFB)?
German: There are a lot of small differences that individually probably don’t mean much, but if you add them up it makes a big, big difference. Starting with the fact that family owned companies are usually trying to, what I call, ‘optimize a different equation’ to a public NFB or a private equity (PE) backed company. These latter firms are focused on maximizing shareholder value, and PE backed companies are focused on ‘exit value’. What you see in family business is that they are trying to maximize their equation. Every family has a different one.
What you see in family business is that they are trying to maximize their equation. Every family has a different one.
But they also have many things in common: First, they have more of a long term view – they are not thinking in quarters or three years – they are thinking in generations: “What am I going to leave for my kids?”, “What am I going to leave for my grandkids?” Second, FB think about stakeholders in a broad way. It’s not only shareholders. It’s also the communities in which they operate. Finally, people who are making the decisions and who are ‘running the show’, are not thinking about their pay check, their bonus, or their stock appreciation – they are thinking a little more about ‘legacy’. When you put all these points together it makes a huge difference in terms of perspective, impact and the equation they are trying to optimize.
TSBR: Considering current global challenges, but also your mentioned ‘long term view’ that FB are taking, what are their strategic priorities?
German: Every FB has a different priority. It’s based on their individual needs, legacy and exposure, but if I had to generalize or summarise: The best strategic framework in application that I know is 3Ps: Profit, People, Planet (1).
The best strategic framework in application that I know is 3Ps: Profit, People, Planet (1).
We all recognize that a company needs to make profit in order to stay alive. But in FB ‘People’ and ‘Planet’ follow closely.
TSBR: Do you feel there is a different approach to corporate governance between FB and NFB?
German: I think there is. NFB that are publicly traded focus more on regulation, oversight and fiduciary responsibility, whilst trying to minimize their overall risk. Public FB admittedly will follow a similar approach. The board’s role in a private FB is more to help the owners with their equation of the 3Ps (Profit, People and Planet). Of course, between FB and NFB there are overlaps with respect to risk management and diversification. In the end, boards tend to converge in what they do, regardless of whether a company is private or public. What is remarkable for FB though is that they would usually start off with more of an advisory board that transforms over time into a fiduciary oversight body.
TSBR: Trying to bridge to sustainability and ESG now – it is becoming best practice to incorporate sustainability matters into the core strategy of a company. Do your clients talk to you about sustainability? Do they embrace it? How do FB approach this?
German: Yes, on both. We’re getting asked about it a lot. My sense is, when you’re talking to FB, especially those that have a high concentration around family ownership, sustainability is in their DNA. Since the day they were founded this is what they believe in and they use their companies to help. A good example is ‘Patagonia’ – since their inception their value proposition was always around sustainability. Today, they are an example in many cases.
You have everybody interested in sustainability today. There are multiple reasons and it’s hard to pinpoint who is doing it for what. But there are people who really believe in sustainability and think it is important when you have the means and the power and the scale. There are others who are worried about not caring for sustainability enough and it’s becoming more of a problem for them. Then, there are companies that are getting pressure from their consumers and investors, and some are embracing sustainability simply because they need to attract the best people. If you’re a company that does well and good, more people are going to want to work for you.
If you’re a company that does well and good, more people are going to want to work for you.
In my eyes, as long as we’re proactive about sustainability and add value – it’s a win-win.
TSBR: Considering that FBs have a higher percentage of Sustainability/ESG competent directors – what might motivate a candidate to join a FB board and what makes those companies attractive for candidates?
German: That is a very loaded question (smiles). I do a lot of board searches. Different people have different reasons for joining a board. You get people who just want to join a board because it is prestigious, or they simply have time on their hands. On the other side, you get individuals who want to give back. They have already made their money; they had a successful career – those people are a bit more selective. They select a board based on impact and purpose.
So, if someone is more purposeful and has a better track record and general interest – they will be drawn to boards that have more meaning, more impact and are more interested in the long-term. Boards with more conviction about sustainably attract the people that are aligned with them.
Boards with more conviction about sustainably attract the people that are aligned with them.
TSBR: Do you think it is important to have a stand-alone sustainability committee on board level?
German: I believe boards who have a committee are more serious about it (sustainability) than those who don’t. I’m not in favor of having a committee just to say you have one, meaning you must put resources behind it too. It is important to establish a structure that enables you to do what you want to do, otherwise it becomes an unfunctional or incompetent committee.
TSBR: How would you summarise why FB are doing better in appointing ESG competent directors than NFB?
German: Care. Because they are doing it for the right reasons. Because they are thinking long, long, long term. They are thinking hundreds of years – generations. That’s what moves them. When you have the flexibility, liberty and luxury to think with that kind of timeframe – you’re also making better decisions.