Professor John Davis joins the YPO Brazil podcast “Extraordinary Leaders.”
In this exclusive episode, Prof. Davis shares his extensive experience and knowledge of the unique challenges and opportunities that surround family business management. Through an in-depth conversation, they explore topics such as the importance of planned succession, family dynamics in the business environment, and how businesses can thrive across generations.
In addition to practical tips for entrepreneurs and successors, Prof. Davis brings inspiring stories and valuable insights into leadership in the family context.
MIT Sloan faculty John Davis and Deborah Ancona discuss why building an owners team is crucial, and what makes an owners team strong and effective.
Given the critical role and contribution of owners in the long-term success of a family enterprise, it is important that the owners remain a strong, unified, and capable team. This requires deliberate effort, especially over time and across generations as the ownership group grows larger and more diverse and complex. MIT Sloan faculty John Davis and Deborah Ancona will discuss why building an owners team is crucial, and what makes an owners team strong and effective.
Equip your family enterprise with the tools and knowledge to cultivate a united and resilient owners team for lasting success. Learn more from Davis and Ancona during their course: Future Family Enterprise: Sustaining Multigenerational Success Future Family Enterprise: Sustaining Multigenerational Success.
Key takeaways:
Why capable owners—especially active owners—are a key advantage for family businesses
The qualities of a strong ownership team and how they are developed
The challenges and practices of building a cross-generational team of owners in your family enterprise
In this webinar, MIT Sloan Professor John Davis explains how your family needs to excel at owner-level decisions—the most crucial capability for a family business to succeed in today’s turbulent environment.
Professor Davis is joined by third-generation family business owner, Karim Zahran, who will share his family’s story about the transformative power of an Owner’s Mindset in his family enterprise.
A podcast conversation with John Davis, Chairman and Founder of the Cambridge Family Enterprise Group and Senior Lecturer in Family Enterprise at MIT Sloan and Jason Jay, Senior Lecturer and Director of the Sustainability Initiative at the MIT Sloan School of Management. In this podcast, John and Jason discuss systemic investing.
In this podcast, Jason and John discuss Jason’s year of researching and discussing systemic investing with the FFI community.
The literature indicates that the board of directors exists to provide resources and strategic direction (service task) and monitor top managers (control task), often tending to overgeneralize board tasks. Using a unique sample of 36 elite family firm directors having served on 615 boards with an aggregate 1447 years’ experience, and integrating interview and secondary data with observations, we capture how the multiple role identity struggles experienced by family directors are managed in the board. Our data indicate that effective boards resolve multiple role identity struggles (i.e., family director ‘pathos’) through the mechanisms that boardroom structural forces trigger and the resulting bridge and buffer tasks enacted (i.e., board ‘ethos’), going beyond the traditional service and control tasks.
We have entered a new era that’s presenting unprecedented challenges, as well as significant opportunities, for family enterprises. Some of the traits of successful family businesses — their long-term outlook, strong financial resilience, stakeholder loyalty, and commitment to positive social impact — will aid their success in this new era. However, other traits — such as their insistence on privacy and control, their narrow definition of stewardship, their prioritization of family harmony over family unity, and their slowness in making big changes and reversing course — will need to change.
New mindsets, strategies, and practices will be required for family enterprises to survive and thrive in today’s turbulent era. Owners themselves must lead the charge, from the inside, and insist on new directions and transformative action to ensure success in the years ahead.
In a two-year study released in September 2022, sponsored by Citi Private Bank, Cambridge Family Enterprise Group (CFEG) explored these new requirements for success. Our research included a global survey of owning families, interviews with senior and next generation family members, and extensive secondary research — all guided by CFEG’s 33 years advising, educating, and researching family enterprises worldwide. The resulting white paper shares our learnings and advice for navigating the new era.
Having an owner’s mindset in today’s disruptive environment means excelling at making four types of owner-level decisions. All four are central to the long-term success of the family and its enterprise.
To remain competitive in today’s environment—one defined by disruption, borderless competition, rapid economic transitions, and constant technological transformation—families need to reconsider the way they own and lead their companies. Strategies that have remained reliable for centuries may no longer deliver results.
The traditional road to success
Family companies have historically focused on operational excellence. They have emphasized quality and steady improvements; aggressive reinvestment in their business; growing within their industry or in related areas; building loyalty among customers, employees, and suppliers; and choosing the right successor to lead the business. This has served family businesses well: when it comes to profitability, growth, and other performance measures, family companies have an impressive record of outperforming and outlasting their non-family competitors.
Traditionally, as family business have recognized the need for change, they have approached change slowly and circumspectly. They may acquire better equipment, work faster in some areas, improve processes somewhat, tinker with products and services, and promote talent as needed – but they make these changes incrementally with the goal of keeping things steady. This is an ownership and leadership style rooted in stability, tradition, and deep familiarity with a particular corner of the economy. It is informed by specialized knowledge and methods that have been passed down from generation to generation.
Professor John Davis of M.I.T. calls this approach to business the operators’ mindset. It has long suited family enterprises. But the reason such a mindset has worked is because industries and business models in the past have evolved slowly, over long periods of relative stability. Dramatic shifts or disruptions have occurred infrequently When change has been needed, adaptation could take place naturally, as the pace of the business world moved in step with families’ natural instinct to change slowly, wait for the right time, and obtain unanimous agreement.
We now, of course, live in a different world. Reliance on this approach alone appears to be a liability rather than an advantage.
The importance of an owner’s mindset
Success today requires blending the “operators’ mindset” with the owners’ mindset.
In contrast to operators, owners:
Gain altitude to take a high-level view of the trajectory of their businesses, industry, markets, competitors, assets, and family. They integrate plans across all of these considerations;
Move into growth opportunities by prioritizing value-creating activities and rejecting value-destroying activities sustained from old senses of loyalty, tradition, attachment, or conflict avoidance; and
Detach from businesses, investments, and people that aren’t working. Tradition and legacy are important, but they are not inviolable reasons to hang on to something that is no longer making—or in some cases even losing—money.
Families often have a particularly difficult time with this last one. Leaders who possess an operator’s mindset can be slow to recognize losing bets. They may be too attached to the business, to a tradition or legacy, or to specific people to admit that things need to change. Or, when they see problems, they think (in good operator’s style) that they can innovate their way out of the mess.
That should scare you, because if there is anything that families in business have to be good at in these disruptive times, it’s letting go of what isn’t working. This requires business leaders and owners to, first, clearly recognize when an investment has lost its momentum and, second, understand that they cannot necessarily make their bet succeed. When the problem before you is a changing industry trend, hanging on to practices that don’t work is foolhardy.
Industries are like a casino: you shouldn’t bet that you can outsmart important trends. You are unlikely to beat the house.
How to think like an owner
The mindset of active owners emphasizes long-term value creation through agility, entrepreneurial experimentation, and thoughtful diversification. It embraces new thinking, prudent consumption by the family and its company, and letting go of value-destroying and outdated activities in a timely way. These owners focus, most broadly, on growing and passing value in ways consistent with their values—whatever those may be. That is, the mission of the family enterprise from the owners’ perspective must be about growing and transmitting economic, social, and relational value while living by the values the family and enterprise determine are meaningful. We call this growing value through your values.
Having an owner’s mindset means excelling at making five types of owner-level decisions:
Setting the owners’ Strategic Vision for what they want to achieve and own with their jointly-held assets
Good bets on Capital Investments (including when to exit bad capital investment bets)
Good bets on key People (including when to change people in key roles)
Setting, protecting, and adjusting the Culture that is key to the family enterprise’s success
Designing the right Governance for the family enterprise so decision-making structures and processes are effective
All five are central to the long-term success of the family and its enterprise.
Some active owners are capable of having the mindset of both an operator and an owner at once. Others readily embody just one, which is fine as long as they appreciate the value of the other. What you must avoid in ownership groups is one mindset—usually the operators’ mindset—becoming the religion of the group. When some owners or advisors point out that the industry is maturing or being disrupted, and the family business can’t succeed in such an environment, and that maybe, just maybe, it’s time to sell the family business and invest in new growth areas, they shouldn’t be branded as heretics. Owners need to appreciate the value of both perspectives.
Build a team to represent both mindsets
Ultimately, both mindsets—operator and owner—help to cultivate the success and sustainability of the family and its assets. Good owners do not neglect operational excellence by any means, but rather delegate operational excellence to a capable management team (whether family, non-family, or both). Owners need to embed the family’s values within the company; they need to arm managers with the owners’ vision and the board’s approved strategy, and let them operate. Charge them with designing better products and processes then step out of the way and work to solve owner-related challenges.
For example, as noted above, big bets on investments and on high-level talent recruitment often rise to the level of the owners for input or decision. Should we take on more debt, bring on an investor, or go public? Should we sell a particular line of business or the whole company? Should we enter this new industry? Should the next CEO be a family member or non-family? Counsel from the board and other advisors is useful for informing such owner-level decisions, but the final choice ultimately lands with the family owners.
To achieve parity between these two mindsets, families should establish forums where owner-level issues and important owners’ goals can be discussed, owner-level policies decided, and new directions set. One way to do this is an owners’ council. Also, under the right circumstances, a portfolio board that recommends portfolio strategy is useful. Independent advisors on boards and elsewhere are a third resource for assuring an owners’ mindset has room to guide the company and family assets. In short, give yourselves permission to think like owners by structuring regular owner-centered conversations.
In disruptive times, it is owner-level decisions that often make or break a business. And it is precisely these types of decisions that demand an owner’s mindset. Without taking steps to establish and reinforce an owners’ mindset at the top of your family enterprise, the past epoch of success may become nothing more than that—something of the past.
Making Family Councils More Effective A 4-day, Interactive Workshop on Family Governance for Tomorrow’s World
This LIVE event took place, October 5-8, 2020
In a series of live, online sessions over four days, Family Council leaders and members from family enterprises across the world gather to explore how Family Councils must adapt to add strategic value in today’s disruptive world.
Active participation is required. Sessions include live, interactive presentations by faculty, daily working sessions in small workgroups, self-reflection and analysis of your own Family Council, and active dialogue and support among participants and faculty.
PROGRAM SUMMARY
We have entered a new age for enterprising families – A new age that calls for Family Councils to elevate their support of the family and its enterprise. It is time for Family Councils to take an active, strategic role in preparing the family for the bold moves that will keep the family and its enterprise adaptive and successful in the New Economy and New Society.
In today’s complex world, family governance is more needed than ever but must adapt to stay effective.
How does a Family Council pivotally help the family to stay united and decisive, build key talent, and support its enterprise?
How do Family Councils need to adapt to add strategic value in today’s disruptive world?
Join us for an advanced program for mature Family Councils to explore how to elevate the Family Council’s strategic support of the family and its enterprise, and prepare the family for tomorrow’s world.
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.
FOUNDATIONS FOR LONG-TERM FAMILY BUSINESS SUCCESS
The ability of a family business to survive long-term depends greatly on the ability of the family to:
stay united, decisive, and industrious
make important directional decisions for its business(es) and assets
produce enough family talent to contribute in key ways to the family enterprise (e.g. as owners, wealth creators, board members, governance members, and in other ways)
support adequate reinvestment in the company.
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:
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.
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.
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.
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.
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.
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.
Which of the family resilience ingredients are abundant in your family? How are you reinforcing them?
Which of the resilience ingredients are in short supply in your family? How can this crisis aggravate your weaknesses?
STRENGTHEN YOUR FAMILY’S RESILIENCE
Which resilience ingredients can your family try to develop during the crisis?
How can you organize your family to pull together in this crisis?
How are family leaders guiding and focusing the family on getting through the crisis?
Which of your family’s core values are you demonstrating and reinforcing in your crisis response?
What are your family’s big goals to achieve in this crisis? Are you discussing these goals as a family?
How well is your family supporting and championing one another and collaborating constructively to solve problems?
Are you creating role models for future generations to learn how to navigate a crisis and rebound from it?
Is the senior generation in your family talking with the next generation about how they’re approaching the crisis and what it takes to get through a tough period?
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.
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.
Davis leads you on a personal and professional voyage back to the 1970s to pay special homage to the groundbreaking work of his late mentor, Renato Tagiuri, who pioneered the field of family business with frameworks that included their notable Three-Circle Model of the Family Business System.
Davis then pivots to the future and offers a modern roadmap for business families to transform themselves to conquer the next economy. FBN invites you to partake in the new paradigm of business families leading the sustainable change required to address the great challenges of our time.
Looking into the Future of Business Families overflows with poignant lessons and forward-looking tools for multigenerational families, researchers, professional advisors, and the entire ecosystem of the family enterprise field.
The book launched at FBN’s 30th Global Summit in October 2019 in commemoration of FBN’s 30th anniversary. The book will be widely released in Q1 2020.
Is your family growing the value you want to be building?
Learn from MIT’s family enterprise experts about the two latest trends that help families build value (of various kinds) across generations, particularly in this era of rapid change and global uncertainty.
MIT Sloan faculty John Davis and Jason Jay discuss their latest insights on two emerging trends: how an owner strategy and systemic investing are being put to use by families to grow value, develop family talent, and build family unity across generations.
This webinar is especially relevant for the owners and leaders of family enterprises and family offices who want to stay ahead of the curve and gain new insights about family enterprise success.
Key takeaways include:
Why family enterprises need to pivot their value-creation strategies, given today’s turbulence
How families are putting to use two strategies to build value: an owner strategy and systemic investing
How your family can make use of these strategies in your family enterprise or family office
The latest thinking on family enterprise out of MIT
Information about the upcoming Future Family Enterprise program
Today, family business leaders and owners face some of the most challenging and high-stakes decisions seen in a generation.
How are YOU navigating the complex decisions that your family enterprise faces? Let’s dig into them together in this important conversation—a Q&A with Professor John Davis.
Featuring Professor John Davis of MIT Executive Education
Family enterprises face big challenges in order to survive and thrive in our era of rapid technological and market disruption. Having to adopt to new business models, and accept changing customer loyalties, they must also address changing attitudes and aspirations within the family itself, as the Millennial generation takes the reins of the family business.
The Millennial generation (Gen Y) is, arguably, the most researched generation in history. The subgroup of Millennials from business families has not been well understood until Professor John Davis’ recent study of business family Millennials from more than 40 countries.
Following his highly popular 2019 webinar, IEDP welcomes back renowned academic and shaper of the family enterprise field, MIT Sloan Professor John Davis, to share his latest research findings about Millennials’ interests and aspirations for their lives, careers, financial wealth, and their family business.
In this Trusted Family Webinar, Professor John A. Davis discusses the Three-Circle Model in-depth. The webinar explores the history of the Three-Circle Model and answers many questions, including which group has the most power in the Model and does the Model now need a 4th circle?
MIT Management Executive Education November 15, 2021
This is a new era for family businesses. To succeed in this turbulent period, family businesses must adopt new practices at not only the operations level, but also at the ownership level.
Professor John Davis explores the owner perspective, owner-level decisions, and how to architect governance to make these strategic decisions for the family business and family assets.
In this webinar, Professor John A. Davis explores some current trends in corporate governance and discusses how to ensure a high-functioning board for a family business.
Professor John Davis is one of the world’s leading authorities on family enterprises. How would he advise business families and their advisors to prepare for a world of ever-more-rapid technological change?
Davis has advised multi-generational family enterprises in more than 65 countries. His professional training includes management, psychology and economics. He’s also spent decades teaching at the Harvard Business School and currently leads the family enterprise programs at the MIT Sloan School of Management.
Mitzi Perdue: What are the skills family enterprises should be nurturing now to thrive in the future?
John Davis: The workforce of the future will look quite different than it does today. Not only are existing jobs being threatened, but new jobs will emerge that don’t exist today. A combination of reskilling and upskilling is going to be important in order for talent to keep pace with innovation.
While there are many more skills required than these, below are four important categories that will be increasingly needed in the next economy:
Digital/technology competencies will be a key need. One source said that of the jobs created in the United States in the last 10 years, two-thirds were digital-related jobs. Talent will need to be able to work with existing and emerging technologies across industries.
Interpersonal skills will be increasingly sought after as these aren’t as authentically conveyed by machines. Examples of the interpersonal skills that will be in increasing demand are: caring, empathy, listening, reading a room, teaming/collaborating, ability to influence and a global citizenship mindset.
The ability to create will be essential. These skills include creativity, experimentation, failing and learning, innovation, entrepreneurship, foresight, envisioning, intuition and design.
Talent will need to be flexible in this next economy, prioritizing one’s ongoing growth and development. Rigidity will be detrimental. These skills include the ability to be curious, problem-solve, change, adapt, pivot, be resilient and agile, actively learn and reskill yourself.
MP: You recently moved to MIT after 21 years at the Harvard Business School. Comment?
JD: I moved to the faculty at MIT because of its focus on the future. MIT is way ahead of other schools’ understanding of what’s happening and changing in our world. In many ways, the MIT ecosystem—with its many labs—is creating the Fourth Industrial Revolution that we’re all preparing for.
My work at MIT focuses on helping family enterprises prepare for the ways in which the future will impact them—and there are many. There are forces affecting businesses, families, ownership, investing, philanthropy, governance, talent and virtually every aspect of a family enterprise. Technology is only one force we hear about a lot, but there are others that I’m paying close attention to and helping families prepare for.
Date: May 3–8, 2020 │ Format: In-class study with action-planning │ Location: MIT Campus, Cambridge, MA
MP: And these are?
JD: In addition to technology, I am watching social and demographic changes, the rise of the Millennial generation, globalization trends, industry disruptions, environmental shifts, political movements, the actions of governments, and other forces. These are opening up opportunities for families, giving rise to some challenges, and revealing the need to adapt, which is not so easy.
Family enterprises are inherently wired for stable or gradually changing environments, because gradual change is more compatible with family culture. Most enterprising families aren’t wired to flex with substantial change, fast change or disruptive change (although some do this admirably). Family companies generally do well with managing economic cycles, but industry disruptions, which happen more frequently than economic cycles, can have more profound impacts on a company or industry, and family companies need to build new practices for the new business world. Enterprising families need to:
Learn a new formula for success that will allow them to endure in the next economy.
Continue to manage the evergreen issues facing family companies (such as succession planning and family relationships).
MP: If members of a business family wanted to learn more about how to thrive in the new world of technological change, where could they go?
JD: I’ve launched two programs at MIT in 2019 (Future Family Enterprise, May 5-10, and Founder to Family, July 22-26) to help families at specific stages in the life cycle learn to succeed in new ways with new mindsets. I invite families who want to learn about these experiences to be in touch with me at [email protected].
MP: There’s a quote attributed to Darwin but that’s probably a paraphrase: “It is not the strongest that survives, but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.” For family enterprise members and for those who advise them, your work can influence their survival. On behalf of the readers of Trusts & Estates Magazine, thank you.
Mitzi Perdue is a professional public speaker and author of the book, HOW TO MAKE YOUR FAMILY BUSINESS LAST a Treasury of Checklists, Templates, Resources, and Tips. Visit her website, www.MitziPerdue.com.
MIT Sloan Executive Education faculty member John Davis, a pioneer in the study of family companies and the director of MIT Sloan’s portfolio of Family Enterprise Programs, is bemused by the sudden interest of corporations in ‘long termism’. “We see non-family, publicly-traded companies suddenly ‘discovering’ long-termism— as if they really discovered it. I’m glad they’re thinking about it; let’s see if they make a genuine effort and really do it,” he says.
Davis remains skeptical—and for good reason. He knows long-termism well, and he knows it works. He teaches the practices, planning, and mindsets to do it successfully to classrooms of business families at MIT. For more than 40 years, across 70 countries, Davis has studied, taught, and advised family-owned companies on how to survive in business for generations. What amuses him about Wall Street’s recent appeal for long-termism is that they define “long-term” in many cases as three years. Meanwhile, Davis works on 25-year, 50-year, and 100-year plans with multigenerational families, and was recently asked by a founder to develop a plan for his family enterprise to last 500 years (20 generations).
Family companies, Davis believes, favor the decisions and behaviors that matter to long-term, sustainable performance “more naturally and more inherently than non-family companies.”
Date: May 3–8, 2020 │ Format: In-class study with action-planning │ Location: MIT Campus, Cambridge, MA
Long-term thinking has always been at the heart of successful family companies. “And not only long-term thinking, but also planning, investing, partnering, relationship-building, and community-building for the long-term,” Davis explains. A long-term perspective “comes more naturally inside a company that is owned by a family, because their time horizon is intrinsically longer. They plan for their descendants to own this business or this land (or the wealth generated by its sale) for generations. There is an attitude of legacy and stewardship as a way of being in families, which permeates into the culture of the company.”
Another inherent quality of a family that penetrates the family company is the stability of ownership, “which says that what we’re in this for the long haul – it’s not a speculative venture – and if you come to work for us, or if you’re one of our customers or suppliers, we’re sticking this out.” This is reflective of their fierce loyalty, which “family companies tend to nurture more than non-family companies.” Davis cites.
Family companies also tend to develop financial stability, with stronger balance sheets and less debt. This makes them more resilient to economic downturns, avoiding the frantic efforts many non-family companies make to boost their suddenly shaky bottom lines. Davis’ work at MIT now focuses on how family enterprises can survive today’s disruptive, fast-changing environment, which requires some different skills than outlasting economic cycles.
The qualities described above that are inherent to family companies help explain one of the business world’s best-kept secrets: on average, family companies, whether public or private, whether small or large, consistently outperform their non-family counterparts. As established by the research, the difference in profitability, growth, or any other kind of return is significant, he says. “We’re not saying that all family companies perform better than all non-family companies,” Davis notes, “but on average, they do.”
Most industry leaders are family companies. The majority of publicly listed companies are family controlled. While the famous three-generation rule – which states that many family companies don’t survive past the third generation after founding – may have some validity (Davis has researched this), the fact is that even fewer non-family companies ever last three generations.
Reluctance to Let Go—in Several ways
Of course, family companies have their challenges as well. One of the main vulnerabilities of family companies is their reluctance to “let go.” As Davis explains, “Family companies hold onto people who aren’t working out well way too long, they hold onto investment bets that aren’t working well too long, they hang onto products or business lines that aren’t working well too long, and sometimes the senior generation hangs on to leadership too long. Families tend to be excessively loyal, stubborn, and they get attached. That doesn’t work very well in today’s economy.”
Date: November 9–13, 2020 | Format: In-class study with action planning | Location: MIT Campus, Cambridge, MA
The irony is that by remaining loyal to original products or to the original business rather than experimenting and scanning the horizon for new growth opportunities, the younger generation of a business family forgets the spirit that inspired the company’s founding in the first place. The driving ambition of the company’s founder was “to create something new that people will value,” says Davis; building a company was only the means to that end. Later generations, however, get attached to the means and forget the ends. As Davis urges his family company students and clients, “We need to migrate to new, good opportunities, and not fixate on the means of production.”
The challenge is that families have a passion for the family business, which is both a strength and a vulnerability. “It’s hard to create anything of great value if you’re not passionate about it,” Davis says, “but passion for a business also results in attachment to it.” Davis, who is also a trained psychologist, notes that success in life often depends on the quality of our attachments but also on our ability for detachment. Successful parenting, for example, requires balancing attachment, and, as children grow older, detachment.
At the family company level, achieving this balancing is a part of the culture that is set in motion by the owners, and then filters into the board and organization, says Davis. “How do you balance attaching and being passionate about something, but also moving away from it at the right time and letting go of things that don’t work any longer?” According to Davis, this skill is an essential part of the modern success formula for family enterprises in today’s turbulent environment. Most family owners don’t know how to do it well; they congregate in Davis’ classes to learn how.
Never Forget the Values
The best family companies know when to pivot and divest, but they also work hard to ensure that such moves are achieved in a positive and humane manner. “When a family business shuts down an operation in a community and people’s lives are affected, you are judged rightfully about how you treat the people who helped you over so many years,” says Davis.
“Good families and good family companies make the right moves in the interest of long-term value building, but they do it with the right values,” he says. “They treat people with dignity, they help them find new jobs, they help the community, maybe repurpose their old factory in some way. They honor contribution and loyalty–and their roots.”
Such timeless values will ensure that no matter how volatile, chaotic, and uncertain the world around them, the best family companies will continue to quietly outperform their noisier, short-term focused, non-family competitors.
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.”
