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In turbulent times, can family businesses prosper by sticking to their core values?

How the Covid-19 pandemic is exposing both the strengths and weaknesses of family-owned firms

In recent years the business world has become used to the concept of “disruption” – the effect caused by companies which create a product, service or way of operating that displaces existing market leaders. This year the world has seen another disruptor of a very different sort: the Covid-19 pandemic.

Coronavirus has had an unprecedented effect on the world, and the rising tide of redundancies is just one indication that global businesses are feeling its impact. Family businesses, which are central to the global economy, are by no means exempt from this trend.

It may come as some surprise that this percentage is not even higher. While family businesses are associated with particular attributes which equip them to deal better with crises compared to their non-family peers, such as long-term vision, low debt and a focus on resilience, any potential weak points will be sorely tested.

This is a sobering reminder of the vulnerability of family businesses. If this global health crisis is a call to action, how can these companies steer a course through it?

Peter Vogel, professor of family business and the director of the global family business center at IMD Business School, has identified six attributes commonly displayed by successful multi-generational companies which help them to navigate crises.

Family cohesion has also been cited as a potential challenge, as while Covid-19 has had the effect of pulling some families closer together, others are feeling the tension. 29 per cent have seen some negative impact on family relationships, while 24 per cent have seen a positive impact.

“We are seeing a lot of families coming together around the need to save the business, to save the employees, to rescue as many careers as they can,” notes Josh Baron, adjunct professor at Columbia Business School. Baron says the crisis has created a “fertile ground” for bringing revitalising new blood into discussions.

However, this can also be a potential cause of friction. “You may have a younger generation within the business that is progressive and with a greater aptitude for innovation and taking risks,” says Peter Shand of Edinburgh-based private client law firm Murray Beith Murray. “That could come crashing into the older generation who may feel a conservative instinct to withdraw.”

That said, the crisis could also be an opportunity to accelerate the bridging of the generational gap with a shift towards the next generation for leadership. “Now is the time to leverage the digital savvy of the younger family members as this can make the difference between falling behind and staying ahead,” says Peter Englisch, global family business leader for PwC.

Family firm leaders can’t afford to ignore disruptive business models, digitalisation and other emerging trends affecting their industries. According to Peter Vogel the world is only growing more complex and the rate of change is accelerating as a result of digitisation.

The subject of generational renewal raises another potentially thorny issue for family-owned businesses: succession planning.

More than 50 per cent of global family CEOs lack a formal retirement plan and 70 per cent of global family businesses do not have a formal succession plan, according to a global survey of over 1,800 family business leaders.

Many family firms, says Vogel, are led by a single dominant patriarchal or matriarchal figure who has been running the company for decades. Should that figurehead be affected by the coronavirus, the company stands to suddenly lose its decision maker-in-chief and potentially impact the business negatively.

Similarly, many family firms don’t have fully professionalised boards or have management teams partially filled by family members. This means these businesses can be ill-equipped to take effective decisions in a time of crisis. “Family firms that have not professionalised their governance can find themselves in deep trouble,” Vogel adds.

Assembling a capable and engaged board of directors is an essential first step to good governance and, without this, family firms risk being unrepresentative and out of touch.

Nonetheless, with the tools and capabilities to weather unprecedented global disruptions, family businesses not only have the potential to excel for years to come, but to emerge from crises such as the recent pandemic even stronger than their corporate peers.

24 August 2020

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