John Davis: ‘Sometimes, a Company Needs a Chief Executive Who Is Not a Member of the Family’

Originally published in Knowledge @ Wharton (November 2007)

The grandfather is the founder. The father is a spendthrift. His son is a beggar. That saying pinpoints the problem that confronts family-owned companies when it is time choose a successor. Only 30% of all family-owned companies manage to reach the second generation of family rule. Barely 15% reach the third generation. It’s a real feat to manage more than ten managerial changes and still have the same family running the company. De Kuyper, the Dutch distiller, is one company that has been able to do that. In an effort to promote the success rate of family owned companies, John Davis, widely recognized as one of the foremost experts on this subject, recently visited Spain for an event sponsored by the HSM management forum. Davis shared with [email protected] some of the secrets that corporate dynasties can use in order to confront the challenges that threaten their survival.

[email protected]: What are the main challenges facing family business globally?

John Davis: I see family businesses facing five main challenges: remaining competitive; blending nepotism and professionalism in the business; maintaining family control of the family business; perpetuating family success over generations; and passing control of management and ownership. There is a lot that can be said about each of these challenges. I’ll make just a few comments on each one.

Remaining competitive: Competition is becoming more difficult for all firms. Given the typical characteristics of a family business, family companies have some advantages and also potential disadvantages in this new competitive world. Among the positives for family companies are their long-term patient approach to investing, and their ability to maintain a highly innovative and quality-oriented culture. Among the potential disadvantages are their long leadership tenures, and their fear of diluting ownership control.

Blending nepotism and professionalism in the business: The terms “nepotism” and “professionalism” are often considered opposites, but in fact, they are entirely compatible. Nepotism is a natural family practice of favoring relatives in all types of resource distributions. We normally think of nepotism as favoring relatives in employment, but it can also involve favoring them in ownership or in other ways. The important point is that it is natural and understandable. Professionalism has to do with maintaining high standards of performance and ethics in one’s work. There can be professional and unprofessional employees — both family and non-family. The challenge is to get family members well prepared and motivated as professionals in a family business. I know that it is possible because some of the most professional executives I have ever seen are members of the business-owning family.

Maintaining family control of the family business: It is a challenge to keep a family interested in owning a business for more than a generation. What increases the difficulty of this challenge is that as families and businesses grow, they each could use more money from the business. It is difficult to satisfy a growing business and family from the same source.

Perpetuating family success over generations: Every culture has its own rule that essentially says that family success and wealth do not survive three generations. The implicit assumption of these sayings is that success, wealth and power reduce the unity of a family and the industriousness of its members. But again, some business-owning families manage to defy these predictions.

Passing control of management and ownership: The final challenge of passing control is faced in every generation. It is necessary to not only build the necessary talent, passion, and judgment in the next generation, but to also get the senior generation to let go of its responsibilities and ownership in a timely way, to make room for the next generation.

[email protected]: How should an heir of a family business be chosen? How can you ensure he or she is competent?

J.D.: To choose the next business leader, you need to select someone who has the right package of qualities, in terms of management and technical skills, leadership skills, values, experience and ability to represent the company well in public. Family members generally have an advantage in having the “right” values, being able to lead the company and represent the company in public. Family members also need to have adequate management and technical skills, and enough good experience to gain the respect of others and to perform well. The way you should choose a successor is to first be clear about the qualities you need in the next leader, then evaluate the successor candidates on each of these dimensions. Sometimes what you find is that a family member has the right qualities to be chairman, but that the business needs a non-family executive to run day-to-day operations.

[email protected]: What is the secret for the survival of family business? Could you give a concrete example of a family business that has survived for several centuries?

J.D.: I am currently writing a book on how some family companies manage to survive three or more generations. Even though family companies survive longer, on average, than non-family companies, surviving three generations is an impressive accomplishment. To survive five, six, or more generations is even more difficult, and reveals more about the many factors that help or hinder survival. I am not trying to be difficult when I say that there is not one, but several factors that influence long-term survival. Let me summarize a few. First, the business needs to focus both on current performance as well as the performance of the family and business in the future. Achieving the right balance here is not always easy, but it is critical for success.

Second, the family needs to stay united around the business, but not at any cost. The need to be united does not imply that the family won’t have conflicts around the business. Conflict is virtually inevitable. The family simply needs to have a healthy way of dealing with conflict.

Third, the family needs to nurture the next generation to be good stewards of the business as owners, and to hopefully produce one or more family members who can work in and lead the business successfully.

In my book, my sample includes three European family businesses: Ferragamo (2nd generation, Italy), Rothschild (7th generation, UK and France), and De Kuyper (10th generation, The Netherlands). Each of these companies demonstrates the above points, but also shows that luck plays a role in survival and success too.

[email protected]: What are the differences between American, Asian and European family businesses?

J.D.: Culture does play a role in shaping both family and business practices. Obviously there will be differences in family businesses in different parts of the world. But surprisingly, the issues and challenges that family companies face are virtually identical almost anywhere in the world. I recognize the importance of culture and local laws and traditions, but I typically see family companies as very similar.

[email protected]: Do you think that the image the public has about family businesses matches reality? Why?

J.D.: The short answer to your question is no. The public often sees family companies as small, inefficient, unprofessional, and full of conflict. What we know from a very consistent stream of research over the last two decades is that family companies, on average, perform much better than do non-family companies. We also know that family companies outlive non-family companies. Clearly some family businesses have lots of problems, but so do some non-family businesses.

The public has some biases about owning something with a family member, working with a family member, nepotism, and inherited wealth. These biases spill over into our views of family companies. I’ve spent a lot of time in my career trying to correct these biases so that family companies can be viewed fairly, according to their own accomplishments.