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The Future of the Three-Circle Model: A conversation between Pramodita Sharma and John Davis

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.

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Celebrating the 40th Anniversary of the Three-Circle Model: An interview with John Davis

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.

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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?

JD:  Well, I was a doctoral student at the time and Renato Tagiuri, who was an extraordinary conceptualizer and a wonderful mentor, would send me to do interviews with his executive students who worked in family companies. I’d ask the subjects very basic questions, listen, record, and make notes on what I was hearing (I still have tape recordings of a lot of these interviews, by the way).
Renato and I would go through a standard process: “So, what did you learn?” “Well, so and so has this complicated issue with his brother and these are his worries.” I would make lists and Renato, who loved to sketch, would be drawing stick-figure diagrams and circles. (I was attuned to diagraming situations because of my earlier training as an economist. I always preferred graphical analyses to mathematical formulas.) We started out thinking in terms of a family and business system but my interviews (and lists) showed that ownership concerns were very present. “In this case it’s not just about family and business problems. He (the interviewee) has inheritance concerns and is also talking about ownership.” Renato added a third circle for ownership to the two-circle Venn we were drawing on, and he said, “Does that help?” And I said, “Yeah, that helps.”

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How Three Circles Changed the Way We Understand Family Business

Cambridge Family Enterprise Press, 2018

How Three Circles Changed the Way We Understand Family Business

A family business advisor sits with a founder and his two daughters in a conference room in Chicago, helping the family with an intense discussion they are having about the future of their family-owned brewery. The elder daughter works in the business. Neither daughter has shares in the family company. All three family members say they want what is best for the business and what is also fair to the three of them. But, for all of their agreement on principle, this discussion about future leadership, ownership and inheritance is getting testy and personal.

The advisor picks up a marker, goes to a flip chart, and begins to draw.

The circles he inscribes are a little wobbly, but that doesn’t matter. He labels the circles of the Venn diagram: Family, Ownership, and Business. He places each of the three family members in their appropriate sector of the diagram, and next to each of their names lists their interests and concerns. The diagram helps to clarify the roles and perspectives, and issues to be resolved.

What the advisor has drawn is the Three-Circle Model of the Family Business System, the fundamental framework in the family business field, created by Renato Tagiuri and John Davis at Harvard Business School (HBS) in 1978.

Two Circles Became Three Circles

Forty years ago, Tagiuri and Davis were looking for a framework to categorize the issues, interests and concerns they were hearing from Tagiuri’s executive students who led family companies. In 1978, Davis was a first-year doctoral student and Tagiuri, a senior professor of organizational behavior. Davis had a strong interest in family psychology as well as in business organizations. Tagiuri was a new faculty member in the Owner President Management (OPM) executive program at HBS, where most of the participants owned family companies. Tagiuri invited Davis to become his research assistant so they could both learn about family companies. It proved to be a very successful and enduring academic partnership that lasted over 30 years.

Over the next four and a half years, while Davis finished his doctorate, the duo conducted numerous interviews with family company owner-managers and surveyed hundreds of executive students on various family business topics. They met almost daily to discuss their projects and findings in the lounge of Humphrey House, Tagiuri’s office building on the Harvard Business School campus. They would take over the lounge for hours, spread their papers over the conference table, and discuss the latest survey or interview results.

“Renato would ask me, “What are we finding in this interview?” John Davis recalled. “I would explain the themes of the interview and the issues that I could spot. Then we would start diagramming the situation, trying to explain why this issue or that problem came about, and how the family influenced the business, and so on. Tagiuri drew circles, triangles, flow diagrams, and stick figures of fathers and sons (at that time there were few women in the OPM program, or in most family businesses).” Davis adopted diagramming as a way to express ideas, and continues to use this method to explain phenomena to students and colleagues. “We would go back and forth explaining whatever, and we came up with very solid understandings and some pretty wise recommendations for that time, like the need for governance to strengthen discipline among family members, although we didn’t call it governance back then.”

There was almost nothing in the literature to guide their exploration. Little had been written about any aspect of family businesses, and the only conceptual model of a family business system was a two-circle framework, which showed the family and the business as two overlapping systems or circles.

The Two-Circle Model recognized the influence of family and business on each other, and the need for alignment of family and business goals and interests. This model also made it easier to understand the confusion that individuals and the system could feel because of competing norms of the family and the business.

But for Tagiuri and Davis, even in the early stages of their work together, the two circles fell short of capturing the interactions and tensions they were seeing in the family business systems they were studying, from a fledgling retail operation owned and run by its husband-and-wife founders to a late generation manufacturing empire owned by cousins with many non-family executives.

So, they were on a hunt for a better framework. And it came several months after they began their research.

On this particular day in the fall of 1978, Davis reviewed a couple cases and Tagiuri took out his pen and drew two circles to represent the family and the business. “That’s part of it,” Davis remembers saying, “But in this system, they are fighting over getting shares in the company. Some of the family members are owners and some are not, and the two circles don’t account for that.”

Tagiuri thought for a moment. “Would this work?” he inquired, sketching out a third circle overlapping both of the first two, and labeling it Ownership.

“That’s it,” said Davis. “Some of these people are owners, some of them are family members, some are both. And some are also managers in the company. And this makes room for the people I am interviewing the most, the owner-presidents who are right in the center.”

Case by case, the pair started to work through specific family business cases to see whether these systems could be adequately described by the three circles. Husband and wife co-founders, Father-son companies, sibling partners, large cousin families with multiple branches, family managers actively running the business, owners and spouses who were not running the business, family employees who had not yet inherited ownership, young children in the family, relatives who had been bought out but were still in the family, non-family employees who were given minority shares, and even the anonymous public owners of listed family companies—all of them not only fit within the Three-Circle Model, their perspectives, goals, and concerns were better understood by it.

The addition of the third, ownership circle allowed more attention to be paid to other issues that were not explicitly recognized by the first two circles. Succession had to do with passing leadership and ownership. Some tough situations were resolved through buyouts of owners. Capitalizing a family business sometimes required bringing in outside owners. Linking the family, business, and ownership circles now fully defined the family business system, which is the integration of all three of these subsystems.

Three-Circle Model of the Family Business System

Elementary it may seem, but for forty years now academics, business families and their advisors have been sketching these three circles to gain insight into the inner workings of their family business and business family relationships. All family business systems can be described using the three circles, and each family business system can be uniquely understood with this framework.

It was this diagram (and the addition of the ownership circle) that also framed Tagiuri and Davis’s definition of family companies:

A family company is one whose ownership is controlled by a single family and where two or more family members significantly influence the direction and policies of the business, through their management positions, ownership rights, or family roles.

This definition could not have been derived without a three-circle perspective.

Three-Circle Model Explained

The Three-Circle Model of the Family Business System shows three interdependent and overlapping groups: family, ownership, and business.

An individual in a family business system occupies one of the seven sectors that are formed by these three overlapping circles. An owner (partner or shareholder) and only an owner will sit within the top circle. Family members will occupy the left-hand circle, and employees of the family company the right-hand circle. If you have only one of these roles, you will be in just one circle. However, if you have two roles, you will be in an overlapping sector, sitting within two circles at one time. If you are a family member who works in the business but has no ownership stake, you’re in the bottom-center sector. If you are a family member who works in the business and is an owner, then you will sit right in the center of the three overlapping circles.

Three-Circle Model of the Family Business System

“The Model identifies where key people are located in the system,” Davis explains, “and think about different roles that family members have: being a family owner, or a family employee. These overlap areas in the Model indicate role overlaps and potential role confusion.”

With the Three-Circle Model, one can depict seven distinct interest groups (or stakeholders) with a connection to the family business:

  1. Family members not involved in the business, but who are descendants or spouses/partners of owners
  2. Family owners not employed in the business
  3. Non-family owners who do not work in the business
  4. Non-family owners who work in the business
  5. Non-family employees
  6. Family members who work in the business but are not owners
  7. Family owners who work in the business

Each of the seven interest groups identified by the Model has its own viewpoints, goals, concerns, and dynamics. The Model reminds us that the views of each sector are legitimate and deserve to be respected. No one viewpoint is more legitimate than another but the different viewpoints must be integrated in order to set future direction for the family business system. The long-term success of family business systems depends on the functioning and mutual support of each of these groups.

Changing the Game

Sitting around the conference table in Humphrey House lounge on the Harvard Business School campus in the late 1970s, Davis and Tagiuri had no sense that they were inventing a game-changer. For starters, there wasn’t really a game to be changed: the study of family business was in its infancy. “There was not only little writing on these systems, there was almost no conceptual thinking on these systems.” Davis explains.

Their intentions were very immediate and quite pragmatic: As they doodled, they were simply trying to develop a useful tool. “We just needed something convenient to be able to organize our thinking about how these systems were structured. That’s all we needed to do at first.”

From those doodles, though, came a model that allowed for deep analysis of family businesses, and led to benefits that are both direct and wide-ranging.

Here are six often-noted impacts and consequences of the use of the Three-Circle Model.

  1. Family business academics and advisors the world over, have witnessed the transformative power of the Three-Circle Model. As Davis puts it, “Whenever I’m in a classroom helping MBA students get their arms around their system for the first time, my students will later tell me: When I saw the three circles, it all made sense.”
  2. The model of the family business system shows three overlapping circles or subsystems that are interconnected, which indicates that what happens in one circle influences the others. If one circle, say the family, is in conflict or stuck, it can pull down the performance of the other circles and stall out the development of the entire family business system. On the other hand, a high-performing business can create pride in a family and build unity in the ownership group.
  3. More than just indicating interdependence, the three-circles visually raise questions that beg for answers. The Three-Circle Model not only helps identify where in the family business system issues are occurring, but also helps to diagnose why issues have occurred or spread from one circle to another. Why are two owners so opposed to one another? To what extent has their estrangement stemmed from family difficulties, or differences that evolved in their business relationship? Would an ownership agreement help?
  4. The neutrality of the Model can help to defuse tensions in the family business system by illustrating the power of roles, rather than assuming differences are caused by personality differences. “One of the benefits of a more systems-oriented approach is that it alleviates some of the blaming that goes on,” Davis says. “People have told me that relationship tensions just made more sense after they saw where their relatives were located in the Model. For example, an owner-manager might observe: ‘My sister is always irritated at me because of the low dividends we pay. And I’ve been thinking, Wow, you’re so greedy. But when you see where she is in the system, it makes more sense. She doesn’t get a salary and benefits like I do working in this company. She doesn’t receive any of that.’”
  5. The Three-Circle Model explicitly recognizes the several interest groups or constituencies in the family business system. It becomes apparent that every group in the system has its own, legitimate interest in the family business, and all groups need to be respected, responded to and integrated in some way into the policies and decisions of the company.
  6. The Model also teaches us that the needs of the three circles, and of each interest group, evolve and change. The three circles are always in motion—never static. Families not only need to address their current challenges, but prepare for future challenges that they will likely face. Fortunately, the development of each circle over generations is fairly predictable. This realization led to the development of the Three-Stage Model of Family Business System Development (described in the book Generation to Generation: Life Cycles of the Family Business).

How One 5th Generation Family Conglomerate Used the Model

One 5th generation leader of a multi-billion dollar, family-owned conglomerate expressed the impact that the Model has had on his family’s understanding of their family business:

“A decade ago, we were in the midst of many challenges. Our values had become confused with our rules. Treating people with respect meant not firing anybody. Consensus meant that the scope for leadership was limited. Eventually these, and other issues, caused serious problems in the business. We had a governance crisis and a performance crisis, and closed one of our primary geographic regions’ operations.

That’s when we met John Davis, and the simple insight of the Three-Circle Model was revelatory. The fact that the circles are related but distinct, each with their own perspective, but linked, was illuminating. If one circle is unhealthy in its approach, it will affect the others. That was a significant shift for us.”

Withstanding the Test of Time

When so much in business, technology, wealth, family, and society has changed, how can a 40-year-old model still help us understand and manage issues in current family business systems?

Part of the reason why the Model has withstood the test of time, and is still relevant today, is that the Model, in its unaltered form, is adaptable. As the definition of “family” has changed in society, the Model allows for that. In-laws, blended families, divorce, adoption, domestic partners, and whoever the family calls a member of the “business family” because they are connected through ownership – all of these roles are consistent with the Model.

Likewise, the ownership circle can accommodate many possible scenarios. If a family business goes public or invites a private equity partner, the Model accommodates that ownership change. If the company issues different classes of stock (voting and non-voting), and holds some of the shares in a trust, the Model accommodates that. Today, as families have many different capital alternatives, the Model accommodates joint ventures, mergers, acquisitions, and different sources of capital that impact the ownership circle.

Many businesses have changed significantly in 40 years but the business circle of the Model is flexible: It may represent one business, or multiple businesses, holding companies, joint ventures and more. It can even describe a situation where the business family has sold its operating company and is managing their financial assets as an entity. The family is in a different business, but it is still their business. Similarly, the “business” circle can be labeled the “family office,” and the model still works.

With the pace of change, globalization, technological advancements, and disruption around the world, the changing environment will continue to shape businesses, ownership groups, and families. And the Three-Circle Model will continue to accommodate this evolution.

How About a Fourth Circle?

Like designing a three-wheeled car or adding a second story to an Eichler house, sometimes a classic design stays around because it simply can’t be improved on—given its purpose.

Over the years, many family business practitioners have sought to improve on the three circles. They have added more circles, and redrawn them as overlapping ovals. “Sometimes,” says Davis, “these models accomplish their purpose. But they tend to be complicated and not do as efficiently what the Three-Circle Model does.”

Davis himself has, over the years, tinkered with adaptations and additions to the three circles. “I played around for a while with the idea of having a fourth circle of wealth holders because in some situations the holders of family wealth differ from the owners of the family business. I wondered if we could try to map wealth holders distinct from owners. The fourth circle just didn’t work.”

Nothing seems to have the sticking power of the original Three-Circle Model. It is still the widely accepted, organizing framework used worldwide to understand family business systems. The acid test for the Three-Circle Model, Davis says, is this: “No one in the world now addressing family business issues doesn’t use it.”

Simplicity is central to the efficacy of the Three-Circle Model, Davis contends. “Models that have legs – that keep working – need to be simple enough to describe most of what you need to describe, and the Three-Circle Model does that.”

Expedient as it may be, even the Three-Circle Model has its limitations, and Davis is ready to concede that. “You know, it’s just a helpful tool and it’s not the only tool that you need.” He goes on to illustrate his point with another example. “We could describe your family business system using the Three-Circle Model. But your family also has a family vacation house, a family philanthropic foundation, financial investments that are managed collectively, maybe an art collection. All of these assets and activities influence one another and are important to your family but this collection isn’t captured by the Three-Circle Model. I created another framework for that, looking at the family enterprise system, which is a broader term than the family business system.”

A Three-Dimensional Future

So what lies in the future for the Three-Circle Model? Will we be using these same three circles in another forty years’ time?

“I think that the Model will still be the Model,” Davis says. “I think we will make more progress understanding how the family business system fits into the broader family enterprise system. I also think we will use the ability to map systems not in a two-dimensional way, but in a three-dimensional way. In my mind’s eye I can see three intersecting spheres and maybe being able to represent a family business system in three-dimensional space could allow some breakthroughs in understanding. But I don’t think somebody will come up with a fourth circle that compels people to do away with the three circles.”

The Three-Circle Model of the Family Business System was developed by Renato Tagiuri and John Davis at Harvard Business School, and circulated in working papers starting in 1978. It was first published in Davis’ doctoral dissertation, The Influence of Life Stages on Father-Son Work Relationships in Family Companies, in 1982. In 1996, the Family Business Review published it in Tagiuri and Davis’ classic article, “Bivalent Attributes of the Family Firm.”

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Cambridge Family Enterprise Press, 2018

For permission to quote or distribute this article, contact [email protected]

Dual-class shares, family businesses, institutional investors…and Marx

Originally published in: Family Capital (October 12, 2017)

Dual-class stock listings, often favored by founders and families who take their companies public, have a bad rap with a number of stock markets, stock analysts and especially with institutional investors. These investment companies, including pension funds and other investment pools, claim dual-class systems are a threat to “democratic norms” in public markets because these ownership systems “entrench” families in control of their family companies. The business press has largely fallen in line with these critics, I think because they haven’t examined the benefits of dual-class systems and the weaknesses of today’s stock markets.

Dual-class stock structures are beneficial for the economy because they allow families to stay in control of their companies while holding just a minority of the economic value of the family company. In a dual-class system, the class of shares held by the controlling family gives the family more votes per share (sometimes even all the votes), or special rights, in order to elect the board of directors they want. This allows these publicly traded family companies to pursue long-term objectives insulated somewhat from the extreme short-term pressures of the stock market.

We should want all public companies to take actions that strengthen their long-term performance, like improving their operating efficiency and stimulating ongoing innovation, developing great managers and skilled employees, investing in promising new opportunities, and changing outmoded strategies and policies. These choices, however, usually require a long period to implement. Pressures that lead a company to avoid useful longer-term investments and changes so that short-term/quarterly results seem better, are wasteful and harmful to the economy and should be avoided.

It is widely acknowledged that public companies feel pressured to take short-term actions to demonstrate that their quarterly earnings meet the expectations of analysts and key investors. Public companies are even known to manipulate their financial statements in response to quarterly pressures on earnings to achieve desired short-term results. Institutional investors are the most influential actors producing this short-term orientation. If a company narrowly misses its quarterly projections, institutional investors can and do move mountains of investment capital from one company to another. Anonymously-owned public companies are most vulnerable to these pressures. Have you observed that especially anonymously–owned public companies have been hording mountains of cash, not investing it, or using it to buy back their own shares? A key reason for this is that long-term bets by a company generally don’t produce quick short-term gains to a company’s stock price and could depress the stock price for a period. Publicly traded single class family controlled companies do somewhat better at resisting short-term pressures because they naturally have a longer-term, sustainability orientation. Family companies with dual class ownership systems do the best of the lot.

To understand the short-term bias in the stock market just follow the money. The stock market’s focus on short term results agrees with the compensation incentives of many public company executives and institutional investor managers even if this bias perversely constrains the long-term performance of public companies. If you want change the orientation of public companies and institutional investors, change how their key managers are compensated.

This pressure by institutional investors on stock markets, in my opinion, constitutes a real threat to the health of capitalism because short-term pressures sway companies in the wrong direction. Marx warned us that economies and societies plant the seeds of their own destruction. Institutional investors — a natural outgrowth of large stockpiles of investment capital combined with investment managers with a mentality (encouraged by their compensation system) to maximize short-term economic gains are these seeds.

Democratic norms in a public stock market do not mean that all owners have the same votes, as institutional investors have cleverly skewed the debate to argue. Public markets should be democratic in this way: public companies need to be responsible, clear about their strategies (long-term, short-term, etc.), and transparent enough for investors to know how they are really performing against their stated strategies. Individual investors in the stock market come in all flavors—short-term and long-term oriented, some wanting liquidity, others appreciation. Public markets should make it easy for investors to know what they are buying. If stockholders don’t like what a public company is doing, they can vote with their feet. If public companies cheat stockholders, regulators should catch them and punish them. We need regulations and laws that promote good corporate behavior. A good board will help a company perform better for all owners, given its stated strategy. Having an ownership control group in place helps to choose a board that can help a company be responsible and achieve long-term success.

I think that public stock markets can serve a good purpose. We need to have a diverse ecology of mechanisms in an economy to capitalize companies (debt, private equity, public ownership, etc.), including a public market option that serves all companies well and flexibly. Public markets have their obvious costs for companies, including transparency and compliance costs. The big problem comes from institutional investors. Because many institutional investors have relatively big positions in public companies, they can be very disruptive in the wrong way. The short-termism of institutional investors is what I really object to. Public markets need to wake up to the threat of powerful, short-term investors. Public ownership has already become less and less attractive to companies, and stock markets are shrinking. They will shrink more if they restrict dual-class shares. The stock markets shouldn’t let institutional investors be the seeds that undermine the value that stock markets can have.

What’s Missing in Trump’s View of Nepotism

Originally published in: Huffington Post (July 25, 2017)

The pictures of Jared Kushner and Ivanka Trump participating in executive and ceremonial meetings with foreign leaders draw the ire of many. These images raise central questions about the legitimacy and utility of nepotism in the White House.

Most commentators regard the governmental presence of Kushner-Trump as, at the minimum, overstepping the proper roles of relatives supporting their family leader. More critically, their presence is a poor and inappropriate substitute for professionals who should be in these advisory roles. The most generous comment I have read about the Trump scions’ administrative roles is that they seem to have a moderating influence on the President and, therefore can help him perform better. However, in face of recent news about the practices and approaches engaged in by his children, this theory no longer seems credible.

Do Ivanka Trump and Jared Kushner belong in these roles? This is a central question for my field of family business management, as we witness the U.S. president attempt to run the White House in the same manner as his family businesses. They have the confidence of President Trump, who indicates that he is proud of his daughter and son in-law, and trusts them to represent and advise him on both foreign and domestic issues. Despite the fact that they have achieved some success—in their respective businesses—Ivanka Trump and Jared Kushner do not have experience or demonstrated skills that would qualify them for their roles in the current administration.

“In their respective businesses” is an important clause and underscores why we are justified in labeling Trump-Kushner as harmful nepots. The term nepotism is associated with giving preference in hiring and promotion to one’s relatives, independent of their merit or qualifications. To be fair, all species — from single-cell organisms to orangutans to humans — favor their close relatives, granting them more care, resources and opportunities. Most people (probably including you, dear reader) probably support and sympathize with a family’s desire to favor passing its assets to succeeding generations, as in a family company.

Assuming that President Trump views them as qualified for their posts (remembering that he views himself as highly qualified for his current position), we must still recognize that he chose them, in particular, because he wanted family members in his advisory team. He favored them in government employment because of their family membership and loyalty to him, not for their professional and governmental acumen. Hence, they are harmful nepots – instead of “nepotistic professionals,” family members who are qualified to serve in specific roles.

Professionals are individuals who, emphasizing the latest tools of their crafts, exhibit high standards of performance and ethics. Professional behavior can be seen (or not) in both family and non-family employee groups. The fact that Jared and Ivanka are family members does not automatically mean they are not professionals. Their lack of governmental and topical experience means that they are not nepotistic professionals either. For anyone to be a professional means that he or she is schooled, trained and has developed the understandings, skills and ethics of one’s trade and is qualified to be in a particular position – which Trump and Kushner are not.

President Trump, who behaves as if he and his family own the White House, has trampled on the principle of nepotistic professionalism by installing his daughter and son in-law in roles they are clearly not prepared for. In doing so, he and they not only recklessly risk the performance of our government, but also damage the image of their family and of family companies overall.

Dr. John A. Davis is a globally-recognized authority, academic and researcher on family business and family wealth. Learn more about Dr. Davis at johndavis.com, on Twitter at @ProfJohnDavis, and on LinkedIn.

 

Viewpoint: Succession with Chinese Characteristics

Originally published in: Family Capital (August 24, 2016)

Photo: Pixabay

Perhaps the most challenging issue for China’s private businesses in the years ahead is how they deal with succession. Given the country’s brief 30 year experience with a market economy, China’s family businesses have yet to fully embrace succession. That, of course, is changing – as the founder generation begins to transition to the second generation. But what is becoming increasingly clear is that China wants to shape its own thinking on succession, which borrows ideas from the west, but is also about something that feels distinct for themselves.

At many levels, passing the business to the next generation is no different for family-owned businesses in China than it is for other family businesses anywhere else. They face the same set of challenges, such as getting the next generation prepared and committed to taking over management plus encouraging the senior generation to let go in time. The ultimate goal, for any business, is to maintain both the momentum of the business and the family. That’s no different for China’s family businesses.

Founder Generation

But succession in China has some particular twists. One of these is that the country is largely dealing with founder succession. Of course, issues around founder succession are universal, where the founder has an intense attachment to the company and they fear to let go.

“China is largely dealing with founder succession”

But the founder generation is split in China between older Phase 1 founders who started in the 1980s and early 1990s, and younger Phase 2 founders who launched private companies in the late 1990s and 2000s. The older Phase 1 founders are mostly in their 70s now, and were mostly involved in transforming state enterprises that weren’t doing very well into private enterprises; they were part of the state structure and their thinking has been influenced by that culture. The younger Phase 2 founders, who are mostly in their 50s, started their own companies from zero and are more similar to the entrepreneurs in the west.

It is the older founders that currently face the greatest challenge with succession, for three predominant reasons.

One-Child Policy

Because of China’s one-child policy, the family does not really have a choice in terms of who they appoint as their successor. This is especially true because China has yet to develop a deep pool of professional, non-family, senior management talent that operates with high ethics and can be trusted by family owners.

Cultural Divide Between the Generations

There tends to be a cultural gap between the senior and junior generation family members. Unfortunately, many next generation family members do not want to work in the family business. They often see the family business, usually connected to manufacturing, as unattractive because of the low growth of these industries, the often remote locations of production facilities, and the complexity of building and maintaining government relationships. Those feelings tend to be amplified if the next generation is educated abroad. The two generations diverge on their approaches to the family’s wealth strategy, business strategy for specific operating companies, and management strategy of how to lead the business organization effectively.

Extended Family

Another issue that often complicates succession in China is the concept of the extended family. Many times the founder supports members of the extended family informally. Sometimes this means giving relatives jobs inside the company or supporting them in their own business ventures. Typically, in China, the family is a significant obligation and becomes a real headache for the second generation, because they can’t fire members of the extended family working in the company. They also find it difficult to decrease other types of financial support over time, so they have to keep supporting them. This becomes an increasing burden as the size of the extended family grows in successive generations.

“In the west, the boundaries of a business family are its owners, their spouses and their immediate descendants; but in China, this idea almost feels socially unacceptable.”

This is further complicated by the fact that it often becomes difficult to define what is the boundary of the business family in China. In the west, it’s the owners, their spouses and their immediate descendants; but in China, this idea almost feels socially unacceptable. They see the business family as much broader, and this places a lot of pressure on the only child when it comes to managing expectations.

Models of Succession

As a next generation family business cohort, it is uncertain whether generational transitions within Chinese family companies will generally be successful since succession has yet to go through a whole cycle, which will probably occur in 15 to 20 years time. There have been a few successful cases of family business generational transitions in China so far. For example, Liu Yonghao who founded one of the largest private agribusinesses in China—New Hope Liuhe Co—ceded the chairmanship of his company to his 33-year old daughter Liu Chang in 2013 when he was 62 years old. He selected a director on the company board to be the co-chairman with his daughter. Examples from places like Hong Kong and Taiwan, where succession often has not been well managed, are difficult to be held up as role models in China.

A key judge of the success of generational transitions in China will likely be found in its history and the traditional Chinese values that have been around for a long time like Confucianism. Confucianism focuses on duty to your country, duty to your family, duty to your community. Families are implementing more Confucian thought into their management practices. If anything, this tendency is likely to continue in the years ahead.

They will not just want to run their businesses as capitalist organizations, but adapt them to a Confucian way of thinking.Over time, it is our view that China is going to develop a succession strategy that is successful, and works for its huge economy—probably a more successful succession strategy than currently works in Hong Kong and Taiwan. But to get there, China still needs to confront a number of challenges—and many of these go to the heart of what type of society China sees itself as.

Governing the Family-Run Business

Originally published in Harvard Business School:  Working Knowledge  (Sept 4, 2001)

 

The topic of governance is hot. Shareholders, managers, and business advisors are demanding improved governance of (typically public) companies by strengthening their boards of directors and developing more responsive shareholder relations.

But what happens when your board of directors is also your family?

The governance of a family business is more complicated than for non-family owned companies because of the central role of the family that owns and typically leads the business. In a family business, the business, the family, and the ownership group all need governance.

In family businesses (companies whose ownership is controlled by a single family) and other kinds of family enterprises including family foundations and family investment funds, the lack of effective governance is a major cause of organizational problems. In my two decades of working with family enterprises of all kinds, it has been clear that every business able to improve governance reaped lasting benefits.

If you are in a family enterprise, you need to learn the basics of governance and apply the best practices that exist in family business governance. But even non-family business leaders can benefit from considering how the problems of a family enterprise and non-family business are often the same. Personalities, passions, and power, after all, are at the heart of any enterprise.

In this article, I will describe effective overall governance of a family enterprise. In the following two articles in this series I will go into more detail explaining governance of the family business and governance of the business family—the family that owns the enterprise.

Effective Governance Means …

Let’s start by defining our topic. For any organization, be it a business, a family, a family foundation, or a Boy Scout troop, effective governance:

  • Generates a sense of direction, values to live by or work by, and well-understood and accepted policies that tell organization members how they should behave or what they should do in certain circumstances. Examples of policies are hiring policies, promotion policies, debt policies, even fire emergency policies.
  • Brings the right people together at the right time to discuss the right (important) things.

No organization is effective for long without doing these things. You should measure the effectiveness of your governance system by these outcomes, not by the boards and councils you can put in place. Effective governance can be done in an informal, casual manner. Or it might require formal structures (e.g. boards, councils) and processes (e.g. agendas, voting). The particular kinds of structures in your governance system can vary as long as your organization is producing the two outcomes described above.

If your organization is doing the above two activities in an informal, casual way, don’t change. But if your organization does not have these outcomes—a clear sense of direction, clear values, well-understood, sensible policies, does not assemble the right people in a timely way to discuss and decide the big issues facing your organization—then your governance system is flawed, should be improved, and probably needs to be made more formal. Given how difficult it is for most people to confront especially sensitive issues and to plan ahead, some degree of formality often helps people focus on their issues, work toward their goals, and resolve their differences. What is clear in my work with family enterprises is that a few well-composed and well-managed governance structures greatly help your chances of being effectively governed.

The world of family enterprise generates a mixture of business, family and ownership concerns that can make these systems emotionally charged environments for planning and problem solving. In these systems individuals must manage issues within and across three overlapping groups: the family, the business, and the ownership group (see Figure 1). The overlap among the three groups often leads to differing points of view among individuals depending on their location in the three circles. For example, family shareholders not employed in the business often have different views about the proper level of dividends than do their relative owners who work in the business. Both viewpoints are typically legitimate and must be reconciled in a respectful way to set direction for the enterprise and preserve harmony in the family. To effectively manage business, family and ownership concerns requires communication and decision making within and across the family, the business, and the ownership groups.

The overlap among the three groups often leads to differing points of view among individuals depending on their location in the three circles. For example, family shareholders not employed in the business often have different views about the proper level of dividends than do their relative owners who work in the business. Both viewpoints are typically legitimate and must be reconciled in a respectful way to set direction for the enterprise and preserve harmony in the family. To effectively manage business, family and ownership concerns requires communication and decision making within and across the family, the business, and the ownership groups.

Three-circle Model of the Family Business

Figure 1: The “3-circle” model of family business

Without belaboring an oft-made point about family business, reconciling these diverse concerns can be terribly difficult. Too often, family firms employ dysfunctional and short-sighted approaches to handle tensions, such as:

  • Exclusion and secrecy—keeping some family members or shareholders out of conversations and keeping too many secrets from employees, owners or family members.
  • Divide and conquer—relying on the support of some allies and excluding others from information and decision-making.
  • Bribery—hiring relatives who do not deserve jobs, paying relatives more than they deserve, distributing more funds from the company than is responsible for the sake of preserving family harmony or maintaining certain individuals’ power.

These methods of addressing business-family-ownership tensions can provide some short-term relief but rarely resolve issues and predictably intensify them. Effective governance does not eliminate tensions in family enterprise systems. But it can reduce tensions and improve the effectiveness and harmony of these systems by clarifying family-business-ownership needs and managing the conversations needed to agree on goals, values, and policies.

IF YOU ARE IN A FAMILY ENTERPRISE, YOU NEED TO LEARN THE BASICS OF GOVERNANCE AND APPLY THE BEST PRACTICES THAT EXIST IN FAMILY BUSINESS GOVERNANCE.
— JOHN DAVIS

Size Doesn’t Matter

The absence of effective governance is by no means confined to smaller companies. The board of a large, fourth-generation family company created painful family turmoil when it dismissed the family chairman. The dismissal seemed abrupt to the chairman and his family allies, and long overdue by others. The family had the wisdom to address the ensuing family conflict and expose the weaknesses of its existing governance system: the family council was not consulted about the board’s issues with the chairman and did not understand its role in working with the board on such issues; the board of directors was too dominated by the family which had kept it paralyzed and unable to give the chairman pointed, critical feedback. This family business had the right structures in place; they just weren’t working properly. By strengthening the board and family council, and using the board, council, and family assembly to confront real issues facing the family and business, the business and most of the family moved beyond the removal of the chairman. They were also able to begin addressing the exclusion and secrecy at the root of problems in their system. This family business sold two of its three companies; the family is making a real attempt to become more supportive and cooperative. The improved governance system was at the heart of both gains.

Good governance contributes three fundamental ingredients for family businesses to function well:

  • Clarity on roles, rights, and responsibilities for all members of the three circles;
  • Encouraging family members, business employees, and owners to act responsibly;
  • Regulating appropriate family and owner inclusion in business discussions.

Governance System Structures

So far, we have established the philosophy underpinning family business governance. Now, let’s review the structures in a family business governance system. Effective governance requires forums for the examination of the complicated and often emotional family, business, and ownership issues that confront family firms. The structures I recommend for any family-business-ownership system will vary somewhat based on the size and diversity of the business organization, the size and diversity of the ownership group, and the size, generation, and diversity of the family. One type of governance structure does not fit all family enterprise systems. But most family enterprise systems can be governed by a few structures, shown in Figure 2:

  • Top management group;
  • Board of directors or board of advisors;
  • Family assembly and/or family council, and;
  • Shareholders meeting and/or shareholder council.

Three-Circle Model of the Family Business Tagiuri and Davis
Figure 2: Basic governance structures of the family business system

The membership and functions of these governance structures need to evolve as the business, family, and ownership groups change over time. A first-generation family business may only require (or tolerate) a small, informal advisory board rather than a board of directors. A third-generation family may need a family assembly to bring together the twenty-two members of the family annually to learn about and discuss the family business, plus a family council to help set policy for the family. It is quite clear that as ownership of the family business becomes more divided over generations, board composition and the role of the family council need to change. My advice is to create your board, family council, or family assembly to meet your current needs and to periodically discuss how to update these structures to meet the needs of your changing system.

The relationships among the governance structures is depicted in Figure 3 below:

Three-Circle Model of the Family Business John A. Davis
Figure 3: Relationships among governance structures

This diagram illustrates the principle of the separate functions of the family council and the board of directors, or “the separation of church and state.” The family council sets policy for the family and recommends policy that concerns the family to the board (e.g. policy about family employment in the business). The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business. These board and family council will ideally coordinate their work (we will discuss how later) but they should not overstep into each other’s domains.

At this point, consider my description of effective governance and assess how well your family enterprise performs according to the standards I have proposed. Then ask if your family enterprise system might be helped by a formal structure or two.

Fueling the Future Intrapreneurs

Originally featured at the Business Families Foundation: Family Matters Forum (November 2016)

John A. Davis presentation: FUELING THE FUTURE: INTRAPRENEURS.

Making reference to his latest research, Professor John A. Davis focused his presentation on the Intrapreneur as a creator of wealth within the family and business. The intrapreneur’s mindset was explored, as well as the challenges they face within the family enterprise. John Davis discussed how families can identify and develop intrapreneurs amongst the next generation.

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Veja por que o mercado de moda no Brasil é o que mais cresce

Originally published in: Exame (January 2014)

Campo Bom – O mineiro Alexandre Birman é um viciado em sapatos — os de salto agulha, de preferência. Enquanto executivos e empresários normais interrompem conversas para checar e-mails no telefone, Birman se distrai o tempo todo porque analisa os sapatos de cada mulher com quem cruza na rua, esbarra em eventos ou mesmo vê na televisão.

Essa espécie de distúrbio social começou a se manifestar aos 12 anos, quando presenteou o pai, Anderson, com um mocassim marrom feito, da concepção ao acabamento, por ele.

“Queria que meu pai nunca esquecesse, então caprichei”, diz Birman, que hoje comanda uma das maiores empresas de moda do Brasil, a sapataria Arezzo. A rigor, as origens de tanta obsessão remontam a 1972, quando o pai e o tio começaram a usar um galpão para fabricar sapatos e fundaram a empresa (o nome veio após uma pesquisa aleatória de cidades no mapa da Itália).

Alexandre nasceu quatro anos depois e cresceu dentro da fábrica, que teve um começo marcado pela modéstia. Com a Arezzo em dificuldades, ele contou com a ajuda do pai para fundar, aos 19 anos, sua própria marca de sapatos femininos, a Schutz. Nos 12 anos seguintes, pai e filho concorreram um com o outro.

Até que, em 2007, decidiram se unir novamente. Começou ali uma era de ouro para a Arezzo, que quintuplicou de tamanho desde então. Hoje, a empresa vale 2,6 bilhões de reais. Pai e filho figuram na lista de homens mais ricos do país, com uma fortuna de 1,7 bilhão de reais.

Não existe empresa de sapatos como a Arezzo. Alexandre Birman alimenta sua obsessão criando modelos num ritmo alucinado. Mais de 300 pessoas trabalham no centro de inovação da empresa, em Campo Bom, cidadezinha gaúcha a 60 quilômetros de Porto Alegre. Das pranchetas, saem 1 000 novos modelos de sapatos femininos por mês.

Birman coordena pessoalmente a triagem e escolhe os cerca de 170 modelos que chegam às prateleiras. Esse ritmo ajuda a explicar por que a Arezzo vende tanto. Separada em quatro marcas para públicos distintos, a Arezzo pode cobrar tanto 80 reais por uma sapatilha quanto 2 400 reais por uma sandália de couro de cobra. No ano passado, a empresa superou duas barreiras simbólicas.

Vendeu mais de 10 milhões de pares de sapatos e faturou 1 bilhão de reais. “Estamos investindo para virar uma das maiores empresas de sapatos do mundo”, diz Alexandre Birman, que, aos 37 anos, é o mais jovem entre os 100 executivos mais influentes do mundo do sapato.


A Arezzo é o símbolo de um fenômeno. Os brasileiros (mais precisamente, as brasileiras) nunca gastaram tanto dinheiro com sapatos, roupas, joias, óculos e os demais produtos que formam o que se convenciona chamar de mercado da moda. Em nenhum país, esse setor cresce tanto quanto no Brasil.

Nos últimos dez anos, o faturamento quadruplicou, e chegou a 140 bilhões de reais em 2013, segundo a consultoria Euromonitor. Nesse período, o mercado brasileiro saiu da 14a para a oitava posição entre os maiores do mundo — está prestes a passar o italiano, terra de grifes consagradas, como Prada, Gucci e Armani.

É uma trajetória que tem se repetido em outras áreas. O Brasil já é o maior consumidor mundial de perfumes, o segundo de produtos para cabelo, e o terceiro de cosméticos — atrás apenas de Estados Unidos e Japão. Era natural que o movimento se repetisse na moda. “Ainda há muito espaço para crescer”, diz Flávio Rocha, presidente da varejista de roupas Riachuelo, que cresceu 62% nos últimos cinco anos.

Pessoas com a cabeça no lugar só compram um sapato novo depois de assegurar que terão casa, comida e transporte (embora seja verdade que nem todos têm a cabeça no lugar). Por isso, o avanço da moda se dá aos saltos: de acordo com dados do Instituto Brasileiro de Geografia e Estatística (IBGE)­, as pessoas dobram seus gastos mensais com moda a cada degrau que sobem na escada social.

Nas classes D e E, quase todo o dinheiro é gasto em necessidades básicas, como moradia e alimentação. Sobram apenas 40 reais por mês para roupas e acessórios. Quem passa para a classe C gasta, em média, 97 reais. Na classe B, 202 reais. E, na classe A, 455 reais por mês.

Em outras categorias de produtos, a diferença de gastos por faixa de renda é muito menor. Portanto, à medida que um país  enriquece e as pessoas pulam de faixa social, um dos setores mais beneficiados tende a ser o de moda. É o que vem acontecendo no Brasil.

Quem mais ajudou nessa expansão recente foram as mulheres. Mais de 11 milhões delas entraram no mercado de trabalho na última década, o que impulsiona o setor por dois motivos. Primeiro, e mais óbvio, porque têm mais dinheiro no bolso e, como mostram as estatísticas do IBGE, mais disposição para gastar.


Segundo, porque elas passam a ter a obrigação de andar mais bem vestidas no dia a dia. Esse tipo de mudança teve impacto direto em nichos como o de produtos para cabelo. E está se repetindo no vestuário. Segundo pesquisas da consultoria Data Popular, as mulheres das classes D e E têm em média nove pares de sapatos em casa. Nas classes A e B, a média sobe para 20.

Assim como aconteceu com a Arez­zo, dezenas de empresas de moda mudaram de patamar com essa nova fase do mercado. Se historicamente as vendas de roupas se concentravam em lojinhas de bairro e grandes lojas que vendiam de tudo, a expansão do número de shoppings no país foi mudando a cara do setor — e abrindo espaço para quem queria criar marcas nacionais.

Segundo a consultoria do setor têxtil Iemi, a fatia de mercado das butiques de bairro caiu de 44% para 37% nos últimos seis anos. Enquanto isso, foram erguidos 160 shoppings no país na última década. Diversas empresas souberam aproveitar essa onda. O número de redes de franquias de moda avançou 259% no período.

Elas cresceram não só em número mas em tamanho. As redes de moda feminina Farm e Animale, que se uniram em 2010, crescem 35% ao ano e faturam 850 milhões de reais. A malharia catarinense Malwee, que vendia só para lojas de bairro, abriu mais de 100 pontos de venda desde 2011.

O grupo M5, dono da M. Officer, já tem 200 lojas. A rede de moda jovem TNG tem 180 lojas, todas próprias. Especialistas no setor calculam que existam perto de 50 empresas com faturamento de pelo menos 500 milhões de reais e que poderiam valer até 1 bilhão de reais caso fossem vendidas.

Nenhuma empresa aproveitou de forma tão ágil a oportunidade criada por esse novo momento quanto a camisaria catarinense Dudalina. Criada há 56 anos pelo casal Duda Souza e Adelina Hess, passou mais de cinco décadas vendendo suas camisas só para varejistas. Isso começou a mudar em 2010, quando abriu sua primeira loja-conceito.


Era o mesmo caminho seguido com sucesso pela pioneira Hering e as que vieram depois, como a Malwee e a Paquetá, fabricante de sapatos gaúcha que partiu para o varejo a fim de fugir da competição com os chineses. “Estava cansada de me sentir espremida pelo custo da matéria-prima e pela pressão por preço baixo dos lojistas”, afirma Sônia Hess, presidente da Dudalina e filha dos fundadores.

Naquele mesmo ano, a empresa começou a fabricar camisas femininas, feitas sob medida para o batalhão de mulheres que entravam no mercado de trabalho e ascendiam nas companhias. Na época, não havia uma varejista dedicada a esse público. O faturamento quadruplicou desde então, chegando a 500 milhões de reais em 2013.

Em dezembro, a família Hess vendeu 72% da Dudalina para os fundos de private equity americanos Advent e Warburg Pincus, numa transação que avaliou a empresa em 800 milhões de reais (a companhia não comenta esses dados). Com o fôlego financeiro dos fundos, a meta é chegar a 1 bilhão de reais em vendas em 2016. Para isso, passou de nove para 20 coleções por ano de suas quatro marcas.

Investidores como Advent e Warburg Pincus são atraídos por uma combinação única de fatores. Apesar da expansão recente, o Brasil não tem fabricantes ou varejistas que dominem o mercado de moda. As cinco principais varejistas têm apenas 10% de participação de mercado. Há muito espaço para crescer, seja comprando marcas, seja abrindo lojas.

As empresas de moda também têm a vantagem de precisar de pouco capital porque costumam dividir os investimentos na expansão com os franquea­dos. As margens de lucro de quem tem marcas conhecidas ficam entre 8% e 15%, até cinco vezes maior que em outras áreas do varejo.

Um dos fundos mais agressivos tem sido a Tarpon, que teve um retorno de 500% de seu investimento de 76 milhões de reais na Arezzo. A empresa abriu o capital em 2011. Além da Arezzo, a Tarpon comprou participações em empresas como a Hering, a varejista Marisa e a fabricante de roupas femininas Morena Rosa.


O fundo americano Carlyle comprou, em 2010, 51% da Scalina, fabricantes das meias Trifil. O Gávea investiu em 2011 estimados 150 milhões de reais na Camisaria Colombo, maior varejista de moda masculina, e, em 2012, comprou 30% da empresa de óculos e acessórios Chilli Beans.

A bem da verdade, ganhar dinheiro com moda tem sido mais difícil do que se imaginava. O melhor negócio até hoje foi mesmo o da Tarpon com a Arez­zo. Os investidores penam com uma característica comum a muitas empresas do setor — os fundadores são também responsáveis pela criação das peças e acabam mantidos mesmo quando vendem o controle.

Mas eles resistem a medidas, como cortes de custos, que signifiquem uma “intromissão” em seu trabalho, uma senha para brigas com fundos que precisam dar retorno a seus investidores. É uma das dificuldades enfrentadas, por exemplo, pelo fundo Vinci Partners, que em 2008 se tornou sócio da InBrands, grupo com 11 marcas, como Alexandre Herchcovitch e Richards.

A ideia era vender 1 bilhão de reais em 2010, mas a empresa ainda não bateu a marca e deu prejuízo em 2011 e 2012. Áreas como logística e finanças foram unificadas, mas até hoje criação, mar­keting e vendas estão separados por marca. Sócios como Herchcovitch passaram anos dizendo que é difícil ser criativo pensando apenas em redução de custos. Manter o estilista como sócio pode ser um problema.

Mas sacá-lo pode ser ainda pior. A malharia catarinense Marisol, por exemplo, comprou, em 2006, a grife de moda praia Rosa Chá, do estilista Amir Slama — que depois deixou a empresa. Sem acertar a mão em uma única coleção, vendeu a companhia em 2012 para a Restoque, dona das lojas Le Lis Blanc. A ciclotimia é um dos problemas do setor.

Uma ou duas coleções que não caiam no gosto dos clientes e encalhem nas prateleiras podem colocar o negócio em risco — o que dificilmente acontece com uma fabricante de biscoitos ou de cerveja.

O crescimento do mercado beneficia  algumas novatas, mas também companhias que chegam a ter um século de história. A Hering é de 1880. A Malwee, de 1906. A Arezzo, de 1972.  A empresa foi fundada por Anderson Birman, na época com 18 anos, e seu irmão Jefferson, de 21. Até os anos 90, fazia de tudo: os desenhos, os moldes, e tinha fabricação própria.


Foi quando um tombo na economia levou a empresa a acumular prejuízos e mudar de estratégia. Naquela época, os baratíssimos sapatos chineses começavam a invadir os principais mercados do mundo. Como outros empresários do setor, Anderson Birman concluiu que seguir naquela trilha seria inviável.

A inspiração para a nova fase veio de dois ícones do consumo. Influenciado pela experiência da Nike, que não fabrica seus tênis e se concentra no desenho e no marketing, Birman decidiu terceirizar a produção para cerca de 200 fábricas e investir o dinheiro na abertura de lojas. Da espanhola Zara veio a ideia de lançar diversas coleções por ano e, com isso, estimular os clientes a visitar as lojas com mais frequência.

Seis anos atrás, a Arezzo se transformaria na empresa que é hoje. Foi quando recebeu o investimento da Tarpon. Anderson Birman comandava sozinho a companhia. Seu irmão havia deixado o dia a dia, e seu filho, Alexandre, continuava na Schutz, fundada por ele em 1995. A primeira ação dos novos sócios foi coordenar a fusão da Arezzo com a Schutz para acabar com a concorrência familiar (veja quadro ao lado).

O fundo levou também uma cultura de planejamento de longo prazo e de remuneração por cumprimento de metas. De empresa com uma só marca, a Arezzo passou a ter lojas para diversos públicos. A participação de mercado da companhia foi de 4% para 11% em seis anos. “Ajudamos a empresa a ser mais agressiva lançando marcas. Havia um espaço enorme no mercado”, diz Eduardo Mufarej, sócio da Tarpon.

Expansão das marcas

Se o fantástico crescimento da Hering — que nos últimos cinco anos quase triplicou o faturamento — mostrou às empresas do setor a oportunidade que existia na abertura de lojas com sua própria marca, o sucesso da Arezzo a partir de 2007 também deu pistas do caminho ideal a seguir.

No caso da sapataria, a sacada foi investir em inovação e novas marcas. Acostumada a atender consumidores das classes A e B, a empresa lançou em 2008 sua marca mais popular, a AnaCapri, que tem hoje 12 pontos de venda. A grife Alexandre Birman, a mais chique, tem os tais sapatos de couro de cobra.

Hoje, em maior ou menor grau, todas as empresas de moda estão trilhando caminho semelhante. As varejistas mais populares investem para chegar a novos perfis de consumidor. A Renner, que tem mais de 200 lojas pelo país, comprou em 2011 a varejista de utilidades domésticas Camicado e no ano seguinte começou a inaugurar lojas menores em shoppings para vender roupas da marca jovem Youcom, que hoje tem 15 unidades, mas quer chegar a 400 até 2021.


Na Hering, a marca que mais cresce é a infantil Hering Kids, que tem 46 lojas. A empresa anunciou em dezembro de 2013 o lançamento de uma quinta marca, a Hering For You, de roupas femininas. A Riachuelo, que abriu 42 lojas em 2013, investe no lançamento de coleções assinadas por estilistas como Oskar Metsavaht, da marca Osklen, e celebridades, como a cantora Claudia Leitte — assim, consegue atrair todo tipo de gente às lojas.

A tendência de diversificar as marcas começou nos Estados Unidos na década de 80, quando a varejista GAP comprou as concorrentes Banana Republic e Old Navy e se tornou uma gigante que hoje fatura 16 bilhões de dólares. Na Europa, grandes grupos de luxo também são donos de diversas marcas. No caso brasileiro, as redes correm para ocupar, com suas diversas marcas, espaços em shoppings que estão sendo construídos às dezenas nas grandes metrópoles e em cidades médias do interior.

Ao mesmo tempo, as empresas brasileiras se preparam para um inevitável aumento da concorrência com marcas estrangeiras — que há décadas hesitam em abrir lojas no Brasil. Agora, o crescimento consistente do mercado tem aumentado o apetite de um número crescente de multinacionais.

O maior temor dos varejistas nacionais não são os conglomerados do luxo, mas a entrada de varejistas que vendem para a classe média. A GAP inaugurou duas lojas em 2013 e planeja chegar a 15 em cinco anos. A também americana Forever 21, com mais de 500 lojas no mundo, pretende abrir suas duas primeiras unidades no Brasil em 2014, em São Paulo e no Rio de Janeiro.

A espanhola Desigual, com mais de 250 unidades no mundo e presença em 7 000 lojas multimarcas, abriu a primeira loja em São Paulo em novembro e quer chegar a 50 até 2016. “A competição vai aumentar”, diz José Galló, presidente da Renner. “Mas essas redes vão enfrentar dificuldades, já que terão preços salgados se as regras tributárias continuarem como estão.”

Enquanto essas redes começam a chegar por aqui, um número crescente de empresas brasileiras se arrisca no mercado global. Vencer no exterior é coisa rara, e isso vale para empresas de consumo de qualquer país emergente. No último ranking das 100 principais marcas globais, elaborado pela consultora americana Interbrand, há apenas quatro de mercados emergentes: três sul-coreanas — Kia, Hyundai e Samsung — e uma mexicana — a cerveja Corona.


“As empresas tendem a pensar na internacionalização só quando o mercado doméstico desacelera, e pisam no freio assim que as coisas melhoram no Brasil. É um problema, já que para ter sucesso no exterior é preciso investir de forma consistente por pelo menos uma década”, afirma Felipe Monteiro, professor da escola de negócios francesa Insead.

Não é de hoje que empresas brasileiras de moda flertam com a ideia de crescer no exterior. A verdade é que, até hoje, os resultados têm sido pífios. Há duas exceções. A mais antiga é a joalheria H.Stern, que começou a abrir lojas fora do Brasil no fim da década de 40 e hoje tem 30% de sua receita vinda do exterior.

A outra é a Alpargatas, que acelerou o crescimento nas vendas das sandálias Havaianas com uma agressiva estratégia de abertura de lojas. De 2010 a 2013, foram 92 lojas fora do Brasil, em mais de 60 países. Os sinais mais recentes, porém, mostram que as demais empresas brasileiras renovaram suas ambições globais.

O crescimento do mercado nacional nos últimos anos e a associação com fundos de investimento ajudam a explicar essa nova fase. A grife carioca Osklen, comprada em 2012 pela Alpargatas, tem oito lojas em cidades como Tóquio e Nova York (no Brasil, são 69), mas foi apontada por seus novos donos como peça central em sua expansão global no mercado de luxo.

A fabricante de sapatos femininos Carmen Stef­fens, voltada para o público AB, já tem 45 lojas fora do Brasil. A Chilli Beans abriu 25 pontos de venda no exterior nos últimos dois anos. E por aí vai.


Curiosamente, a atitude dessas empresas pode ser separada em duas — o jeito Havaianas e o jeito H.Stern de crescer no exterior. O primeiro grupo vende uma certa, digamos, “brasilidade”. Osklen e Chilli Beans, por exemplo, apostam nas matérias-primas locais e no suposto jeito brasileiro de levar a vida. Aí vale das tradicionais Havaianas com bandeirinha do Brasil a bolsas de couro de pirarucu, peixe típico da Amazônia, vendidas pela Os­klen.

No outro grupo estão empresas que tentam ganhar terreno com produtos mais tradicionais, comparáveis aos criados em qualquer outro país — como é o caso da H.Stern. A Arezzo tenta se encaixar nesse último grupo. “Queremos conquistar clientes não porque somos brasileiros, mas porque fazemos sapatos espetaculares”, diz Alexandre Birman.

A empresa abriu em 2012 uma loja da marca Schutz na avenida Madison, centro de consumo de luxo em Nova York. Também vende, desde 2009, sapatos da marca Alexandre Birman em 50 butiques internacionais, com preços que podem chegar a 1 000 dólares. A empresa já deu seus tropeços tentando crescer no exterior.

Em 2007, apresentou um plano de chegar a 300 lojas na China, mas as chinesas simplesmente ignoraram os sapatos brasileiros. A primeira coleção da Schutz nos Estados Unidos encalhou porque tinha modelos de camurça, totalmente inapropriados para o inverno americano. A empresa correu para reformular a coleção.

Hoje, a loja é uma das campeãs­ de venda da marca. Alexandre Birman tem ido com frequência aos Estados Unidos. Se a leitora estiver por lá e um estranho ficar olhando para o seu pé em plena Madison, é bem provável que seja ele.

Q&A with John A Davis

Originally published in: Business Family (October 2015)

John A Davis, who has taught at Harvard for 20 years and owns a respected family business consultancy, is one of the best-known voices in the world of family business. We caught up with him and quizzed him about his latest thinking.

BF: What do you think are the biggest issues facing family businesses?

JD: Most people are looking at how family companies stay successful, but there is a big, big question that I think most people in the field haven’t caught on to yet, and that is how families stay successful over generations, financially, in terms of the talent the family has, and in terms of family unity.

And within that big big issue is the one of how we make generational transition. Most people are still stuck talking about management succession and sometimes it broadens to management and ownership succession, but the fundamental transition is broader than that.

And to start answering that, you have to think about how families partner across generations.

BF: So how do you do that successfully? Is that a question of creating a culture of innovation?

JD: I think that you definitely have to keep innovating within generations and as you cross generations you have to keep your innovation up and keep building positive momentum in the system.

But the idea here is: how do we build the talent, and get the next generation experienced enough so that they can help us with what we need to do in the future? It’s not about what a family did in the past and one of the biggest challenges now is that industries, economies and societies are moving so fast there is so much change that it’s harder and harder to predict what will be useful talent and experience for the future.

We don’t know that we are going to be in the same business 10 years from now, we might be, but we might not be. I am trying to help families get ready for the future and think about where their industries are going.

They have to ask: what are the talents and aspirations of the family, and how are those evolving? You’ve got to align what you are good at and what you like to do with what you need to do. Families that think about these issues and try to get that alignment clear, do better.

BF: People often talk about the next generation as if it is a standalone entity, but does a family need to think as a unit?

JD: Yes, you have to think like a unit. A family is going to go through at least 15 years where both generations are involved and in leading. This notion that there is a clean generational hand-off is not realistic, there is a substantial period where both generations’ hands are on the baton.

BF: Do you have any tips for doing generational transitions well?

JD: You have to get the next generation ready, but that is much easier said than done. Ready for what? You don’t really know. You don’t know precisely what businesses you will be in or the nature of those businesses.

One skill the family has always got to be good at, though, is making bets on the future, in terms of what businesses and investments they make, but also the talent they put in place to lead them.

Families don’t have to manage the business – that is optional. But what is not optional and what we do have to prepare families for is making these bets. That is the big, big talent. You don’t need more than one or two who are really good at it, but you need some.

You also need family members who are good at other things: building unity, presenting the family out in the community, or representing the business or being a good board member who thinks strategically, or being a good entrepreneur to demonstrate that the family still has these talents and capabilities.

We have to prepare family members for a series of different roles, but we had better have some who are really good at making bets.

BF: How do you decide who should take on which role?

JD: It depends on the family and the scale of the family. Are we talking about three relatives, or several cousins – or 23 cousins? What you are trying to do in all cases is to make sure that the selection of leadership is seen as wise and fair.

How do you do that? If it would help to do standardised assessments as part of that process, to say that we are going to look at your talents, aspirations and style, and if we can get a paper and pencil test to give us good information then good.

But do you always need it to make such choices? No. In our practice we do these assessments, we are interested in deeply understanding a person, a successor candidate, and you don’t do that just with standardised testing. You have to talk to them, to look at their track record so far, ask how they performed in certain jobs, why were they successful here and not there.

The idea is that the person understands him or herself really well. If we are developing a leader I want her to really understand herself, to know that “I am really good at this but I suck at that and I am impetuous over here, and I am patient over there and this is how I work”.

That leads to understanding what sort of people she needs around her and what sorts of checks and balances you need to maximise her effectiveness. We look deeply at the individual, and at how this person manages key relationships, and we also think about the sorts of structures and people that need to be working with that person to really make them work well.

BF: While we are on the subject of succession, what about non-family managers? When is the right time to move to an outsider to run the business?

JD: We are doing a research study now looking at the issue of the selection of the next leader and under what conditions do you choose family or non-family, and whether you look inside your organisation or should you go outside.

You really want to get this right and understand under what conditions these choices make sense. The non-family leader choice becomes much more relevant and acceptable as the organisation gets big. Your family talent pool is always small.

Whether you have seven or 73 family members, you are lucky to get a handful who are going to be interested and good at your business, so as the company gets bigger and especially as it goes through important changes, more and more families say legitimately that a non-family member might be the best person to be the next CEO or MD.

I have seen non-family executives perform terribly and others perform beautifully, and what we know is that if you go to the outside and you are not very careful about the values and the style of the next CEO that the person can be brilliant but be too disruptive, and almost insulting to the system to be effective.

If you stay with an insider that can be easier stylistically because home-grown non-family executives are deeply imbued with the culture. They could be better cultural agents than family. You don’t need family to carry the culture in that business, if you have been building what I call a tribe inside that business that is another sort of family. I see non-family executives being as good as or even better than family in maintaining cultural values

Whoever you choose, family or non-family, insider or outsider, that person had better have a broad view of what is happening outside the business, in the industry, the economy. If they are trapped by their mindset from spending too much time in the company they are not going to be very useful.

BF: Families are very often reluctant to think about succession. How far in advance should you start planning?

JD: What you don’t want to do is get stuck in a bind, and be in the situation where you have to choose one of three candidates because you have to move quickly. That is a terrible position to be in. We like to see broad transition discussions happening seven years in advance.

Often we are not successful at getting families to plan that far out because the conversations are too sensitive and current leaders don’t like to feel like lame ducks, and leave it until two years, but then you have limited your options.

You need some time, and if you go for an outsider it is vital to really get to know the people you are getting in, to have lots of letters of reference, do psychological testing and lots of interviews. But what you really want to know is how people behave in stressful conditions when they are in a position of power. And that takes a lot of time.

John A Davis has taught family business classes since 1996, and is also founder and chairman of Cambridge Family Enterprise Group, an advisory and education organization for enterprising families with family companies, family offices and family philanthropic foundations.

Managing the Family Business: Preparing to Sell

Originally published in: HBS Working Knowledge (March 2015)

On important occasions, we gather for family portraits. If you were to take a picture of your family business today, what would it show?

Family businesses represent the aspirations, achievements, and struggles of one or more generations of a family. We would see all those things in the portrait of the family business. The portrait of the business would also typically represent more than 90 percent of the owners’ wealth.

“IF THIS TRANSITION IS NOT MANAGED WELL, THE FAMILY HAS A HIGHER RISK OF LOSING ITS WEALTH THROUGH BAD INVESTMENT DECISIONS AND OVERCONSUMPTION”

Few families sell their companies, and those that do sell generally part with them very reluctantly, given all that selling represents. We sympathize with a family’s emotional attachment to its company. But given how fast industries are changing and other factors, more families should consider this move.

If you are in a position to consider selling your legacy business, we congratulate you. You (and all your stakeholders) will hopefully realize the fruits of generations of hard work and sacrifices. Plus, selling your family business presents wonderful opportunities. You can update and reconfigure your ownership group with the right owners for your next chapter of wealth-generating (and social value-generating) ventures.

But it’s important to understand that if this transition is not managed well, the family has a higher risk of losing its wealth through bad investment decisions and overconsumption. Starting now, before your sale and liquidity event, you need to adopt the attitudes of those families that endure as high-performing, enterprising families:
  • They know their industry life cycle(s) and get ahead of the curve.
  • They understand the family’s cash needs, now and in the future, along with its true strengths and weaknesses.
  • They want to educate themselves about the differences between families with operating businesses and post-liquidity families managing portfolio assets.
  • They are willing to face the challenges common to post-liquidity business families that can pose threats to unity of the family and the owners.

Enterprising Families Build Value Through Liquidity Transitions

The attitudes of enterprising families that thrive after legacy transitions seem to lead to the following six key activities that achieve, then propel, their success.

Planning. They develop a family strategic plan—usually with the help of trusted advisors—to specify their goals and values and clarify how they will achieve those goals. This strategic plan naturally takes some time, often a year or two, to develop.

Redeployment. Consistent with the family’s strategic plan, they redeploy the proceeds of a business sale in assets (usually more diversified assets) that match the family’s talents, aspirations, and needs. Short term, families usually place their assets in relatively safe vehicles while they catch their breath and assess their interests, unity, and risk tolerance. Longer term, they might start or buy another operating company, while keeping some portion of their assets, individually or collectively, in other kinds of investments.

Governance. They develop governance mechanisms (forums for discussions and decisions, plus rules, policies, and agreements) to help the family make decisions and keep family members informed, united, and hopefully committed to future investments by the family.

Talent Development. They develop family talent to help manage or guide the new business or other activities of the family. Obviously, with the sale of the family business, the type of family talent needed for the future will be unclear for a while. As the family settles into new activities, it will become better understood what family talent is needed.

More Planning. Even if the family quickly and collectively redeploys its assets in new business activities, after a sale family members will have more financial autonomy. This necessitates that individuals develop their own life plans and financial plans in the context of greater liquid wealth. There are many great resources available to help with financial planning and asset management. Make the family strategic plan before you search for investment advisors. And before you do that, take the time to reexamine individual family members’ life dreams, the family’s collective goals, and the role of wealth in supporting them. Then please shop for the right advisors to help you at the right price.

Develop New Context Awareness. Value-building families also take this opportunity to consider how greater wealth or more liquid wealth will affect family lifestyle, behavior, and work ethic. These are all serious ingredients in sustaining an enterprising family.

Unite the family. They work extra hard to develop family unity and commitment to the new family enterprise. We can’t overemphasize how important it is, now on the eve of your legacy sale, to focus on unity in the family, so you can cultivate and support new family wealth creators for future generations. The family has been the foundation of your success, and it always will be.

Remember, businesses come and go, but business families can last for generations. Maintaining family momentum and growing family assets are the real measures of success from generation to generation. Are you ready for your portrait?

Managing the Family Business: Are Optimists or Pessimists Better Leaders?

Originally published in: HBS Working Knowledge (November 2014)

Optimism and pessimism are strong, stable traits that reflect our coping strategies. We live in an uncertain world. To cope with uncertainty, most people basically assume that things will either turn out well (the optimists) or turn out badly (the pessimists).

So here’s a question to ponder: Is it better to have an optimist or a pessimist leading your family organization? As I’ll show below, both have their own unique traits that can benefit a business. But they will do it in different ways, with different goals.

Which are you? Here’s a quick test. I plunk down two magazines in front of you. One, Time, has Warren Buffet on the cover, under the headline “The Optimist.” The other publication is ThePessimist.com, whose tagline is “Expecting the worst. Never disappointed.” Which do you pick up first?

It’s probably a good thing for us that so-called rationalists (tagline: “Why so emotional?”) are in the minority, because studies show that without optimism or pessimism people don’t accomplish as much. These natural traits motivate people to take action-different actions, but at least action.

Are You A Pessimist?

If you’re a pessimist, you tend to focus on safety and security. Pessimism drives you to seek and find safe havens, establish clear advantages, and protect resources. When pessimistic about needed economic recovery, for instance, families save money and companies build war chests. When the news is bad and likely to get worse, a pessimist is your best ally because pessimists thrive on fixing errors.

To get the most out of the pessimist in your family-owned company, researchers say, you need to provide “targeted negative feedback” from a trusted authority. Pointing out what has gone wrong or what’s less than perfect will motivate the pessimist to innovate products, improve plans, and solve problems. For this reason, pessimists can make good operational leaders. But pessimists in the corner office or leading the family are less likely to foster a culture of growth, risk taking, and wealth creation.

Are You An Optimist?

According to Jeremy Dean, a researcher at University College London, optimists prefer to think about how they and others can advance and grow. Optimists also have larger social networks, solve problems cooperatively, and are more likely to seek help in difficult situations. They make good spouses. People with optimistic spouses were healthier in a 2014 study by researchers at the University of Michigan.1 To energize an optimist, positive feedback is absolutely essential because the optimist builds on incremental achievements and a sense of positive movement.

Choose optimists to lead growth activities in your family organization. Entrepreneurs, for example, are much more likely to be optimists. But if you choose an optimistic business leader, you should probably pair them with “reality testers,” not necessarily authority figures, advises University of Pennsylvania professor Martin Seligman, the father of positive psychology.

Use The Power Of Both Traits

For decades, scientists regarded optimism and pessimism as fixed traits we are born with. But last year, researchers at a German University reported that 18-39 year-olds were more optimistic than people 40-64, and far more than people 65 and older.2 For reasons we don’t fully understand but can appreciate, life experience turns some people into pessimists. By the way, the same study of 40,000 people also found that grumpy people live longer. Their caregivers? You guessed it: Optimists.

Leaders, whatever their orientation, need to learn to harness the power of both traits. “In a striking turnaround,” writes Annie Murphy Paul in Psychology Today, “science now sees optimism and pessimism not as good or bad outlooks you’re born with but as mindsets to adopt as situations demand.”

When testing strategic plans, deploy defensive pessimism, imagining all the things that can go wrong in the future. But when the task requires flexibility and had work toward uncertain goals, build teams with optimists.

As a determined optimist who has grown a bit more pessimistic during my life, I do want to share one important finding from my 35 years of field research: Effective long-term planning and investment requires an optimistic approach, with contingency planning by pessimists—because things never go exactly as you want them to.

Five Steps to Better Family Negotiations

Originally published in HBS Working Knowledge (July 2007)

Negotiations between family members who own a business are different—different from negotiations between non-family members and also different from negotiations between family members who don’t have a business. This is because family relationships are distinctive kinds of relationships, and having a family business raises the stakes of—and often complicates—a family negotiation.

Consider first what sets family relationships apart. Relatives (especially in nuclear families) typically have long-standing relationships that are based on strong emotional ties and lifelong feelings of dependency. These characteristics lead to stronger loyalty and sensitivity to one another but also greater reactivity in their interactions. Family relationships also have deeply ingrained patterns that have developed over years of interacting. Relatives develop and play certain roles in their families, which tend to become fixed and limit the ways family members interact. Some of these patterns and roles can aid communication and negotiation, and some can derail communication and dispute resolution. In addition, communication between family members is notoriously complicated. Because of the sensitivity of their relationships, relatives struggle between openness and caution in their statements to one another. Family members also tend to have difficulty listening to one another without judging what they hear in the context of countless prior experiences that may have little to do with the current topic they are discussing.

In addition to these factors that apply to all family relationships, family members who are in business together have a lot at stake and feel pressured to consider what’s good not only for the family but also for the business and its owners. There is generally a lot more for family members to manage—and negotiate over—in a family business system. Issues such as dividends and reinvestment, nepotism and professionalism, loyalty to stakeholders, and organizational change are ever present; they can be tripwires that spark intense feelings and have wide-ranging implications for the business, family, and owners. In many cases, family members have multiple roles in the system, like father-owner-manager, daughter-employee, or aunt-owner. These multiple roles and ties can create more shared objectives and as a consequence, more potential for value creation. However, these multiple roles and ties can be confusing to coordinate. Relatives can experience role confusion (should I act as a father or boss, a daughter or vice president?) and struggle over the appropriate role to play in a particular negotiation (e.g., is this a father-daughter negotiation or a boss-employee negotiation?). In vaguely defined situations, there is increased opportunity for misunderstanding and conflict.

But given the distinctive nature of negotiations for families in business, 5 basic principles of negotiation that have proven relevant in a wide variety of deal-making and dispute-resolution cases can help family negotiations to be productive while protecting family relationships. Some of the 5 principles of effective negotiation are easier for family members in family business systems to apply, and others are more difficult. But all 5 principles of effective negotiation can be successfully leveraged in negotiations between family members in family business systems. We will review the principles and their applicability to family negotiations below.

1. Analyze The Negotiation Space

The negotiation space consists of all parties that are affected by the negotiation, or that can affect the negotiation. Before you negotiate, it is critical that you consider the interests, the power, and the constraints facing each party. In the case of family businesses, many of the parties affected by a negotiation, or able to affect it, will be around for a long time. It is dangerous to negotiate only considering the interests of those at the bargaining table when those who are not at the table will be affected by what is negotiated and can assert their rights or power in the future.

A TYPICAL STRENGTH OF FAMILY NEGOTIATIONS IS THAT FAMILY MEMBERS GENERALLY PREFER TO REACH MUTUALLY ACCEPTABLE OUTCOMES IN THEIR NEGOTIATIONS.

The negotiation space in a family business system is often extensive and typically complex, involving family members, employees, and owners of the business, and also may involve key stakeholders of the family business system (e.g., customers and suppliers of the business, members of the community in which the family lives, etc.). Because family members in a family business system have highly interrelated lives, even if a relative is not directly involved in a negotiation, he or she might have a keen interest in its outcome and be able to affect the outcome. For example, if a father and his son are negotiating over the son’s employee compensation, the negotiation space is likely to include (among others) the son’s immediate boss, the son’s coworkers, his sister (who is considering joining the business next year), and his mother. The wife-mother may not be a manager, board member, or owner, and have no official say in this matter, but she may still have a strong influence on both the father and the son, and her support may be critical for reaching a negotiated outcome that everyone finds acceptable and fair.

2. Don’t Try To Beat The Other Side

Winning in a negotiation doesn’t necessarily mean that the other party needs to lose. On the contrary, most successful negotiations entail the possibility of mutual value creation, compatible if not aligned interests, and cooperation. In fact, trying to beat the other side often results in negative results for both sides. The person inflicting injury will almost always end up losing—psychologically, socially, and/or financially—as well. This is obvious in a negotiation between family members who want or need to keep a mutually supportive family relationship.

A typical strength of family negotiations is that family members generally prefer to reach mutually acceptable outcomes in their negotiations. This constructive attitude is due in no small part to the strength of family ties: Typically, family members are genuinely interested in one another’s welfare and prefer to avoid conflict because of its effect on future interactions. But some family relationships are weakened to the point where beating the other side is consciously or unconsciously desired by at least 1 party in the negotiation. So it is worth thinking through whether you wish to work together with the other side to negotiate and resolve conflicts—or whether you wish to “win.” If it’s the latter, hopefully you will have a friend or advisor discourage you from this path.

3. Understand The Other Party’s Interests, Constraints, And Perspective

Many people see negotiation as an opportunity to persuade and influence the other side to give them what they want. As a result, most people do not go into negotiation with the goal of listening to and learning about the other party. This is unfortunate, because to get what you want in negotiation, you often need to understand the other side’s needs and interests so that you can “give a little to get a little (or a lot).” Even if the other side is entirely willing to help and is ready to give you what you want, it may be critical that you understand the constraints that he or she faces in meeting your demands. In other words, effective negotiation requires that you understand the other side’s interests and constraints, and that the other party understands your interests and constraints.

Most family members are typically well intentioned when they negotiate, and one would think that such an orientation would make it easy for family members to listen to each other’s perspective and to learn about each other’s interests and constraints. But this isn’t the norm for several reasons. First, relatives tend to be less curious and inquiring about their relatives than they are of others they know less well. This stems partly from an assumption—common among family members—that they already know what the other party wants, likes, and needs. Second, the long history of a family can also institutionalize roles for family members that are rather intractable, making it difficult, for example, for parents, children, and siblings to see each other as they are currently rather than as they were when they were younger. Third, because families generally fear conflict, they avoid certain conversations (that may be useful or necessary in a negotiation) for fear it will touch on a sensitive issue or encourage personal criticism that they won’t know how to manage. While this might alleviate tension in the short run, it also perpetuates the status quo. The consequence: negotiations that involve listening, learning, and the exchange of authentic views between peers do not become the norm in most families.

Ironically, it turns out, people in close relationships (such as spouses) often negotiate worse outcomes than do people who care less about their counterparts!1 Why? Because those in close relationships often avoid making their own interests and priorities known to others—even when these are extremely important issues to them—and instead, compromise across the board in order to avoid being perceived as greedy or overly self-interested. This makes it incumbent on family members to encourage others to identify their core interests and concerns.

4. Avoid Single-issue Negotiations: Identify And Negotiate Multiple Issues Simultaneously

Value is created in negotiation when each party gets what it values most, and makes concessions on issues that the other side values more. But for this to happen, you need to identify all of the issues that are of concern to 1 or more of the parties, and to negotiate multiple issues simultaneously. People will often get stuck on the most salient issue in a negotiation (e.g., salary or status) and spend too much time haggling over that 1 issue. Or, even when they understand that there are a lot of issues to resolve, they will go through the issues 1 at a time—and then argue excessively about their incompatible demands on each issue. Negotiators who negotiate multiple issues simultaneously are more easily able to recognize value-creating tradeoffs. Because of the complex negotiation space in which business families operate, and because family members in business have many overlapping goals and interests, family members generally are negotiating multiple issues simultaneously. But they are not always doing so consciously, transparently, or systematically enough.

While any multi-issue negotiation is going to be complicated, the likely outcome is considerably worsened when negotiators become overly focused on a single issue or dimension. The far superior approach is for all parties involved to work together to identify all of the issues that are relevant in the current negotiation, and then identify which issues are most important to each person (and which issues each person can concede on).

5. Negotiate Over Interests, Not Positions

Effective negotiators get past stated positions (what the party demands) and understand the underlying interests (why the party wants what it demands). Often, disputes over positions will be irreconcilable, whereas a focus on interests will lead to a mutually acceptable agreement. Some families are exceptional at encouraging family members to dream and explore their authentic interests and to express these interests within the family. These families have cultures where family members can talk openly about their goals, needs, and fears. If a family member doesn’t know what his or her interests really are, a supportive family can encourage the family member to talk about possible scenarios and gradually uncover his or her true interests. This process requires patience and a nonjudgmental and positive attitude about the family member and his or her possible choices. In a trusting environment where an individual’s true needs, goals, and fears can be expressed, a negotiation over interests rather than over positions is more likely.

Concluding Thoughts

Negotiations between family members in family business systems are typically more complicated and difficult than those between non-related individuals in non-family business systems. Because family relationships have existed for many years, they have deeply ingrained tendencies, some of which can facilitate a constructive negotiation and some that can hinder it. But if some family members begin to leverage the 5 principles of effective negotiation we have outlined, they will increase their chances of successful dealmaking and dispute resolution. The likelihood of success increases further if others in the family business system learn to put into practice these principles.

The Three Components of Family Governance

Originally published in HBS Working Knowledge (November 2001)

There are three components to family governance:

  • Periodic (typically annual) assemblies of the family; all families in business can benefit from this activity.
  • Family council meetings for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business-family communication and bond.
  • A family constitution—the family’s policies and guiding vision and values that regulate members’ relationship with the business. This written document can be short or long, detailed or simple, but every family in business benefits from this kind of statement.

The rare family in business may have a more elaborate family governance structure, with a separate meeting for family-owner-managers or a separate council for family shareholders or periodic meetings between shareholders, the board, and management. I prefer the simplest structure that does the job and the three components above are all most families in business need.

Properly composed and managed, a family assembly and family council help:

  • Develop clarity on roles, rights, and responsibilities for family members.
  • Encourage family members, family employees, and family owners to act responsibly toward the business and the family.
  • Regulate appropriate family and owner inclusion in business discussions.

The family assembly typically meets annually, lasts one to two days, and includes all adult family members (yes, including in-laws). Families need to decide at what age children should attend these meetings. One family says that children should attend when they are able to feed themselves; most families start bringing the younger generation into meetings at around age 16. For the young children, families should still consider organizing some group activities where the children can begin to learn about the business and develop relationships with their siblings and cousins.

Basic Governance Structures of the Family Business System
Figure 1: Basic Governance Structures of the Family Business System
Family assembly activities include learning about the business through presentations by family and non-family managers, discussing (not deciding) the direction of the company, being educated about what the company does or about important skills like reading financial statements. It is also a good forum to get updated on changes in the family such as important events and accomplishments, and on changes in ownership. For example, have any shares changed hands since the last meeting? Are there new tax laws shareholders need to be aware of?

If your family has fifteen or fewer adults, you may be able to have in-depth discussions and create plans and policies in the family assembly meeting. When the family grows beyond this size certainly, families generally benefit from having a family council. The family council can perform all of the following duties:

  • Plan family assembly meetings, which otherwise the CEO usually has to arrange.
  • Discusses current business, ownership, and family issues and direction and keep the family informed about these.
  • Help the family reach decisions and speak with one voice about its goals.
  • Keep the board of directors informed about family views about the company and maintain a dialogue with the board about key business policies and plans.
  • Develop plans and policies, in conjunction with the board, that regulate family activity with the business.
  • Guard against family interference with the business while seeing that the family’s key goals are satisfied.
  • Develop loyal, informed, contributing family shareholders.
  • Scout the family for business talent.
  • Create educational events or otherwise encourage the education of family members about the business.
  • Plan family social gatherings and rituals and help to create healthy, harmonious family relationships.

Any family council that accomplishes these tasks strengthens a family’s relationship with its business and its discipline and is a valuable resource for management and the board.

The family council can be composed in several ways, the typical way being one member elected per family branch. One should try to compose the family council so that it “looks” like the family, having adequate representation of all generations, both genders, in-laws, actives and passive owners, hometown and geographically distant relatives. The family council typically meets a few times each year for one or two days each time. Most families reimburse family council members for their expenses but do not offer any compensation for their service. Other families feel at least a modest compensation is warranted and earned.

Families in business need to nurture members’ feelings of trust and pride concerning the family and business as well as build a sense of teamwork to keep a family committed and disciplined in its relationship to the business. It is wise, therefore, in the family council and family assembly to emphasize consensus decisions around family goals and policies, openness to various viewpoints, as well as significant transparency in company operations, decision making, and ownership holdings. If the family is reluctant to engage in the discussions it needs to have in the family council or assembly—out of concern about potential family conflict, not understanding what these groups should do or just being shy in these meetings—hire a facilitator to help organize the meetings. Good structures that do not address the right topics are a costly waste of time.

I want to point out again that a family council or family assembly complements rather than replaces the board of directors. The family council sets policy for the family and recommends policy that concerns the family to the board, such as around family employment in the business. The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business.

The board and family council should coordinate their work and not overstep each other’s domains. Coordination may take the simple form of having the council and board update each other periodically on their important objectives, having an annual joint planning session, or having a board member sit on the council or vice versa. Again, I opt for the least complicated solution to achieve adequate communication and coordination between these two groups.

The family constitution articulates a family’s vision for itself and the business, its core values and the policies and guidelines that maintain family discipline. Among the policies a family council might create include:

  • Employment standards for the next generation.
  • Career development policies for family employees.
  • Family compensation.
  • Succession process, including retirement ages.
  • Ownership, including buy-sell agreements.
  • Dividends.

Because each of these topics, except ownership, are clearly business policy areas, the family council would consult with the board and get the board’s endorsement of the policy before it becomes official. Typically, the family council also gets the approval of the family assembly before issuing a policy for the family.

The coordination of the family council and family assembly with management and the board on some key plans affecting family companies is shown in Table 1.

Table 1
Structures and Plans to Govern a Family Business System
STRUCTURE
PLAN CEO TOP
MANAGEMENT
BOARD OF
DIRECTORS
FAMILY COUNCIL &
FAMILY ASSEMBLY
1. Strategic Plan Initiates and
approves
Generates Consults and
approves
Consults and
supports
2. Family
Constitution
Participates in
Family Council
Coucils
and supports
Consults and
approves only
business policies
Generates
3. Succession Plan Generates Consults and
supports
Consults and
approves
Consults and
supports
4. Family Business
Leader’s
Retirement Plan
Generates Aware Aware Consults and
supports
5. Family Business
Leader’s Estate
Plan
Generates Aware Consults Consults and
supports

Treating the family in a more formal, organizational way can feel a bit strange at first. It may take a year or two for the family to grow into this more structured way of interacting. But the value of this process is demonstrated in the strides so many families have made with these structures. They have learned that in discussing issues that can be sensitive and raise complicated feelings, a little structure is a family’s best friend.

Family Biz Go Into Decline After Three Generations: HBS Professor

Originally published in The Economic Times (July 2014)

In 1983, Rajesh Kohli dies intestate, without a will, at the age of 57. Rajesh and his wife, Shobita, created a strong middle class family and invested most of their assets in educating their three sons, Ravi, Nitin and Arvind. It was to Nitin, the son with a head for business, that the father bestowed $50,000 shortly before his death, asking him to invest it on behalf of the family. This vague commandment works for nearly 25 years.

Nitin grows his original business to assets of over $30 million, all of which are in his name, as is the custom in Hindu Undivided Families. He thinks he has been loyal, dependable, trustworthy, supporting his brothers and their children financially through good times and bad. But now his brothers want a clear separation of the business and his former feelings of generosity are replaced by a desire to be free of them and their lack of appreciation.

Nitin Kohli is one of the several case studies that John Davis of Harvard Business School (HBS) has written on Indian business families. The names are disguised, as is usual with HBS case studies, but the students attending the HBS programme he teaches in India wouldn’t have any problem identifying with the Kohli family. Nor would the students from other parts of South Asia and the Middle East who fly down to Mumbai for the programme.

Davis, who teaches an elective course on Managing the Family Business at HBS and has been researching the subject the for 30 years, including in 60 countries outside of the US, and he feels that family businesses are remarkably similar the world over: “Different cultures do more or less of certain things, but the similarities are more than the differences. For example, the patriarch exists everywhere, though he may have more power in certain cultures than others.

“India has seen the decline of the joint family in business houses, which has been replaced by a loose system of living independently in proximity. This is similar to the way things are done in South America. “Activities are arranged to ensure that families come together regularly. It helps perpetuate the family business, uniting everyone around a sense of mission. Of course, there will always be some who find even this to be stifling and they will move away and establish a wholly independent life,” says Davis.

The focus of Davis’ current research is on how families identify and develop wealth creaters in every generation. In the Nitin Kohli case, the father identified the middle sibling as the wealth creator. How do other business families do it? “The wealth creators are usually identified when they between 8 and 14 years of age,” says Davis. “I’ve asked heirs when they knew they were going to follow their dads into the family business and some said they has a strong sense of their destiny at the age of six. It may not be planned, but a certain amount of implicit searching goes on in every business family.”

Traditional business families go to great lengths to develop the next generation and instill in them a sense of dynasty. Earlier, the eldest son might have been the first choice, but that has changed and younger siblings — including daughters — with a genuine talent for business are being given their due. “Being a successor is a tough road,” says Davis, “You’re constantly compared to your father and you have to prove yourself worthy. People doubt you capabilities, which means you need a thick skin. You are dealing with a consortium of relatives and need political skills. You may have to fire a non-performing nephew, while dealing with your sister, who may have a substantial stake in the company. For most heads of family-run companies, family issues take up half the time.”

Once the family has found its wealth creator, other siblings are usually left free to make their own choices, including the option of moving out of business altogether and making a career in the arts. Davis himself comes from a entrepreneurial lineage — both his grandfathers were businessmen — but he has chosen to teach rather than practice. The importance of family businesses has declined in the US, though even now, more than half the publically traded corporations there are family run. In India, Davis estimates it to be two-thirds, which is close to the world average. However, many of these are now run by professionals, though the chairman may be from the family. “Once the company grows beyond a certain point, it’s hard for the family to keep up. That’s when they transition to a bringing in a professional CEO,” says Davis.

Family-run companies have never been the top choice for graduates of top b-schools like HBS, but Davis feels the option shouldn’t be scoffed at. “Family companies focus on the long term and thereby provide a sense of stability. They did better than other companies during the recent downturn. Banks are now paying more attention to them because family run companies have more money than anyone else,” says Davis.

Do family business houses inevitably go into decline after three generations? Davis doesn’t have scientific proof — three generations last over 100 years and nobody seems to have collated the data — but he’s inclined to agree with this perception. The reasons are many. Wealth is best generated through operations and not stock investments, but over time assets mature and the industry that the family is in often goes into decline, which means a fall in returns. And of course, there’s the indolence that sets in among family members of the third generation. “By the third generation, family members are consuming too much, more than they can afford. That’s when the decline becomes visible,” says Davis.

5 Points to ponder points:

  1. Family businesses do go into decline after three generations
  2. For heads of family-run companies, family issues take up half the time
  3. A successor needs political skills to deal with a consortium of relatives
  4. The family needs to identify future business leaders when they are still children
  5. Patriarch’s power may vary depending on the cultural context

Four Trends Impacting Business Families

Originally published in: Business  Families Foundation

Watch Professor John Davis of Harvard Business School talk about challenges & trends facing business families. As new trends emerge in the market, it is essential for family business to be able to recognize these trends and be able to adapt to these changes.

Four Trends impacting business families

Transcript

Society has changed quite a bit in thirty years, and they are changing everywhere, even in the more traditional societies. In terms of trends, I do see this increasing sense of freedom in families that is good to some extent but also leads to a sense of fragmentation in the family’s purpose, and energy, and discipline. So there are some things that I think need to be reversed or strengthened in a number of families. When you think about it, you know, parents even thirty years ago, certainly forty or fifty, had more influence in their children’s lives, on who one of their children married, how they lived, what career they would choose, and that is not the case today.

I think parents need to be more demanding of their children, they need to be stricter about the obligations of family members. They need to obviously support their children to find their own path and to lead happy lives and you cannot chain a family member to the business either as an employee or an owner, that is very harmful. It is better to give them their freedom if that is not what they truly want or are not capable. But you have the right to expect things from children. Commerce is becoming much more globalized now. We are thinking about how becoming more international in commerce is affecting the business. How are family businesses responding to that trend?

And then also how are the families responding to that trend? Businesses are becoming more international. They are selling, sourcing, doing deals across national borders in different configurations, even small ones now. Many families now are becoming much more geographically disbursed, you know, within their own home country or across national borders, or even jeez, you know, cross-continents. They have become multi-cultural, multi-lingual, and there are some advantages to that, but it takes, you have to step up your management, your social engineering of the family in order to keep that kind of a family tight. Industry life cycles are shortening, we know that. The rate of change in business is accelerating. In any ten-year period, that is my rule now, you are going to make at least two important changes to your company.

Some people are really good at reinventing their companies and changing things that they put in place, but if you put it in place and then you have to say, “Well that is no longer working, let us do something else,” I think that is pretty challenging. We may need to make more frequent transitions of leadership in order to keep organizations continuing to regenerate. So there is one question, how long can people stay in office in the role of CEO and continue to go through those transformations? Thirty years? Well that is how long CEOs of family companies are around often, on average, twenty-five to thirty years. That is a long time. People are living longer. If the leader lives longer, will he or she stay in office longer or kind of check out at the late fifties? I want to figure this out, because it could be if leaders stay longer in the company that it is going to stall out the next generation even more than they are currently stalled out and sandwich the middle generation between two others, and you are going to end up with three generations working in a family business not two. And it is hard to tell a business leader that, who is very good at what he does, that it is time to step down. I think probably what we are going to see more on the business side is family leaders working their way up running the company for a while, handing it off to a family or non-family next CEO and remaining chairman to provide more stability at the board level.

Family Businesses Need Entrepreneurs For Long-Run Success

Originally published in: Forbes (August 2014)

In the world of family business, the entrepreneurs we celebrate are usually founders of companies. These clever, hardworking individuals identify a good business opportunity, scrape together some money and loyal employees, and start a company that takes off. The heirs of the founder and later generations of the family are supposed to take care of and grow the founder’s creation; they are not expected to be entrepreneurs themselves. Even attempting to reinvent the family company can be seen as disloyal by the family.

This constraint often kills the family business.

We think it is time to reassess the importance of entrepreneurs for not only the continuation of the family company, but for the continued success of the family itself.

Managers inside your core business who think like entrepreneurs (we call them intrapreneurs) can identify opportunities that move your family company into new lines of business, rejuvenate the founder’s legacy, and put the enterprise on a new growth path. Entrepreneurs (typically family members) working outside the business but with family financial support can keep talented kin inside a broader “family enterprise,” diversify business activities, and build assets.

Families that want to stay in business for another generation don’t have a choice except to encourage entrepreneurship in and out of their company. There are business reasons and family reasons why we think this is true.

The Business Reasons

In today’s competitive environment of rapid technological change and quickly evolving industries, it doesn’t pay to become too attached to current lines of business or methods for serving customer needs. You need to regularly change what you make and sell, and probably how you make and sell it. You must be nimble and, as certain lines of business wane, be able to identify growth opportunities in and out of the core industry and pursue them in experimental, cost-effective ways. For that, you need the risk-taking, resourceful attitude of an entrepreneur.

Entrepreneurs are good at identifying commercial opportunities and getting new products and services off the ground, even when they don’t control the people and resources needed to do it. They know how to attract talent to help them when their idea is unproven, borrow resources they can’t afford to buy, and build buyers’ interest in their activity. Others may see them as risk takers, but good entrepreneurs are actually good at getting other folks to take risks. You need some people like this in your family company and in your family.

The Family Reasons

We’ve spent a lot of time studying why some families stay financially successful over generations and others don’t. (Actually, most don’t.) There are three reasons why families succeed.

First, successful families see important changes in their industry and adapt by diversifying into new activities that can grow. Simply put, successful families are entrepreneurial.

Second, families succeed because they invest in productive activities (including the development of the next generation), emphasize growing assets, and consume relatively little of their wealth. These families maintain a culture that encourages family members to create things of lasting value. It’s not surprising that these families encourage entrepreneurs.

Third, successful families remain reasonably united, keeping supportive members loyal to one another and to the family’s mission. Over generations, as families become more diverse, it is likely that only a few relatives per generation will directly work in the business. Outside-the-business members might still support family philanthropic efforts or social activities, and sometimes that level of involvement is enough to maintain family unity. But investing in family entrepreneurs can also keep talented members contributing to the broader family’s wealth and mission. (The new Millennial generation—ages 15 to 30—seems especially interested in being entrepreneurs.)

Investing in family entrepreneurs has to be done objectively based on the feasibility of their business plans, and also fairly within the family. Even if some entrepreneurial projects don’t succeed, these investments will help you spot talent to keep your business growing. And you are sending an important message: this family is committed to creating value.

About the authors:  Michael Roberts is recently retired after 25 years on the Harvard Business School faculty where he served in the Entrepreneurship unit and was executive director of the Arthur Rock Center for Entrepreneurship. He also served as executive director of the School’s case development efforts and continues to develop case studies for HBS. John Davis is a senior lecturer at Harvard Business School where he teaches and researches in the family business, family wealth, and life planning fields.  This op-ed first appeared on the HBS Working Knowledge website.