Author: John Davis

Originally published in FFI Practitioner

Families in business usually have a deep desire to see the family company prosper and survive into the next generation and to keep the family successful, united, and supportive of the family company. These are often “stretch” goals because not many family companies survive for generations, and because families seldom maintain unity, financial success, and supportiveness. Long-term family company success and survival are for the few who do a number of things right and benefit from the coincidence of particular environmental conditions, usually along with some luck.

Companies in general have short lives. In the U.S. 50% of all companies started today will be dead within five years, 25% will last a decade, and only 16% will survive a generation. Family-owned companies have been observed to live twice as long as non-family companies but still, not that long.

Size doesn’t protect a business much from a short life. A comparison of Forbes’ original (1917) and 1987 lists of the 100 largest American companies showed that only 18 of the original companies remained on the list after 70 years. Sixty-one of the original companies ceased to exist altogether. Another 21 had sunk far down in relative value and dropped off the list. Since 1987, seven of the surviving 18 companies have either been acquired or gone bankrupt. Only one company — GE — was still in existence in 2012 with above market returns. In other words, in a 95-year period, 99 of the largest 100 companies in the U.S. went out of business or fell by the wayside.

There is also evidence that company life spans are shrinking over time. A top 500 American company founded in the 1950s would have lived 53 years. One founded in 1970 lived, on average, only 32 years. In 2010, a top 500 American company was expected to live only 17 years.

The death of most companies is largely driven by the rapid change, contraction, or disappearance of their industries. Broader economic and social disruptions also account for a portion of business failure. The remainder of business failure has to do with how the company responds to the changes happening around it. Together with Tom Steiner, managing partner at Baldwin Bell Green, I am studying how family companies are faring in the current business environment—one of massive disruptive technological and global economic change—to understand how their distinctive characteristics and behaviors affect their chances for survival.

Assessing a family and its company’s chances of survival—the focus of much of my academic work—isn’t a simple matter. After all, these are complex systems operating in complex economic and social environments. Fortunately, however, general explanations of family company success and survival can be reduced to several factors.

In order to survive, all biological and social systems must attain adequate levels of growth and unity and adapt to environmental opportunities and threats. Social systems (businesses, other organizations, even nations) need enough trust, pride, talent, and money (financial resources) to fuel their growth and unity and to adapt to opportunities and threats. A family company must grow and stay united enough to capture resources, take advantage of opportunities in its markets, and protect itself from threats in the industry and the economy. The owning family (and particularly the key owners) must stay united enough and grow the family’s talents and resources so it can adequately control and contribute to its company, take advantage of opportunities, and protect the family and the company from a variety of threats.

Much can get in the way of doing these things well, but we observe that three factors profoundly impact how a family and its business work toward long-term success and survival: the industry life cycle stage, the family’s life cycle stage, and the business leader’s own life cycle stage.

Industry Life Cycle

Industries pass through distinctive periods or stages of start-up, growth, maturity, and decline, although different industries move through these stages at different speeds. A company must match its resources, talents, and management methods to its industry stage. This is generally difficult to do; more so if the company is wed to its traditional ways of doing business; and even more so if the pace of industry change is rapid. Today, many industries are being disrupted and threatened by technological changes occurring at an accelerating pace. As a result, many industry life cycles are becoming dramatically shorter or even collapsing. To survive in these conditions, a family company must be clear about its aspirations, resources, and talents and migrate away from business activities that have less potential for growth to business activities that have more.

Conceptualizing a family company as a portfolio of business activities and not becoming too attached to any one business facilitates such movement. So does having adequate company and family assets, a strong family commitment to value creation, and being able to make timely changes to the family business. These latter ingredients are characteristics of a family’s stage in its own life cycle.

Family Life Cycle

Families also have life cycles and pass through stages with distinctive characteristics. Families start at the creation stage, usually recognized as the generation when the founder starts the family business. The family ideally moves from the creation stage to a regeneration stage, where the family renews its drive to create long term value and wealth and to maintain family unity around its core activities. Alternatively, the family becomes complacent and then usually drifts into a decline stage, where family industry dissipates, family unity dissolves, and family assets disappear. The movement from one stage to another is the product of forces on the family and the family’s choices.

Families in the creation or regeneration stages have the greatest chance of adapting their companies to industry challenges. This is largely because they have a realistic view of their competitive environments and are committed to value creation, not the protection any one line of business activity. These characteristics make the family and business more capable of timely, adaptive change. People, families, and companies tend not to change until they are inescapably confronted with factors that threaten their survival. By then, it is usually too late to adapt fully to threats and survive.

The Leader’s Life Cycle

Leaders of family companies usually strongly influence the ability of a family and its company to adapt to industry changes, look for new opportunities, grow the family company, make bets on the future, and migrate into new business activities. Leaders have identifiable periods of energy, growth orientation, and risk taking, and clear periods of risk aversion when protecting family company assets and their own position of power in the system become high priorities. The success and survivability of a family company depends on the congruence of the leader’s life cycle with the challenges facing the company and the stage of the family itself.

Difficult, Not Impossible

Achieving congruence among these factors is challenging but doable. An excellent example of aligning lifecycles for regeneration is Kikkoman, founded in 1630 and owned by Mogi family members for 16 generations. Soy sauce has been around for centuries and has a long life cycle, but the family has stewarded the company through wars, natural disasters, and global economic changes. In 1973, Kikkoman was the first Japanese food company to open a factory in the U.S. and now people use soy sauces globally. With 79 year-old chairman and CEO Yuzaburo Mogi still at the helm, international sales have grown 10% for 25 years, according to The Economist.[1] But the growth engine of industry leader Kikkoman is not even in sauces. It’s in pharmaceuticals.

Kikkoman subsidiary Biochemifa has been researching yeast and other compounds for more than 100 years. Today it develops systems that monitor food safety and environmental hygiene and produces raw materials for clinical chemistry research and diagnostics, health food ingredients, and chemical products. None of these industries is in decline. Yuzaburo Mogi’s leadership has been key to the company’s growth. He has steadfastly energized the family company and led its expansion while promoting family unity. The Mogi family, still in the regeneration stage, has given the leader strong encouragement to expand and regenerate the company.

The lesson for practitioners in the family business field is to recognize the importance of these factors—industry and company stage, family stage and leader stage—in understanding the capability of the family business system to survive and be successful.

Originally published in Harvard Business School’s Working Knowledge (March 12, 2014)

No one needs convincing that the right CEO matters, and that sometimes CEOs need to be changed. Even the stock market moves with changes in the leadership of a company. When the Japanese camera maker Olympus fired its CEO in 2011, its stock fell; when Air France-KLM indicated it would let its CEO go that same year, its stock rose.

But firing the CEO is a tough decision. It often suggests that something has gone very wrong and the organization could be in trouble. It implies that the person was a bad choice to begin with, which impugns the judgment of those who hired the CEO. And there’s also the personal confrontation that nobody relishes. It’s no wonder that owners and boards are hesitant. Yet sometimes, this is necessary. But when?

You should fire your CEO under two of these three conditions: (1) there is a weak and unfixable fit between the CEO’s skills and the needs of the company, (2) the CEO disrespects the core values of the company, and (3) you have good options to replace the CEO, with manageable consequences that are generally positive.

Factor 1: Fit

High performing companies require CEOs with the right skill set, decision style, and values. They have strong credibility with key stakeholders. They build strong executive teams that can execute the strategy of the company. Good CEOs come in all shapes and sizes. Even deified leaders have weaknesses. No one is good at everything. For this reason, good CEOs surround themselves with strong executives who complement their skills, help analyze complicated situations, and chart the right course for a company.

Successful family CEOs often have the values, vision, passion for the business and abilities to build loyalty with key owners, customers, suppliers, and the employees that make them the right leaders of their companies, even if they lack certain skills. You need to look for a leader with the right package of skills, values, and abilities who can build a strong leadership team. If a family member has the right mix of strengths, having a family leader is usually the better choice. If not, find a nonfamily executive who is a good match.

The CEO is always accountable for whatever affects overall performance. Some would include company performance among the factors to consider in firing a CEO. Japanese leaders are known for stepping down when their organization performs poorly, taking full responsibility. To restore credibility to a company, a leader may need to step aside or be removed. But in a family business, interested in long-term success, poor performance may not be reason enough to fire the leader. The business leader may not be responsible for the poor results and may even be the right person to help restore good health. I recommend that you look beyond current performance to the kind of leadership the company needs to be a strong performer long-term.

If the CEO is blocked from doing his job, then let the CEO (with the oversight of the board) change what needs to be changed so he can deliver good performance. But judge a CEO on his or her fit with the needs of the company.

Given the right feedback, guidance, and support, if the CEO-company fit is good, consider Factor 2. If the CEO cannot fit with the needs of the company, then you may need to make a change.

Factor 2: Does The Ceo Support The Core Values Of The Company?

Companies generally claim to honor their core values. Long-term high performance family companies live by their core values: quality, customer service, environmental concern, respect for employees. Nothing is more detrimental to the core values and culture of a company than to see the CEO violating them. Telltale signs include cutting corners to boost profits when the company says it stands for excellent quality. Or disrespecting the legitimate needs of employees. A very experienced senior executive once told me: “If you want to show that you’re committed to your values, fire a high performing executive who’s violating them.” The same goes for a CEO.

I once advised the chairman of a third-generation family business who was having difficulty with his son, whom he had recently named CEO. The new CEO was a decisive leader, smart and capable, with an MBA and a strong academic record. His analytical skills were first rate, better than his father’s.

But there was a problem. The son was arrogant and made it clear to everyone that he didn’t think much of his father’s management style, his executive team, or the company’s culture, which emphasized quality, respect for others, and patient investing. The son had a burning desire to show that he knew more than others, even though the top management team had been in place for 20 years and had helped secure the father-son transition. The son felt the business could be run in a more profitable way. He was probably right, but the company was performing well.

The chairman’s wife had wanted her son to succeed her husband. But she grew increasingly convinced that her son would not support the values of the company and would harm the culture that had made the company strong and the family proud. The new CEO’s arrogance and disrespectful manner eventually eroded his family’s trust. The concerned patriarch finally admitted this to his board. After consulting with them and with me, the father walked into his son’s office on a Friday afternoon and said, “Son, nobody can contemplate life with you as CEO. I’m very sorry to inform you that you are fired as of right now.”

Torn between being a good leader and a kind father, he protected the core values of his company and endured serious conflict in his family. The son went on to start another company and did well as an entrepreneur. The father stepped back into the role of CEO. After a couple of years, he recruited a cousin from the junior generation and passed the business to him. The company stayed in the family and continued to be well run. Eventually the strained family relationships healed.

Factor 3: Do You Have Good Options?

Of course, you should have options ready if you fire your CEO. Family companies should always develop CEO alternatives-at least for emergency situations. But they rarely do.

In a fast-growth economy like Brazil’s, with a scarcity of available top management talent, companies are reluctant to fire any senior executive, let alone their chief executive. In these circumstances it is even more important to make sure you provide the CEO clear expectations, useful feedback, good guidance, and the understanding that he or she must be accountable to the owners. I’m sure if economic conditions were different, if you had comfortable options, and if the CEO’s fit and values were worrisome enough, you would be more willing to consider firing your CEO. It would still be a tough choice but you need to be ready for this move. I hope you never have to make it.

Originally published in Tharawat Magazine (February 19, 2016)

Professor John Davis at Harvard Business School, is one of the world’s greatest authorities on family businesses. Davis embarked on a successful career as an educator and advisor to business families around the world by combining his passion for business organisation and family psychology. One of the first in the field, Davis began studying family-owned businesses in the 1970s. A few decades and hundreds of articles later, he is the driving force behind many prevalent family business theories and management principles. Professor John Davis continues to teach and research in this field and also consults with families around the world. Tharawat Magazine sat down with Professor Davis to discuss one of the family enterprise’s biggest challenges: talent management.

Why is the discussion of talent management in the family business more important than ever?

Winning in business today is mostly about the talent in your company. To have a high-performing company, you need exceptional talent. You need to be able to recruit, develop, motivate and keep great people. Factors leading to good company performance, such as being able to spot and develop the right opportunities for your company, manage key stakeholder relationships, keep up with technological change all depend on having the right talent, and especially depends on the quality of your management team. If you are not working on building a highly capable management team, including great non-family managers, you might not be able to grow your company or even keep it going.

Families generally hope that one or more family members will be interested in the family business and be able to eventually lead it. Sometimes you get one or more talented family members to join your company but you can’t count on it. At the very least, a family needs to have good options if family members do not have the interest or ability to manage the company.

Do family businesses have any advantages attracting and retaining good non-family employees?

Family businesses are often attractive employers because they tend to create more caring workplaces and offer more job security because of their long-term thinking. If they have an exciting mission on top of that, family companies can be hard to beat. A real competitive advantage of many family companies is the closeness and loyalty of their employees, a sense that the family and non-family employees are a special group, a “tribe” with a special mission. This culture needs to be communicated to people the company wants to recruit. As family companies become more “professional” they should make sure they don’t lose this tribal identity.

Originally published in Harvard Gazette (July 2014).

Despite finding great success and strong customer loyalty in a fiercely competitive industry, Demoulas Super Markets, a regional grocery chain owned by two flanks of the Demoulas family, has been embroiled in a bitter internal feud that dates to the early 1990s.

The first chapter of the dispute resulted in the most expensive lawsuit in Massachusetts history; now, tempers have boiled over again, with employees and customers protesting the ouster of CEO Arthur T. Demoulas and two top deputies by a board controlled by members backing a rival cousin. Demoulas’ firing prompted thousands of workers and their supporters to rally at corporate headquarters this week urging his reinstatement. Dozens of lawmakers have come out publicly in support of the protesting workers, some of whom have also been fired.

Established in 1917, the privately held company has 71 Market Basket grocery stores across Massachusetts, New Hampshire, and Maine. It has approximately 25,000 employees and estimated total revenues of $4.3 billion in 2013.

The Gazette spoke with John A. Davis, a senior lecturer of business administration and the faculty chair of the Families in Business program at Harvard Business School, about the dynamics of family-owned companies and the particular challenges they face.

GAZETTE: What are some of the common issues that family owned businesses contend with, and how are they different from what other businesses confront?

DAVIS: Family companies are the biggest sector out there among private companies, and account for approximately half of all the publicly listed companies in this country. So it’s a huge, huge sector. Maybe half of the biggest companies in the country are still family controlled, all the way up to companies like Wal-Mart.

It’s a very quiet sector, but it’s also a very important one and, arguably, the single most important sector in our economy. If you take a look at the performance of family companies, most all of the research is demonstrating that by a significant margin, on average family companies perform better. They have a lot going for them, but there are high performers and weak performers. You’ve got companies like Mars, a huge, family controlled behemoth in the food products industry; most of your media companies are family controlled; you’ve got Fiat that’s doing quite well. Market Basket [appears to be] a very strong company — high quality, workforce loyalty. … But these family companies are vulnerable to things that not all companies are vulnerable to.

All companies need a good ownership base, no matter what kind of company it is, even whether it’s public or private. You need to have an ownership base that is stable and supports management. Family companies do best when they are long-term oriented, [when] they make investments and develop relationships and loyalty for long-term returns. They are not speculators, in general. They’ll wait years sometimes for good returns because they want to do the game right. Now, if you have an unstable ownership base, which this company obviously does, it’s really hard to manage well in that environment. If the family is unstable, if the family is rivalrous, if family members block one another for whatever reason — it could be that they disagree on strategy or they just don’t like each other — if that starts getting played out in the ownership area, it doesn’t take very long at all before the management really feels it and it affects how things get done and it even affects if people are willing to invest their careers in the company.

So you have to be very careful in a family business to make sure that the ownership base, and the family base, is united and disciplined. It is natural for owners and family members to disagree to some extent with one another. You don’t want 100 percent agreement, but you want unity. And that requires that when we disagree, we have mechanisms where we talk out our disagreements and get on the same page again and then march forward. And if you don’t have those consensus-building mechanisms, you’re usually in a bind.

GAZETTE: What’s the best way to avoid or to resolve those kinds of problems?

DAVIS: A very strong shareholder agreement, number one, that says that family disagreements don’t go to court. When families go to court, it rarely works out well. In most families, family members suing each other is an embarrassment — and should be. The temptation to retaliate is pretty high. The agreement among the owners states that, “In the event of these kinds of disputes, this is how we’re going to deal with it.” Best practices usually include working it out internally, maybe through a family council or the company board, then working with a mediator and then finally, binding arbitration. But we don’t go to court and if you choose to go to court, there are penalties for those owners for going to court. So it’s important that families set up these agreements and this family apparently didn’t.

GAZETTE: In terms of smart corporate governance, is ensuring that some non-family members have a voice in executive decision-making the best strategy?

DAVIS: Yes. I recommend a board with representatives of the owners but only a few, the CEO and no other managers, and independent members — people who are not owners and also not managers, people who are fair-minded, bring expertise and outside perspectives to whatever issues come up, and can help resolve internal conflicts so that the company can unite behind a particular strategy and march forward with a long-term plan. You want the family owner’s point of view on the board because when the board makes a decision, you want to know that the owners are going to line up behind it. But you don’t want the family to dominate the board because you’re trying to reduce and manage family politics, which is likely if not inevitable.

The important thing to remember about families is that the issues don’t have to be big ones to get a family riled up. Sometimes [what seem] like little things really offend or create mistrust within a family. Because family feelings can be sensitive, and also because memories in families are remarkably long, you need to be able to be extra-careful in a family business that you have very solid governance to help make family members feel secure that their interests are well and fairly represented. We see good governance making a huge contribution in well-run family companies, to the benefit of the company and to the family.

GAZETTE: You’ve written about the social psychology of family shareholder dynamics. Could you explain what those typically are and how they affect a business?

DAVIS: In a family ownership group, it’s not just who owns how much, but how are they related? You have to understand the family relationships among the owners, how ownership is distributed, and the relative power of different owners and different ownership groups in the mix. A group of siblings will have a different kind of relationship typically than will a group of cousins. The nature of the family relationship — whether they’re tight and mutually supportive or rivalrous — makes a huge difference in the ownership group. The best predictor of how cousins will get along is how their parents, the siblings, got along. If the siblings set a good example for the cousins, the cousins will usually follow it. There are exceptions to every rule, of course, and I have seen cousin groups who get fed up with their parents’ bickering and come together and say, “We’re going to do this better, we can get along.” But those tend to be the exception.

To understand the shareholder dynamics, you also need to understand how ownership is organized — is it organized within a family holding company or do owners have a shareholder agreement? The more clarity there is about who owns what and what are the rights and responsibilities that the owners have, the better. And again, good governance helps, meaning the rules, policies, agreements that we share and the forums like boards and shareholder meetings. Driving all this is good leadership. You need leaders that are seen as fair and wise, and understand how to make decisions so that we trust them. If we have good leadership, along with good safeguards in our governance system, we’re probably going to manage most of these ownership issues well.

GAZETTE: It appears that much of the infighting in the Market Basket situation stems from issues connected to succession. Is there a lesson here for companies that envision passing along the business to heirs?

DAVIS: Obviously, clarity about who will succeed the previous leader is important, but disputes are not always caused by the lack of a clear plan. Sometimes each side is really clear about who should be the successor, they just disagree. Families like this one need help in agreeing on their common purpose and what they can do to treat each other respectfully. They need to move on from their old disputes, but if they can’t move on, business decisions still need to be made. Families benefit from having a clear buy-sell agreement, so that if we can’t get along, one of us can buy the other out. You don’t want to play that card unless you mean it, but owners have to know it’s in the deck of cards and can be played. Because people need to know that if they don’t behave reasonably and respectfully that the other side can play it. And if the card is played, you restructure the ownership group, buy one party out, and then move on with, hopefully, more aligned owners that see things pretty much the same way and agree on the rules. That is probably needed here. It looks like this family, unfortunately, got off on the wrong foot and then went down this very argumentative and disruptive path and could never get off of it. They’re still on it.

This interview has been edited for clarity and length.

Originally published in: Family Capital (September 2014)

This summer an earthquake erupted at family-owned DeMoulas Super Markets, the Massachusetts-based supermarket business which runs the Market Basket chain, when a long-running disagreement led to one cousin ousting another as chief executive.

The US media gleefully portrayed the story as a family feud, pure and simple. But is that the best way to see it? “Our temptation almost always when we see problems in a family business is to blame it on the family,” says John Davis, a professor at Harvard Business School and a family business expert. “And when we see strength, we say that’s because they must have a good board, or good management. It isn’t because of the family.”

Davis, who advises many North American family businesses, says this situation isn’t fair. “Of course, sometimes the family is responsible for some of the problems, but they are also in many cases responsible for many of their strengths,” he says.

Davis reckons the coverage of the story was typical of how the media portrays family businesses – through the prism of a family feud. “The only time you hear about family businesses is when something like the Market Basket case pops up and them we tend to demonise them,” he says. He has a point.

A story explaining that family ownership is behind a business’s success is a rare thing in the mainstream business press. On the flip-side, problems at family firms are almost always blamed on some aspect of family involvement, real or imagined. Look at how stories about News International are often seen in terms of perceived friction in the Murdoch family. In reality, nobody knows whether the family members get on.

Does this matter? Well, yes, because it disguises the fact that family firms perform so well. “I’m not glorifying family capitalism as a superior form of capitalism,” he says, “there are good family businesses and bad ones, just as there are good non-family businesses and bad ones. But on average, family businesses perform far better than non-family businesses. That has been shown in a large number of studies over the past 15 years.”

The reason they do perform better, says Davis, is because they are sensitive to their stakeholders; they aren’t just trying to build financial value for their shareholders, although they do that as well. And yet that fact is widely ignored.

Why does this happen? Perhaps because, being secretive, family firms become a blank canvas on which people can paint their own stories. “All of the criticism that you see come out about capitalism – the excesses and disappointments – are really being addressed by these better performing family businesses,” says Davis. “But they aren’t telling the world about it.”

Originally published in:  New York Times (May 2015)

PETER GORDON, a member of the family that owns Glenfiddich whisky, has a distinct memory of the workers lined up as he walked into the Scottish distillery in the 1970s. They were waiting for a dram of day-old whisky — the equivalent of a double shot. If they didn’t drink it, they rubbed it into their hands, in the belief that it toughened calluses.

Mr. Gordon was 17 at the time and had just started working at the plant on school holidays and summers. He couldn’t always drink his dram, he said this week in New York, particularly if he was given whisky made the day before as opposed to one that had been bottled the previous day, after mellowing in an oak cask for years.

“It was incredibly strong,” he said. “I couldn’t finish it all.”

Mr. Gordon, a fifth-generation member of the family, is now 56 and the former chairman of William Grant & Sons, which owns Glenfiddich and Balvenie whisky, Hendrick’s gin and other spirits. He said the free samples stopped in the 1980s when employees gave up walking to work and started driving their cars.

But he said the company had worked hard to maintain other traditions, like keeping ownership in the family, even as it has created new ones like a family council. All of this has been done to ensure that the company stays family-owned into the sixth generation and beyond.

“The main purpose of the family council is to keep ownership issues away from the board so the board can concentrate 100 percent on business issues,” Mr. Gordon said. “But there is a subgroup within the family council that works away at policy for the next generation.

Family-owned businesses are like families themselves: When they work well, they’re marvels to behold and the envy of family businesses rived by strife; when they don’t work, they usually go bankrupt or get bought by someone else.

This week, Mr. Gordon brought together some of the 11 other families featured in a new book, “Family Spirit: Stories and Insights From Leading Family-Owned Enterprises” (Chronicle Books, 2015), that have kept their companies going for generations, from Lavazza in coffee and McIlhenny in hot sauce to clothing, weaving, glassmaking and hotel families. The sample is skewed by survivor bias. Still, it’s one with interesting lessons for those thinking about passing on their companies, which, after all, represent not only their wealth, but their life’s work.

If there was one word that rang true among the successful families, it was governance. That refers to the structures a family business puts in place to address any corporate issues that crop up. While those structures can be set up by outside advisers, John A. Davis, chairman of the families-in-business program at Harvard Business School, said the most successful families abided by their own governing principles.

He found three principles in particular. The families have to think about the long term, which keeps them holding on to shares that pay annual distributions, but would bring more immediate wealth if sold.

The families are focused on internal quality controls. “Doing things right seems to be more of a cultural obsession in these companies,” Mr. Davis said.

And they are financially prudent, spending money on projects they believe have long-term value, not speculating on something unrelated to the core business.

But these principles can be hard to follow, particularly as families expand exponentially from the founder. Within a few generations, scores of people could be working in or expecting money from a privately held business. Mr. Davis said the businesses that continued to do well focused on growth, talent and family unity.

Many of the companies require younger members to work outside the family business and not expect a job straight out of college. Before working at William Grant & Sons, for instance, family members are expected to spend at least five years at another company. “We want them to be able to stand on their own two feet before joining the family company,” Mr. Gordon said.

Something similar is in place at Mitchells, an upscale clothing company that is on its third generation of owners. “We have an employment agreement where you have to work five years outside of the business,” Bob Mitchell, co-chief executive, said.

He said five of the six members of his generation worked in the business. But they also rely on nonfamily support in corporate and board roles.

“We have an advisory board with phenomenal outside advisers,” Mr. Mitchell, 49, said. “We try to have great nonfamily executive talent. But at the same time, we know who is responsible for different decision-making and have clear accountability.”

He said the company had retained the original names for its five stores — four of which were bought from other families — and striven to maintain the family-owned feel.

“We celebrate the slight differences,” he said. “People like to celebrate their own stores. If they’re not sacrificing anything, they’d rather shop with a local player who gives back to the community.”

As the generations go on and the families grow, the sheer number of heirs can test even the best governance strictures. Some family companies have benefited from buying out family members.

This happened with the Denihan Hospitality Group, a boutique hotel and real estate company. It began as an upscale dry cleaner in Manhattan in 1908, and now owns and operates boutique hotels in New York and other cities. In 2006, Brooke Denihan Barrett, the chief executive, said she and her brother bought out four other family members, from two sides of their family.

“You could call that pruning the family tree a little bit,” she said. “But then, more family starts. That’s where governance comes in.

She said she often referred to two lessons from a class she took many years ago with Mr. Davis: Family grows faster than business, and structure is your friend.

In the case of Glenfiddich, Mr. Gordon said his father and uncle led a share buyback 30 years ago that reduced the number of family members in the company by 80 percent. “Today, nine individuals represent roughly 90 percent of the shares in our business,” he said. “That’s a very low number, but it allows us to act quite quickly.”

Successful family businesses seem comfortable with concentrating on just one industry. Giuseppe Lavazza, vice chairman of Lavazza Coffee, which was started in 1895 by his great-grandfather in Turin, Italy, said the company sold off other businesses in the 1950s to focus on coffee.

When Lavazza became concerned by the limitations of the Italian market, the company started selling its coffee internationally. “It was a very good idea because the revenue of Lavazza is 50 percent in Italy and 50 percent in the international market,” he said.

Such concentration could be a risk to a family’s wealth. One way to reduce that risk is by being financially conservative. Ms. Barrett said Denihan Hospitality owned 100 percent of the operating company and its hotels in New York and Chicago, and partnered with companies in other properties.

Of course, families all have their quirks. And some family businesses have succeeded by doing things that a public company’s shareholders — or other family-owned businesses — might deem imprudent. The McIlhenny family has produced Tabasco sauce for five generations on Avery Island, 2,200 acres of marshland in southern Louisiana. It has only the one plant in this hurricane-prone area that bottles Tabasco for 187 countries with labels in 22 languages.

“It’s all made here and has been since it started,” said Tony Simmons, the seventh chief executive of the McIlhenny Company since 1868. “We have 20 family members who live on the island, and 130 family shareholders who own the company. It’s a blood stock.”

While the company has 250 employees, its ownership and management is entirely a family affair. The 10 board members are all family, and there is a process in place to test out two to three successors to be the next chief executive. This system worked when the last chief executive, Paul C.P. McIlhenny, died of a heart attack at age 68 in 2013.

Whereas other family-owned companies hire nonfamily members to run the daily operations, like Glenfiddich, or sit on the board, like Mitchells, Mr. Simmons firmly believes in drawing only from the family pool.

“I have a very strong, diverse group of people to look at as board members,” he said. “Two of our most recent board members — one is a partner at Bain & Company and is a family member; another graduated from Harvard with an M.B.A., worked for McKinsey, went back to Harvard, got a law degree and worked at the Department of Justice for a while.”

But if family members fail to live up to expectations, they are literally voted off the island.

“If we feel you can’t be a C.E.O., we’re going to ask you to leave and leave quietly,” Mr. Simmons said. “Family members are expected to be able to continue to show that they can take on added responsibility as they move through their career. They are our succession plan.”

It works for them.

Originally published in City A.M., UK (February 2014)

IF THOMAS Hobbes found himself walking down City streets today, he wouldn’t blink an eye. Business life seems to be getting increasingly short and rather nasty. Due to the accelerating rate of technological change, some economists believe we are heading toward a “winner takes all” era of unprecedented competition, enabled by an enormous number of smart devices communicating vast amounts of information.

As part of our research and advisory work with family companies, we track the forces affecting business everywhere, and the evidence suggests it is in for a cold shower. Businesses have never lived long. In the US, 50 per cent of firms started today will be dead within five years, 25 percent will last a decade and only 16 percent will survive a generation. Family-owned businesses live twice as long, but not that long. Look at the longevity of high-performing businesses and you get a similar picture. The US’s best performing companies in 1970 lived, on average, only 32 years. A high performer founded in the 1950s would have lived 53 years. In 2010, a top 500 US firm was expected to live just 17 years.

But business life will only get shorter and more brutish. Future challenges will get harder, there will be more of them, and meeting them will get more expensive, because all companies exist in a technological vortex where changes are happening faster.

Take 64-bit mobile computing. It didn’t exist until September 2013, when Apple launched the iPhone 5S, even though the first 64-bit supercomputer was invented in 1975. 64-bit computing matters because of its 4GB memory capacity. For servers that process all our smart phoning, 64-bit chips are “crucial, because those machines often need gobs of memory for running many tasks simultaneously,” says CNET’s Stephen Shankland. Today, only 2 percent of all mobiles use this technology. By 2020, all mobiles will be smartphones and all will be 64-bit. The change that took the PC world a generation will happen in the mobile computing world in seven or eight years.

Today, we move eight zettabytes of data worldwide annually, equal to 80 300-page books per second per person for everyone on earth, up from two such books per second in January 2007. By 2020, we will move over 300 zettabytes annually. We are on the edge of the Internet of Things: the networked world of devices talking to one another. Mark Andreessen, Netscape’s founder, says we are rapidly approaching a world of 6 to 8bn handheld, worn or implanted miniature supercomputers, connected and communicating almost unimaginable volumes of information.

It is mind-boggling to envision how companies will be able to keep up with the accelerating rate of change. Nest, recently bought by Google for $3.1bn, makes smart devices that will be at the endpoints of this vast data network. Will Google be agile enough for Nest to succeed, and will Nest be sprightly enough to keep pace with the ever-expanding Internet of Things? Will we even remember Nest in five years’ time?

The cycle of “creative destruction,” first identified in 1943 by economist Joseph Schumpeter, is intensifying. Schumpeter believed that industries and companies form, prosper, and then perish.

Do industries perish? Forbes developed a list of the 100 largest US companies for the first time in 1917. Forbes compared the original list with its 1987 version 70 years later. Only 18 companies remained on the 1987 list from the original, 61 ceased to exist, and 21 had sunk in relative value. Since 1987, seven more firms have been acquired or gone bankrupt. Only one – GE – is still in existence with above market returns. In 95 years, 99 of the leading 100 companies went out of business or fell by the wayside.

Baldwin Bell Green conducted an extensive analysis of the top 500 companies in the US from 1955 to 2012. From 1955 to 1975, roughly 11 fell off the list every year, and 44 percent did not survive. Between 1975 and 1995, the pace of competition sped up. About 15 companies fell off the list every year and 61 percent did not survive the 20 years to 1995. Since 1995, the pace has picked up yet again: 75 percent of companies dropped off the list by 2012. That’s a mortality rate of 21 companies per year.

It’s also harder for the wealthiest families to stay on top, meaning that wealth (from investments in business) is also transient. Of the 100 wealthiest families in 1985 on Forbes’s list of 400 Richest Americans, 13 remained on the list in 2013. Only six of those 13 families were able to outperform the S&P average.

Companies can adapt by shrinking or selling businesses in decline, growing other businesses and changing business lines. But most are single business ventures in industries that don’t significantly change. Most firms in these situations don’t diversify. This, more than anything else, explains the nasty, brutish and short lives of all companies.

No pessimist should be surprised that Schumpeter’s creative destruction process continues unchecked. But even Hobbes would be astonished by the rate of change and the “winner takes all” competition that we’ll experience over the next six years. Walk faster, Hobbes.

Tom Steiner is managing partner of Baldwin Bell Green. John Davis is a professor at Harvard Business School, and founder and chairman of Cambridge Advisors to Family Enterprise.

Originally published in: Harvard Business Review (August 2014)

Family businesses rarely receive much public attention unless they are in crisis. The public loves a good Greek tragedy. And periodically, families in business give them one.

Right now we have an honest to goodness Greek tragedy in Market Basket, a large family-owned grocery store chain being run into the ground by the feuding Demoulas (yes, Greek-American) family. The story is front-page news in Boston and is getting attention nationally and even outside the U.S. This drama is enhanced with antagonist-cousins, Arthur T. Demoulas and Arthur S. Demoulas, each named after the family business founder, Arthur Demoulas. You can’t make this stuff up.

At this very well-regarded family company, employees are picketing to protest the board’s firing of CEO Arthur T. Demoulas. Shelves are largely bare, and suppliers are being hurt by the slowdown. Many shoppers are not crossing the picket lines. The company’s newly appointed co-CEOs are trying to replace striking employees; some 25,000 jobs are at stake, but employees are holding the line. Politicians and government officials are weighing in.

This high-stakes, riveting story obviously teaches us a lot about the vulnerabilities of family companies — but it’s also a good reminder of their strengths. It is important to keep in mind that family business, a largely silent sector of market capitalism, is also the biggest sector, accounting for two-thirds of all businesses in the world, and about half of the largest companies in the United States. Studies done in a number of countries indicate that both public and private family companies perform, on average, significantly better than non-family businesses. They are stronger financially, have higher stakeholder loyalty, live longer, and are more trusted by the public. These company strengths have a lot to do with their family ownership and family leadership. And this is also true at Market Basket.

The now-former family leader of Market Basket, Arthur T. Demoulas, built an impressive and extremely loyal employee group. What company wouldn’t love to have frontline employees striking to support their CEO? The same goes for the cult-like loyalty of Market Basket customers.

All this goodwill pays off. In a very competitive industry where margins are low and sales are hard fought every single day, Market Basket performs well against encroaching giants and big box discounters. The company has been able to keep its prices low and highly competitive, in part, because the company, not the family, owns its real estate. Arthur T. Demoulas has championed the strategy of company ownership of real estate, and employees cheer him for it. The faction led by Arthur S. Demoulas wishes to transfer ownership of the real estate to the family. The employees are right when they predict that this transfer would result in higher store rents and higher prices in the stores; this could in turn lead to competitive problems and lower growth for the business.

Arthur T. Demoulas was able to maintain his business model as long as he had the support of the board. Board support was gained by having a majority of family owners (including one from the Arthur S. family branch) support his stewardship approach to the family business. When family business owners are largely stewards of their business — who want to grow and pass their company into the next generation and take only affordable dividends from the business — management is able to focus on customers, quality, and long-term growth. Not all family owners need to be stewards. Some family owners can have more of an “investor” mind-set and emphasize strong dividends and stock appreciation. Investor-owners usefully keep management on its toes. But to support continuity of a family business, it is better to have mostly steward-owners. In the Market Basket situation, a mostly steward-ownership group switched to a mostly investor-ownership group when one board member switched to the Arthur S. side and tipped the balance; the board subsequently fired Arthur T.

To be fair, the board may have fired Arthur T. for reasons other than this philosophical divide. Certainly, the steward-investor divide among the Demoulas owners is just the tip of the iceberg of disunity in the Demoulas family. The family ownership group has been fractured and fraught with distrust and disrespect at least since a court battle that began 24 years ago. After four years of fighting in court, in 1994 the court found that one branch had taken advantage of the other by siphoning significant company assets to itself. The court awarded the wronged branch (now headed by Arthur S.) 50.5% of the company shares and created a board with three independent directors to mediate between the branches on the board — a pretty wise solution. But it didn’t adequately address, let alone restore, family trust. With deep family wounds on both sides stemming from ugly personal attacks, and a shareholder agreement that didn’t have a clear buy-sell process or a mandated process for privately managing disputes, it was practically fated that the family would publicly battle again and again.

How is it that the conflict didn’t overwhelm the company sooner? The fact that the business held up as well as it did is a testament to the strength of the Market Basket business model, a tenuous majority of votes on the board of directors, and adequate sheltering of the management and employees by Arthur T. from the owners’ problems. But it didn’t last.

Once families turn to lawyers and courts, it is very difficult to restore trust in a family. But it is possible. My colleague Suzanne Stroh and I document in our HBS case “Clarks at a Crossroads” how family board chairman Roger Pedder helped rebuild family unity and commitment to the U.K.’s Clarks shoe company in the wake of a big, public shareholder battle. The Demoulas family could have created a shareholder agreement that mandated that future disputes be mediated and arbitrated rather than going to court. A clearer, fair process for future buy-outs could also have been negotiated. They could have tried rebuilding trust in the broader family. The independent board members could have insisted on these actions and guided the process. A neutral non-family CEO could have assumed the helm until things in the family improved.

I can’t say that these suggestions would definitely have worked with this family, but families in business have an obligation to their many stakeholders to at least try to reconcile or to peacefully part ways. Now that they have reached this point, where the company is hemorrhaging, the independent directors need to find a new ownership solution. Arthur T. has made a buyout bid which is being “considered” by the Arthur S. branch. My guess is that the Arthur S. side would prefer an outside buyer to selling to their cousins. With every day that passes, more and more industry commentators claim that the company has reached its marketing and financial limits. And yet the stalemate goes on.

It’s possible that the Arthur T. branch may be able to partner with the employee group. Alternatively, Arthur T. might be able to secure family-friendly private equity backing to regain ownership control. He would, however, be well advised to steer clear of traditional short-term, high-return private equity funding sources. Given the loyalty of employees to Arthur T., it will be interesting to see if suppliers and customers can rally around any other new owner, who will probably bring in new senior management.

No matter how this crisis gets resolved, this family business drama will play out on the public stage for a while, at least until the next family business Greek tragedy takes its place. In the meantime, I hope that the public will see beyond just the vulnerabilities of family ownership of a business in this case. Family capitalism has many natural strengths and it does a lot for the world economy. It’s just not as riveting to talk about them.