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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.

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.

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.

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.

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.

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

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.

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.

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.

Originally published in Family Business Review Journal (June 1996)

Although family-owned and managed firms are the predominant form of business organization in the world today, little systematic research exists on these companies. This paper builds upon insights found in the emerging literature on these enterprises and upon our own observations to provide a conceptual frame-work to better understand these complex organizations. We introduce the concept of the Bivalent Attributes–a unique, inherent feature of an organization that is the source of both advantages and disadvantages–to explain the dynamics of the family firm.

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Originally published in Knowledge @ Wharton (November 2007)

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

Universia-Knowledge@Wharton: What are the main challenges facing family business globally?

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

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

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

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

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

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

UK@W.: How should an heir of a family business be chosen? How can you ensure he or she is competent?

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

UK@W.: What is the secret for the survival of family business? Could you give a concrete example of a family business that has survived for several centuries?

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

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

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

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

UK@W.: What are the differences between American, Asian and European family businesses?

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

UK@W.: Do you think that the image the public has about family businesses matches reality? Why?

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

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

Originally published in The Economist (November 2014)

THE “Lucky Sperm Club”, as Warren Buffett likes to call it, is still going strong in the commanding heights of business. On opposite sides of the Atlantic, Ana Botín and Abigail Johnson have recently succeeded their fathers in filling two of the most powerful jobs in finance, as chairman of Banco Santander and chief executive of Fidelity Investments, respectively.

Founding dynasties run, or wield significant clout at, some of the world’s largest multinationals, from Walmart to Mars, Samsung to BMW. Half a century ago management experts expected the hereditary principle to fade fast, because of the greater ability of professionally-run public firms to raise capital and attract top talent. In fact, family firms have held their ground and, in recent years have increased their presence among global businesses.

Family-controlled firms now make up 19% of the companies in the Fortune Global 500, which tracks the world’s largest firms by sales. That is up from 15% in 2005, according to new research by McKinsey, a consulting firm (which defines such firms as ones whose founders or their families have the biggest stake, of at least 18%, plus the power to appoint the chief executive). Since 2008 sales by these firms have grown by 7% a year, slightly ahead of the 6.2% a year by non-family firms in the list. McKinsey sees these trends continuing for the foreseeable future.

This is largely because of rapid growth in big developing economies where family ownership is the norm among large businesses. Since 2005 the countries that have most increased their share of the Fortune Global 500 are Brazil, China, Russia, South Korea and Taiwan. By 2025, McKinsey forecasts, there will be more than 15,000 companies worldwide with at least $1 billion in annual revenues, of which 37% will be emerging-market family firms. In 2010 there were only 8,000 firms worldwide of this size, and only 16% of them were family-controlled and from emerging markets.

Around 85% of $1 billion-plus businesses in South-East Asia are family-run, around 75% in Latin America, 67% in India and around 65% in the Middle East. China (where the proportion is about 40%) and Sub-Saharan Africa (35%) stand out for their relatively low share of family firms, because in both cases many large firms are state-owned.

However, even in the rich world, big family firms are defying expectations of their demise. The tendency for founders and their heirs to abandon control to faceless institutional shareholders seems to have reached a limit. Of the American firms in the Fortune Global 500, 15% are family ones, only slightly less than in 2005. Among them is the world’s largest family firm, Walmart, in which the children of the late founder, Sam Walton (pictured, third from left) are still big shareholders. His eldest son, Rob, is the chairman, another son, Jim, is also on the board and their sister, Alice, also inherited a huge stake. In Europe, 40% of big stockmarket-listed companies still have a controlling family.

Until recently many emerging economies lacked the large, liquid capital markets that rich countries enjoy. So local firms could not rely on them to provide funds for expansion, and depended instead on founding families reinvesting their profits. As such firms’ access to domestic and global stock and bond markets continues to improve, it is possible to imagine this situation changing; family owners could seize the opportunity to make a lucrative exit, as happened for a time in the rich world.

However, one reason why the experts’ predictions of 50 years ago have proved wrong is that stockmarkets and regulators have been so accommodating in letting founding families retain a fair degree of control despite selling large stakes to outside investors. One way they have done so is through special classes of shares—a trend that has lately featured in a number of technology-firm flotations: who knows, perhaps in future Facebook will be controlled by the Zuckerberg dynasty and Google by the Page and Brin clans. Investors have accepted such arrangements as the price of getting a slice of these firms’ profits, but they rarely like them.

Besides being able to access capital markets without losing control, there are at least four other reasons why so many big firms have defied expectations and stayed under family control. One is that they are often the product of a superbly talented entrepreneur like Sam Walton. While such founders are alive and on form, the combination of their abilities and the freedom they have as controlling shareholder to run by their own rules often gives them a strong competitive advantage. Even after they are gone, their heirs can keep up the firm’s success, simply by continuing to follow the founder’s successful principles.

Whether private or public, family firms also tend to take a longer-term perspective. As Heinrich Liechtenstein of IESE business school in Barcelona observes, this is true both relative to non-family-controlled public companies, which tend to be obsessed with meeting the demands of investors to maximise short-term profits, and companies owned by private-equity firms, which although able to take a longer view than public firms must still cater to investors who want to sell up for a juicy profit within a few years.

Family firms are also less likely to load up on debt. An obvious exception, and an illustration of why most family capitalists fear debt, is the recent collapse of Espírito Santo. Massive debts turned the family-owned Portuguese financial conglomerate into one of Europe’s largest corporate failures, ending in a state bail-out of the bank at the group’s core. A reluctance to borrow may limit growth in good times, but it can make family firms more resilient when the going is tough.

They also tend to have better labour relations, according to studies by Holger Mueler and Thomas Philippon of New York University’s Stern business school. This may be because workers are readier to believe promises that they will be rewarded for delivering in the long run, if such pledges are made by founding families rather than outsider bosses who may be gone in a few years. And in situations where businesses have to push through efficiency improvements, family owners may be more willing to act firmly when dealing with labour unions, because of their significant stake in the business, than salaried outsider bosses, the studies suggest. These are advantages especially in countries with generally hostile relations between workers and management, say the two economists.

Overall, those family firms that get big tend to have a superior corporate culture to their non-family peers, reckons Heinz-Peter Elstrodt of McKinsey. The firm has applied its index of “organisational health” to 114 family firms and around 1,200 other large companies. Family firms scored significantly higher on their culture, worker motivation and leadership, though they lagged slightly on innovation and being too internally focused.

The presence of a founding family seems to be good for a business’s image. In a recent survey in 12 big economies by Edelman, a (family-run) PR firm, 73% of people said they trusted family-owned companies, compared with 64% who trusted publicly-traded companies in general, and 61% for both private-equity-owned and state-owned firms. This is no doubt why S.C. Johnson, a household-products maker, has as its slogan, “A Family Company”.

There is evidence of a positive “family effect” on financial performance, according to a new study by Cristina Cruz Serrano and Laura Nuñez Letamendia of IE business school in Madrid. They calculated that €1,000 invested in 2001 in a portfolio of publicly traded family firms in Europe, weighted by market capitalisation, would have generated €3,533 by the end of the decade, compared with €2,241 from a portfolio of non-family firms. The difference is equivalent to five percentage points of extra return per year.

All this may be why, for all his professed disapproval of the Lucky Sperm Club, Mr Buffett wants his son, Howard (pictured, left, with his son, Howard Warren Buffett, an academic) to succeed him as chairman, and guardian of the firm’s culture. The elder Mr Buffett is such a big fan of family firms that he likes to buy them: in October he bought Van Tuyl Group, America’s largest family-owned car dealership chain. As with LVMH and Kering, two family-run French luxury-goods giants that have bought a number of European fashion houses, Mr Buffett’s spiel to founding families is: if you want to sell up but want your business’s culture preserved, it will be in safe hands with us.

Ultimately, whether big family firms will continue to defy expectations of their demise will depend on their ability to negotiate the rocks on which family businesses have a unique propensity to founder. One is the risk of squabbles among relatives. This summer, for example, a family feud nearly destroyed Market Basket, an American supermarket chain. Workers went on strike when their popular boss, Arthur T. Demoulas, was fired at the behest of his cousin, Arthur S. Demoulas. Disaster was only averted after pleas to the family by the governors of Massachusetts and New Hampshire.

No issue is potentially more toxic than the transition from one generation of a family to the next. In India, an epic feud began in 2002 after Dhirubhai Ambani, the founder of Reliance Industries, died without naming a sole heir. The battle between his sons, Mukesh and Anil, eventually led to the group being split in two.

In some cases even strong and successful firms can implode soon after a generational succession, which is why so many countries have some variation of the saying, “from shirtsleeves to shirtsleeves in three generations” (clogs to clogs, kimono to kimono). Edelman’s survey found that the public’s trust in family firms falls once the baton is passed from the founder to the next generation. Alarmingly, a study of 2,400 family firms in 40 countries published last month by PwC, a consulting firm, found that only 16% of them had a “discussed and documented” succession plan in place.

The families that do best are those which understand that their interests and those of their business can diverge, and put in place processes to manage the consequences of these differences, says John Davis of Harvard Business School, the author of several books about family firms.

Some families are adept at training the next generation to work in the family firm. Illycaffé, a coffee-maker now run by a third-generation Illy family member, has a pact setting the rules for when an Illy can go into the business: competence for the job is paramount. Sweden’s Wallenberg business empire is run by a fifth generation of the founding family: two cousins, Jacob and Marcus Wallenberg, were groomed from an early age to run the group’s industrial and financial sides respectively.

However, sometimes children do not want to join the family business, or turn out not to have inherited the entrepreneurial genes of the founder. It may then be in the best interests of the firm for a professional to run it, rather than a reluctant or incompetent scion, even if the family retains some control. Letting professionals take over can make a lot of sense. Talented managers are more likely to join a firm where there is a chance of getting to the very top, or at least where they do not have to work under a useless heir. Some 40% of the family firms interviewed by PwC said that professionalising their business was among the main challenges they face in the next five years.

Even when they have agreed to let an outside manager run their businesses, families sometimes find it hard to keep their hands away from the wheel. Luxottica, an Italian maker of sunglasses, was well run by a professional chief executive for ten years, but recently lost him, and six weeks later his successor, reportedly following differences of opinion with the founder, Leonardo Del Vecchio, and his wife, Nicoletta Zampillo.

Even when independent outsiders are brought in to serve on a family company’s board, they can often fail to make the impact they should, notes Mr Davis. Outsiders often refuse to get involved in managing tensions within the family and assume their job is just to oversee the running of the business, when in reality they may be the last line of defence against a family breakdown destabilising the firm, he says.

In the rich world there is a strong contingent of firms which have demonstrated an ability to get the best out of being both family-controlled and professionally run. In some emerging markets, however, things are not so clear. Many of their big firms are still run by a founder with strong links to those in power, and only time will tell if they have what it takes to survive the passing of either the founder or the regime. However, the positive examples of Tata in India and Samsung in South Korea suggest that it is possible, even in places with a strong tradition of crony capitalism, for world-class, professionally run family firms to emerge.

As big emerging-market firms pass from the founders to their heirs, the challenge will be, as it has been in the rich world, to reconcile the family’s needs and desires with the demands of running a successful business. They will need to learn that when it comes to company matters, as Michael Corleone put it in “The Godfather”, that great study of a family firm, “It’s not personal…it’s strictly business.”

Correction: This article originally said that the late Emilio Botín had struck a deal which allowed his daughter, Ana, to succeed him as chairman of Santander. In fact, no such explicit agreement was struck, although Ms Botín does indeed now chair the Spanish bank.

Originally published in FFI Practitioner

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

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

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

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

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

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

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

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

Industry Life Cycle

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

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

Family Life Cycle

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

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

The Leader’s Life Cycle

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

Difficult, Not Impossible

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

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

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

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

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

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

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

Factor 1: Fit

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

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

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

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

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

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

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

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

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

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

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

Factor 3: Do You Have Good Options?

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

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

Originally published in Tharawat Magazine (February 19, 2016)

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

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

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

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

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

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

Originally published in Harvard Gazette (July 2014).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This interview has been edited for clarity and length.

Originally published in: Family Capital (September 2014)

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

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

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

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

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

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

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

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