Family Capitalism

Best practices in ownership and leadership

Gry Osnes, Gry Osnes

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315444185
• Edition: 1
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

In most countries family businesses make up between 50 - 95% of business entities. Families control 30% of the Fortune 500 companies. These owners and their businesses are often an important part of the social fabric in local communities, and increasingly the international economy. Despite this, Family Capitalism, or ownership, has been seen as synonymous with stagnation, conflict and crises. The authors focus on how family owners avoids these pitfalls, and how emotional resources develop strategizing capacities.

The book explores how successful family businesses innovate and create Visionary Ownership, and implement it. Two crucial leadership capacities are introduced; Leadership of Paradox and Distributed Leadership.

A renewed understanding of family businesses show how the family can generate unique strategic advantages in stewardship, succession, long-term thinking, risk management and building social capital. It shows a different perspective regarding value creation in the economy. The book provides new insights for family owners, advisors, leaders as well as scholars.

The findings are from a best-practice research project with cases from China, USA, Germany, Colombia, Israel, Tanzania, France and Sweden. Applying strategy-as-practice theory shows how family owners, across different cultures and sectors, use generic ownership strategies and experiment, such as with cluster ownership and creating new ventures in succession.

1 Introduction

Strategy practice in family ownership

Gry Osnes

This is a book about successful family owners and their businesses. It complements literature that has a focus on fault-lines, failures and problems seen as intrinsic to the family ownership of a business. Much of the literature on family-owned businesses has featured failed family ownership and enterprises and this should not be seen as synonymous with family ownership. An aspiration of this book is to describe the counterforces to these destructive dynamics. We describe and explore the resources and strategies families deploy as owners and leaders.

Family business or family capitalism

We differentiate between studying ‘family capitalism’ and ‘family businesses’. The term ‘family capitalism’ captures both the family and its involvement inside the business, and the impact of leadership through ownership structures and governance. With this framework there is a wider perspective of what the family is doing with the ‘object’ (business). If one focuses on the business, and not the relationship between the family and business, one can fail to grasp the dynamic of how a family owner changes its ownership. It can be changing their use of governing structures; how they start and develop new ventures or use the proceeds from a sale of a business to develop a new business. Recent research shows that many families own several companies in a cluster (Tsabari, Labaki, and Zachary, 2014). Our technology excellence case was the only case where the family had owned only one company from its founding in the early twentieth century until 2016.

Jones and Rose (1993) question and refute a broader narrative of family businesses as a contributor to stagnation in the economy. We will build on these contributions and show how the family owners are renewing entrepreneurship, growing the business or developing new business, and by this contributing to economic growth. In addition many of the family owners and their businesses had other goals such as stewardship for a local community, building a wider social network of business communities, technological excellence and letting employees buy a company they owned. As such the family had impact beyond the financial aspect of their businesses. The USA family, risk averse and conservative, challenged themselves to expand and grow the assets they had over a period of thirty years. They sold businesses to former employees, who would continue to own and manage them successfully, so as to finance a bigger business. The Chinese business we describe had evolved a structure of a conglomerate with several interlinked companies which would be the driving force behind a business cluster in the region in China. This allowed them to continue to innovate and to cooperate on business activities and big contracts between different family-owned companies.

If only one in ten family-owned businesses have such a wide impact it would be significant, in addition to the economic contribution, for a local community or region. Academic literature has often ignored the influence of family ownership and family businesses in the economy, as the writers Heck and Stafford (2001) noted. Not only has there been a focus on dysfunction and family business failures in addition to a perspective that family businesses contribute to stagnation in the economy. More recent business history research challenges this notion (Jones and Rose, 1993). Our case study supports this perspective and emphasizes the crucial role of family as an entrepreneurial group as pivotal to value creation and innovation in an economy. The economic impact of family businesses and their ownership is formidable, and has probably been under-estimated. In addition to the economic aspect, our cases show how they are a part of the social fabric in the local community and increasingly an actor in their global markets. A major international study by the Boston Consulting Group reported in Harvard Business Review (Kachaner, Stalk and Bloch, 2012) found that family-owned firms tended to be more resilient and commercially successful than a comparator group, as a result of counter-cyclical investment, frugality, successful diversifications and long-term strategy-setting: ‘When we looked across business cycles from 1997 to 2009, we found that the average long-term financial performance was higher for family businesses than for nonfamily businesses in every country we examined.’

There is a specialist research stream trying to quantify the economic impact of family-owned businesses. Numbers from The Family Firm Institute webpage, www.ffi.org, estimate that family firms to account for two-thirds, or 70–90 percent, of global GDP annually. Between 50–80 percent of jobs in the majority of countries worldwide are created by family businesses, 85 percent of start-up companies are established with family money. In most countries around the world, family businesses constitute between 70 and 95 percent of all business entities. Of the world’s biggest companies (Global Fortune 500 Companies) 33 percent are family controlled.

The latest research shows that the individual heroic entrepreneur, often assumed to be a man, is rare compared to entrepreneurial groups. The latter accounts for 70 percent of newly founded businesses in the USA (Ruef, 2011). Entrepreneurship in groups does not only describe the founding of the business but also its renewal, in different ways, over the history of a successful business or ownership. We therefore focus on what the family as a group does, rather than on a single family member. It might appear that there is one person in control, but after looking under the surface a more complex dynamic often emerges. With more in-depth exploration, in all our cases, there was distribution of leadership and control to different family members within a generation. Furthermore, in all our cases there were three generations or more involved. Very rarely would the oldest generation retire, but instead would carve out innovative exit roles. In our cases it was always a couple that started the business and, contrary to the stereotype, the woman would often have financial control and veto power on investment. Of the younger generations emerging now, the sisters compete, and collaborate, with brothers or cousins.

Ownership and leadership

Members of an entrepreneurial, business-owning family are actors with drive, imagination and dreams that they seek to achieve and implement. These goals and dreams we regard as visionary ownership as described in Part I. It is about how one innovates a vision or dream and uses strategic practices to achieve them. We grouped three tasks that would be important for the vision: grasping and exploiting opportunities, entrepreneurship and consolidation, accumulating advantage for the family. A successful owner has to be able, over a long-term perspective, to manage these tasks.

In Part II we focus on two other important leadership strategies that we found these families used: the leadership of paradox (Ingram et al., 2016) and distributed leadership (Gronn, 2002). These leadership capacities are invoked when the family uses their emotional and social resources. The family and the business have needs and goals that are contradictory, resulting in paradoxes. An important part of family leadership is to be able to make priorities and create ‘win-win’ dynamics out of these paradoxes. Distributed leadership can happen in transfer of leadership between generations, among siblings and by creating clusters of ownership.

Strategy-as-practice theory

Our book describes best practices in how to optimize the outcome for a family and to maintain the business as competitive and financially profitable. These businesses were successful both in the short and the long term. The analytical approach applied builds on a strategy-as-practice approach, in which strategy is seen as a ‘doing’ activity (Whittington and Vaara, 2012). Different strategy practices that owners use are described in Part I: serial entrepreneurship, building social capital, creating cluster ownership and stewardship strategies. These strategy practice guides behavior and are macro strategies. At the micro-level praxes are creating and upholding these macro-strategy practices. Actions, or praxes, enable and implement the strategy practices (Ibid.). The difference is important as there is room for innovation and development when one executes praxis. At the praxis level one can slightly, or possibly dramatically, change the policy or procedure. In this way one can conceptualize how change can happen naturally and how strategies emerge over time, and with experimentation. This is important in a system that is fluid and less rigid, such as a well-functioning family business.

Figure 1.1 Strategy practices in family capitalism

The strategy practices framework for family ownership is suggested in Figure 1.1. To the left of the figure are the ownership strategies we found. These practices were present in all the family cases across different cultures and types of businesses. The emotional and social resources, praxes and leadership used by the families, are shown to the right. We have divided the book into two sections according to this macro- and micro-level. Part I describes the macro-ownership strategies we found made families successful in their ownership. Important micro-activities or praxes, or leadership strategies are in Part II. This is how the families used social and emotional resources in leading the family group, and business, when implementing their ownership strategies. Important leadership strategies, or praxes, included negotiating autonomy when creating roles, being able to mourn loss of safety and creating authority.

Overlap of two systems: creative tension or destruction

Studies on why a family business fails are useful. These are plentiful, covering lack of planning the life cycles, conflict in succession or a failed succession and an inability to effect renewal (e.g., Gersick, 1997; Lansberg, 1999; Kets de Vries, 2001). Another risk with family ownership, and within the business, is a preoccupation with an overwhelming legacy (Gilmore and Ronchi, 1995), which can be an overhanging shadow for successive generations. Rivalry between or within generations (e.g., Kets de Vries, 2001) can lead to passivity, faulty decision-making or strategizing. Most of our families had confronted some of these problems. The research focus arose from exploring how the families strategized these threats, used leadership abilities to counteract them, and created resilient and thriving enterprises.

There is an intrinsic tension between the family system and the business system. As pointed out, this can lead to conflict and threaten to create destructive dynamics. But we also found creative tension and ingenuity resulting from the overlap. In some cases, it triggered strategizing and thinking around the contradictory needs and paradoxes. The family has a primary task to create attachment and a sense of safety. The business seeks to be adaptable in the external reality, to be a transitional object. The paradox between the family as an attachment object can create conflict or creativity when the business, to be competitive and profitable, is a transitional object.The strategy practices we found successful enabled to avoid conflicts affecting the business and tension became the origin for creativity and innovation.

Figure 1.2 Strategy practice: creative tension or destruction

The succession theme

Less surprising is that succession, regarded as a critical stumbling block, was a prominent issue in the cross section between ownership and leadership strategies. We will therefore treat succession in both sections. A succession outcome is part of a process within the family as described in Chapter 5, Part I. The different options, and strategic elements, in a succession are described in Chapter 18, Part II. Succession forms a part of the other strategies and cases we describe. Stewardship overlaps with succession, and this is described in a subsection in Chapter 8. The same is the case with building social capital, as it can be transferred to the next generation (see Chapter 4). Succession and governance form part of a process of how to strategize authority, or can be approached as such (see Chapter 14). In Chapter 17 a non-family chair of the board describes how he makes role transitions for a new generation of family members and trains them. In the index there will be a complete list of where succession strategies and dynamics are described.

What is a family?

Applying a strategy-as-practice framework to the family unit challenges a romanticized image of the family. In western-based culture there is a social narrative of the family as a reproductive unit where the couple earns an income from employment. The family is the seat for romantic love; stereotypically with the wife’s main task being to care for their children and remain relatively dependent on her husband for financial prosperity. There is a strong notion that income and financial resources are generated from somewhere other than within the family.

A surprising research finding, maybe based on our naivety, was that in every one of our cases it was a founder-couple that started the business. This was the case in an Arab-Israeli company, and in the German business and in the Chinese, American, French, Tanzanian and Swedish businesses. The business would often start, literally, in the kitchen. The wife would work, own and partake in the business often with equal if not more financial control than the husband. Women were instrumental in the strategy development and risk assessment that made the business successful. In this sense, the family should not be thought as being limited to romantic and emotional tasks. It can also be a business partnership and a space for risk assessment and strategy making. This is explored, together with a growing trend of powerful sisters, in a separate chapter. We discern a trend of ‘sisters in ascent’ that challenges a more patriarchal notion of the family unit and family ownership.

Educational approach

This book is for leaders, family members, owners and advisors involved with family businesses. For th...