Is family business the most valuable family asset?

A perceptive investor is more likely to put money in a corporation whose founder still works there. On the other hand, the likelihood that the founder is still in the company, even after decades, is higher when such a corporation is a family business.

The presence of the founder or the founding family members builds so much external trust, not necessarily because of their business knowledge or their technical expertise, but the tenacity behind the success.

You can relate to this: we encourage our managers to take ownership and reward them for efforts of doing so. But for family members, all owners or heirs, there is no pretense. They built credibility by their daily (even nightly) toil and sacrifice, tears and family conflicts, which they all overcame to make the family business survive and prosper.  Their familiarity with struggle became handy during the pandemic.

In the 2021 PwC Global Family Business Survey report, out of the 2,801 family businesses surveyed over 87 countries, 64 percent remained ambitious with their 2021 targets, even in the pandemic crisis-laden year of 2020.

This Sunday, allow me to share key insights coming from the survey report before I offer an answer to the question in my title above.

The fourth (and onwards) generation businesses are far more likely to be run by non-family external management. In the Philippines, we see that it can be as early as the third generation. The first generation establishes the business, the second generation takes the business to the next level, while the third generation, with entrepreneurial spirit, may look at establishing their own ventures or startup companies, prompting the absolute necessity of an external management for the family business. In fact, the third generation can have the luxury of pursuing their own and independent interests. It just makes sense that succession planning should make inclusion of non-family members in play.

Family businesses think that diversification is one of the keys to success in the future. These are the top reasons that family businesses are listed as critical to succeeding in this present day: use of new technologies, new thinking, sustainability ... but on top of that list is expansion and diversification into new markets or client segments in five years’ time. This seems to go hand in hand with the PwC report that says in five years’ time, over a third of family businesses expect the next generation to be majority shareholders. More involvement of the next generation in the transformation will likely lend focus to more digital solutions (such as those that enrich customer experience) that can further expedite the diversification strategy.

Family conflicts may be abundant, but the trust level among family members remains high. Over three-quarters of respondents admit that family conflict occurs within the business. Yet levels of trust, transparency and communication remain high among family members, with about 60 percent saying there is alignment in company direction. In contrast, conflict and trust could not coexist among business partners who are not family, unless they are parting ways. This is the edge of family corporations over non-family businesses. Family members have no choice but to bear with each other and each other’s idiosyncrasies.

A point to be made also from the survey is that family businesses do not use third parties or resolution mechanisms to resolve and minimize future conflicts. But more than two-thirds say they have a clear sense of company and family values. What is probably not yet realized by many is that there is clear evidence that having family values in written form correlates strongly with success and other positive outcomes. So if a family business does not have formal resolution mechanisms, but have their family values written down to remind everyone, sometimes that can be good enough.

Family businesses need to graduate from CSR to ESG. You can say that philanthropy is in the DNA of almost all family businesses. In point of fact, the survey report captured that more than 80 percent give back to society through social responsibility activities. However, less than 40 percent have developed and communicated a sustainability strategy. Peer recommendations point to the necessity of having an ESG (environmental, social, and governance) mindset in everything that family businesses do, in good times and bad times. It builds brand value and even lowers the cost of capital.

This is the part where the next generations are expected to make the most impact. Locally, we gathered sentiments from student leaders and they lament that they are indeed more aware of what needs to be changed in the world, but they feel helpless as their hands are full just trying to graduate, and when they do, they will be trying to make both ends meet at the onset of their employment. Family members in their business do not feel this helplessness. They have resources, people, and enterprise. They are empowered and can make a difference today if they are to ensure their legacy tomorrow.

So to the question of whether the family business is the family’s most valuable asset, I reply by first asking the question: Of which generation? No family business is that valuable without longevity. Not only must the business survive and transform, the succession plan must also be strong. Legacy is such a tricky thing. All the good that a pioneer has done, can be undone by the next. Legacy is a helpless asset, and only strong if honored by the generation that succeeds.  Maybe, the family’s most valuable asset after all is love for the one that left it all behind.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected].