Author: John Davis

The Covid-19 crisis is a time when you should gauge your family’s resilience—and build more of it. An enterprising family’s goal is to not just cope with adversity, but grow stronger as a result of it. Here are ways to achieve that.

The Covid-19 pandemic is a huge, disruptive event that is severely challenging every aspect of our societies, every level of our governments, and all sectors of our economies. This pandemic is a disorienting, strongly felt shock to our collective nervous system—a textbook case of a major crisis and setback. The health, societal, and economic upset from this disruption will rumble through the world for the rest of this year and into the next. The human, economic, and social costs of the pandemic are staggering, and the ultimate costs are only now being imagined. Some businesses will prosper during this period, but most will struggle, and no economy will be spared.

What will be the impact of the crisis on enterprising families?

There Are Two Possible Outcomes for a Family

Adversity and crisis can either lead a family and its enterprise into decline, or into renewal and regeneration. It can go either way.

If you are not resilient, a crisis or prolonged adversity can more likely divide family members, derail family functioning and decision making, create lasting divisions, and destroy value.

If you are resilient, adversity will more often bring family members together, be a wakeup call for things that need to change, motivate more attention to meaningful relationships and activities, bring innovation to systems, and lead to reinvention and value creation.

Causes of Family Derailment

It’s easy to understand how crisis situations or periods of prolonged adversity can cause families or other groups to have difficulties. Crisis situations like we are in now can easily produce these outcomes:

Family members can feel considerable anxiety about their circumstances.

Some anxiety is needed to respond well to problems but too much anxiety paralyzes us or makes us aggressive. Great anxiety usually leads to more emotionally-reactive and self-protective behavior, and it is often associated with a loss of confidence, hiding from problems, rushing and staying busy but not solving critical problems, and looking for magic bullets, while tending to see a narrower scope of options. If you see these behaviors, as a leader you need to calmly but directly address them: reassure group members that these behaviors are understandable but not helpful or acceptable, and refocus family members on solving specific problems together.

Family members can experience loss and, understandably, fear that they will experience more loss.

People are experiencing a range of losses in this crisis–the loss of loved ones, of course, being the most profound. But it is not the only one: financial losses, loss of employment and income, loss of opportunities, loss of social interaction, loss of normalcy, loss of predictability, loss of control. Losses during this adverse time can raise old issues to the surface that can no longer be ignored. (In good times, money has a way of concealing problems.)

Typically, there are new crisis issues to manage that we may not be familiar with or feel capable to handle.

The combination of old and new issues can lead family members to feel a loss of control, resulting in the tendency to blame others. This results in conflicts, instead of pulling together.

The Key Determinant is Resilience

The key determinant of decline or regeneration (besides external forces and luck) is the presence or not of resilience in a group.

Resilience is the capability of an individual or group to get through and recover well from prolonged adversity, important setbacks, or crises. Resilience is created by having adequate  resources, useful structures to support the family and make key decisions, and trusted leadership.

Think of resilience as a storehouse of these three types of ingredients:

Resources

• material resources to help cope with loss and maintain stability
• skills that are useful in a crisis or in a period of prolonged adversity (e.g. composure, courage, perseverance)
• experience solving tough problems while keeping members of your group united
• allies, advisors and friends who will help in a crisis
• a strong sense of purpose, trust, and pride in our family
• willpower and sense of hope to get through adversity, recover, and move forward again
• unity of family members, especially under pressure and conditions of deprivation
• family members who care for others, encourage them, and help them cope with loss

Leadership

• trusted leadership who can make wise, fair, tough decisions
• a leader who focuses our attention on needed accomplishments and encourages collaboration and problem solving
• a leader who conveys hope and purpose (why is it important to get through this)

Structures: Roles, Forums, Agreements, and Decision Processes

• clear roles for who decides, who is consulted, and who is informed of key information
• forums (like boards, family councils, owners’ councils) where groups can have important conversations and make key decisions
• decision rules, principles, and processes that help build consensus and help us make tough decisions
• ownership agreements and family policies that help maintain the stability of the group in hard times

>> I encourage you to do a quick assessment of the presence of each of these resilience ingredients in both your family and your family company.

Each of these resilience ingredients lowers anxiety in stressful times, encourages collaboration, and allows us to focus on important problems to be solved. Success through a crisis requires that these resilience ingredients work together to overcome hardship and achieve recovery.

Ideally, you should strengthen as many of these factors as you can before a crisis and be ready to re-energize any of these that weaken in adverse times. The weakest link in our arsenal (say, trust in other family members) can become overstressed and fray in hard times, then can stress other factors (like family unity and our material resources), which can further stress the system and eventually bring us down. System failures are usually the result of cascading and compounding smaller failures.

Resilience is Needed Today More than Ever

Around 2000, we entered a new age, which is ushering in more frequent and more volatile disruptions to industries, societies, companies, and families. It is common to describe today’s environment, borrowing from military parlance, as VUCA: Volatile, Uncertain, Complex, and Ambiguous.

Accelerating changes in technology along with increased globalization has reshaped how commerce is done. Industries are changing, maturing, and disappearing much more quickly. Society is experiencing shifts such as increased diversity, increasing transparency, greater digital connectedness, and more political disruptions and social tensions. Scientific breakthroughs are increasing human lifespan and changing former genetic limitations. Business families themselves are morphing, becoming more diverse, more geographically dispersed, more international, and more egalitarian. The Millennials are changing the ways in which we do business, care for the world, and lead our lives. Add to these factors that societies, companies, and families must cope with periodic, widespread disruption such as the tragic Covid-19 pandemic.

In these conditions, companies must innovate constantly, anticipate disruption, and consider wider diversification to stay alive. The families behind these companies must themselves be innovative, agile, and resilient.

Resilient families and companies that get through the Coronavirus crisis will need then to get ready for the next disruption, and the next, because further disruptions are coming. Companies have heard this admonition for at least a decade, and progressive companies now consider how they can become more resilient and hopefully disruption-proof. A good part of my work today is helping family companies, family offices, and their owning families become better prepared for this new age, including growing more resilient.

Why Family Resilience?

We definitely need to build the resilience of the enterprising families behind family companies and family offices. The family is the ultimate foundation for a family enterprise—even more fundamental than the family owners.

The ability of a family business to survive long-term depends greatly on the ability of the family to:

If your family is not resilient, it will likely undermine the resilience of your ownership group and then your enterprise.

The good news is that a family and company that are able to successfully move through serious adversity will likely be better prepared for the next disruption. The family’s confidence, judgment, skills, unity, and pride will be strengthened and become embedded in its memory, giving the family or company a better chance to overcome the next setback it faces.

Help Your Family Develop Resilience

How resilient is your family? How does your family deal with prolonged adversity, setbacks or crisis? What are you doing to help your family learn from this period and grow in capability?

Your family’s goal should be not to just cope with the adversity it faces, but to grow stronger as a result of it. Your objective is that strengths come out of this struggle.

How do you achieve that? A family can build and reinforce resilience in good times and also during a crisis. In the midst of the current crisis, these actions will help:

1. A family grows stronger as a unit by pulling together toward a common goal, supporting one another, and collaboratively problem-solving through hard times. Set previous disagreements aside. Don’t let them divide you in these times.
2. Family leaders need to actively shepherd the family through this crisis: be open with the family about the challenges the family and its company face, give hope that both company and family will make it through this time, focus the family on specific concrete goals and actions, and stress the need for trust and collaboration.
3. As much as you need strong performance during this time, emphasize the importance of behaving according to core family values. A family will be proud not just because it survived a crisis, but because it survived the crisis while keeping its values.
4. Families need to know what, besides saving the family’s fortune, the family should try to accomplish in this crisis. Define what your family wants to protect and what its big goals are. Be open in this time to redefining how you achieve success as a family.
5. Praise teamwork and support collaboration among family members. Challenge any attempts by some to achieve political advantage of the crisis for one faction or another in the family.
6. Be a role model for future generations. An individual, a generation of the family, or the whole family can be a good role model for future generations regarding overcoming a crisis. Resilience is transmitted through the generations not only through successfully rebounding from adversity but also through role models. You learn from role models who acted bravely in crisis periods; they become memories that you will recall when you’re experiencing future challenges.

Resilience Builds on Itself

Getting through tough situations together as a family helps build the confidence, trust, pride, relationships, unity, and skills to face new challenges and rebound from the next crisis. Resilience builds on itself. It’s a virtuous cycle.

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With an appreciative nod to Gabriel García Márquez and his literary classic, Love in the Time of Cholera. García Márquez teaches us all the value of persistence and resilience.

Originally appeared in Harvard Business Review

The performance edge family businesses have over their non-family business counterparts has been explained by their dogged pursuit of operational excellence. Family firms tend to take a long-term view of investments and relationships, stay in ownership control to do things their way, focus on persistent improvement and innovation, develop loyal stakeholder relationships, build key talent in select individuals, carry lower debt, and build greater financial stability. This approach to running a business reflects an Operator’s Mindset. It is informed by specialized knowledge passed down from generation to generation. This mindset is deeply embedded in the cultures of most family companies and business families: If you want to be important in the company and family, you have to be good at operations.

Cultivating an Operator’s Mindset has largely paid off because most industries and business models have, until recently, evolved slowly, making operations quality central to success. But dramatic shifts do happen and, when they do, family companies that can’t think beyond the Operator’s Mindset often fall behind.

Family companies that have persisted over generations despite changing conditions strive for operational excellence, but not exclusively. They also are skilled at migrating to new value-creating activities and at leaving activities and practices that destroy value. They don’t become stuck in traditional businesses or outmoded practices. Some, after exhausting growth opportunities in their core business, diversified into different industries. Some experienced their industry maturing and consolidating around them and decided either to stay and acquire competitors or sell their outflanked business and redeploy assets. Some have parried the disruption of technology or regulation. Such adaptations are profoundly informative.

What distinguishes these long-term adapters is their strong Owner’s Mindset among the owners and in their top boards. An Owner’s Mindset recognizes the importance of operational excellence, but insists on being in activities that create value (financial, social, relational, and reputational) according to the key values of the owners.

Read the full article in Harvard Business Review

WealthManagement.com, by Mitzi Perdue, February 26, 2019

Originally appeared here.

IEDP, October 25, 2019

Originally appeared here.

Ideas that Matter MIT Sloan, 2019

What to Watch When Planning a Family Enterprise Succession

Walmart, Comcast, Nordstrom, BMW, Ikea, Zara, Lego, Samsung — all multibillion-dollar empires, all family companies. These companies testify to the power of the family business model, in which ownership is controlled by a single-family and two or more family members significantly influence the direction of the business through management or governance roles, ownership rights, or family relationships. Most of the world’s businesses, in fact — including many of the largest ones, even among those that are publicly traded — are family companies.

While family companies can be superior performers and leaders in innovation, all forms of enterprise have their weaknesses. One vulnerability of family companies concerns the transition of ownership and leadership between generations. Most of these transitions are not managed well enough and too many end in failure for the company and family. This is especially true of the transition between the founder and next generation, but this vulnerability persists in any generation of family control.

All this is according to John Davis, a senior lecturer in the MIT Sloan Executive Education family enterprise programs. Davis has spent four decades studying, teaching, and advising family-owned enterprises on how to sustain their success over the long term, including the pivotal transition of leadership from the senior generation to the next. Davis offers key guidelines for family businesses that are facing a shift between generations. While each generational transition presents distinctive challenges, these four management principles apply universally.

Maintain momentum

Momentum, or forward movement of a business or family, “is an underappreciated force that we need to be very respectful of,” Davis said. “If you kill, stall out, or even significantly reduce the momentum in a system, it’s hard to make it up.” Families need to steadily grow their financial assets, develop talent for the whole enterprise, and maintain group unity to stay ahead of company, family office, and family-related challenges.

Maintaining momentum must include preparing for and willfully making a transition from one generation of ownership, governance, and leadership to the next. Steady progress towards the goal of a successful handoff is a far better strategy than ignoring preparation and taking your chances at the end of a generation. Davis likened this to handing off a baton in a relay race: Both generations need to be running at the same speed for a smooth pass.

You need to pass the baton when the next generation is ready to lead — not when you’re ready to leave.

This analogy nicely captures the importance of timing. Transition from one generation to the next too soon and you will likely stumble. Delay the transition too long, and the next generation may be detached from and uninterested in the work. Growth can stagnate. Morale and unity can crash. According to Davis, the right timing hinges on one central consideration: “You need to pass the baton when the next generation is ready to lead — not when the senior generation is ready to leave,” Davis said. “And that’s an understandably tough principle to expect the senior generation to champion.”

No company head or leader of any enterprise organization, especially a founder with a deep personal investment in the company or family office, wants to leave “the game” that they are good at and enjoy playing, Davis said. To facilitate timely transitions, leaders need to plan for their next chapter of life and families need to identify valued roles for elder family members.

Question the ‘theory of one’

“A generation transition involves a passing of ultimate responsibility for all of the major activities of the family,” Davis said. “This almost always involves passing the leadership of the family company, but families have more interests than just the family company.” Consider philanthropy, the family office, the management of the family’s outside assets, and the leadership of the family itself. At the end of the process, you want a capable and committed next generation successfully leading the family’s key activities.

Many families believe all of these activities can and should be led by one person — the “theory of one.”

“Sometimes this approach works, but it has consequences: It not only saddles one person with wide responsibilities, but often means some family activities will get little attention, and that only business leadership will be valued,” Davis said. “There are better ways for a family to get things done and maintain unity.”

Smart transitions are about having a team of family members (and non-family managers where appropriate) ready to take on different positions and responsibilities in the future.

Prepare the business (and other family organizations) for the transition

Maintaining momentum also means that companies need to be prepared to support and flex with the changes the next generation brings. “That means preparing for new investments in new business opportunities, reconsidering standard management practices, strengthening the company’s balance sheet, adapting the culture of the company, transitioning key customer relationships, and so on,” Davis said. “You want the next team to hit the ground running.”

The new generation of leaders will hopefully want to pursue some different strategic goals and, likely, will manage with a different style. The senior generation and the organization must integrate and facilitate these changes while maintaining important corporate values — without starting a tug of war between entrenched practices and the new vision. “It’s typical for the senior leaders to see some change as threatening, rather than exciting, and for next gens to feel held back,” Davis said. “But transitions go better when the next generation shows appreciation for the accomplishments of the senior generation, and the senior generation appreciates the need to change in healthy ways.”

Build a new ownership team

In a generational transition, ownership is generally passed from a smaller to a larger group of people and a new group of owners must support the business and other activities of the family. According to Davis, ownership should be treated like a job — a strategic tool — but most families spend little time considering who deserves to be an owner and how ownership should be structured. “Families are generally on autopilot regarding the ownership transition,” he said.

Instead, the two generations need to have transparent conversations about how ownership will be exercised, divided, and transitioned. What is the job description for family owners or beneficiaries? Should shares be passed over a 20-year period starting when the next generation of owners is in their 30s? Should ownership be given to individuals based on specific conditions, such as being an employee? What kind of shareholder agreement will best serve the next generation? The right kind of ownership formula will provide a more stable foundation for the business organization and build unity among the succeeding generation. The next generation of owners must not only be well-prepared individually to perform as owners but need to be trained and motivated to coordinate like a team.

Of particular concern are situations where ownership is only passed, or even revealed, when the senior generation dies. “This is dangerous,” Davis said, “and not simply because of estate taxation. When ownership comes all at once, at an emotional time, the next generation is unpracticed as an ownership team.”

Originally appeared here.

FFI | Practitioner – June 13, 2018

This article, first published on June 13, 2018 in the Family Firm Institute online journal
FFI Practitioner is reprinted with permission. ©Family Firm Institute

This week’s FFI Practitioner concludes our two-part series commemorating the 40th anniversary of the influential Three-Circle Model. Thank you to FFI Fellows, Pramodita Sharma and John Davis for sharing their insightful conversation about the future of the model, research, and the field.   Read the Full Article >

Pramodita Sharma (PS): As I walked into my office for our interview, I ran into one of our Sustainable Innovation MBA students. They are reading my book Entrepreneurs in Every Generation, so I asked: “How’s my course going for your class?” And she said – “Honestly, you know what? I love the three-circle model. It applies everywhere, in every course.”

Her comment made me think perhaps we should use the three-circle model in our PhD programs, because if you think about the theories we refer to, e.g., agency theory, resource-based theory, we can go back to the three circle regions and say, OK, where does a theory like agency theory fall in the three circles? What issues of the three-circle model are we trying to address with it? The three-circle model is the starting place to understand these systems. I really believe the model’s impact is only now beginning to show. When I put the three-circle model on the board, people can use it to think in a theoretical way, as well as locate themselves in the model as practitioners.

In my case, teaching, for example, most of the variants that you’re trying to capture in a case and to get people to talk about having to do with the seven regions in the three circles. It’s not as if it’s all we talk about, but after people have used the three-circle model in traditional ways, they try to use it to explore other issues. For instance, the implications of wealth in the business, or in the family, or both. It seems like there is no question that we’re talking about another dimension. Can you, or did you ever, imagine positioning a wealth circle?

John Davis (JD): First, it’s gratifying to hear that your students and you think the three-circle model is useful theoretically and managerially. That never fails to buoy me. I agree that the model is a foundation for understanding the family business system. Other theories like agency theory can be understood in the context of the three-circle model. Unfortunately, and not to get distracted here, but it’s disappointing that some reviewers for journal articles I have submitted recently see “no relevance” for the three-circle model. Seriously? While you, a highly respected researcher and theoretician, are deeply understanding of family business system issues and appreciative of the power of those three little circles, other academics in the field are not.

But I am the first to recognize that the three-circle model is not designed to answer all important questions in our field. No framework can. Take the interesting topic of family wealth. While every family owner of a family business is a wealth holder, a family’s wealth includes assets outside the family business, and some family members could be a holder of some family wealth and not an owner of the family business. Believe me, I have played with adding a fourth wealth circle and couldn’t make it work conceptually. The same conceptual limitation in the model is there to distinguish family members that are engaged in social impact activities. The three-circle model can’t cleanly handle the distinction in general. But you can still make notations about a particular family’s three-circle map to indicate particular groupings of interests.

PS: I’ve always wondered if we could get away from two dimensions. If we could see some things in three dimensions that would be different or more powerful than what we currently seem capable of. In 2011, I was asked to speak on governance of a family and its enterprise at a conference in Taiwan. That’s the first time I used a three-sphere model as opposed to the three circles. I had all these different kinds of flowers and said, well, this is your family. These different flowers, some of them fading, others are in full bloom, and some are buds, etc., represent all the kinds of people in the family. Similarly, I used fish in a pond for another circle, and drops in an ocean for the third. So, we have the three circles and we have the seven regions, but even within the regions there are differences.

I think that more dimensions could offer some insights that we can’t appreciate now. I have drawn three spheres too but couldn’t get to new understandings through a three-dimensional representation. I think it would be cool to see a hologram where you could peer into the regions of each sphere and ask questions. Maybe we would appreciate the interconnections of the three systems better than we can today. I think there’s a richness in the model that we haven’t explored yet.

I’m so looking forward to getting to that stage in our thinking and practice! Where do you see us going? And where would you like us to slow down and take a moment to reflect on where we’ve been?

JD: It’s very impressive to me to see all the good thinkers and researchers who have discovered this field and are writing about it and having useful things to say. Right behind me in my office is my collection of FBR. Often, I find myself pulling out a specific year and looking to see what was written then. We’ve come a long way since 1984. I want researchers to understand the family business system to gauge how their particular research fits into the broad issues of the three-circle model. That takes extra effort on the part of researchers but I hope they do it. Research will be more useful if that happens.

Read the Full Article >

FFI | Practitioner – June 6, 2018

This article, first published on June 6, 2018 in the Family Firm Institute online journal
FFI Practitioner is reprinted with permission. ©Family Firm Institute.

To celebrate the 40th anniversary of the legendary Three-Circle Model, FFI Practitioner is excited to share two editions about the model during the month of June. For the first edition, we’d like to thank Pramodita Sharma for her interview about the inception and impact of the model on the field with one of its two creators, John Davis.

Read the Full Article >

Pramodita Sharma (PS):  What was the original idea behind the model? Has it been misused?

John Davis (JD):  Well, remember that this framework came out very early in our interviewing of people who worked in family businesses. Most of them were family business leaders, many were founders, a few were later generation family member-employees. We needed a conceptual “place to put people” we were interviewing. We wanted to understand individuals’ viewpoints, their roles, their confusion about some topics, why certain decisions were difficult for them, and why they were dwelling on certain issues. Ultimately, we were trying to understand why individuals in these businesses (we didn’t call it a system yet) saw the world the way they did and what issues were important to them. The need to organize the information we were gathering and what we were learning led us to the three circles: the business, obviously; the family, naturally; but then, eventually, also the ownership group. Without accounting for the ownership group and perspective, we couldn’t bucket all the comments and data adequately. But with three circles, we could organize the information we were gathering and we thought, wow, the three-circle framework seems to be enough.

And it started as a framework. Frameworks are largely for bucketing information. Later, we saw that the three circles and the interaction of the three circles had great explanatory power, and we called it a model. A comprehensive, predictive theory of action and reaction in the family business system hasn’t been accomplished, and maybe won’t be developed given the many intervening variables that can affect the outcomes of certain changes in any circle.

The original intent of the three-circle model was to locate individuals in the system, identify their various interests, and observe how individual and group interests and behaviors interacted. The three circles can also indicate thematically, for example, that the goals of the three groups can overlap and still be distinct. The clarity and simplicity of the model allowed people in the field to explore many topics. It has guided our thinking in this field in fundamental ways. That’s all we needed in the beginning, and it has held up well, I would say.

When you build a framework or a model, you hope it helps you understand a lot, but soon enough you see that it doesn’t do everything. Advisers don’t have a clear place in the model. Governance structures, for example, with their adviser members, don’t fit perfectly in the geometry of the three circles. That said, non-purists can still add a board of director’s symbol in the overlap of business and ownership groups, and readers can see where it belongs in terms of its responsibilities.

As for examples of misuse, I can’t go that far. Some people thought highly enough of the three-circle model that in the early days they claimed it as their invention. But that’s different than misuse. Some have found the original three-circle model frustrating because it doesn’t do what they want it to do—like have clear categories for advisers or governance groups. I would add that the three-circle model doesn’t adequately diagram the situation of a multi-family business. But attempts to build a substitute model, with the necessary complexity to account for other memberships, haven’t been received well because they are either conceptually flawed or very complex and hard to use. I haven’t seen a workable (clear and relatively uncomplicated) four-circle model although it’s been tried.

I wouldn’t call these a misuse of the model, but it’s not how we initially thought of it. Sometimes to make a point, people will move the circles around, separate a couple of the circles, make circles of different size, etc. That’s a different use of three circles and it’s fine if it gets you someplace in your thinking and explanations. In general, I think people have used the model in ways that have been useful.

PS: Can you share the spirit of the conversations and thought processes you went through when this model was created? What was it like working with Ron Taguiri?

Read the Full Article >