Family Firms: Natural Survivors?
22nd May 2020
Academic research published in the wake of the banking crisis provides a timely and encouraging reminder of the resilience of the family business model.
A Covid-19 related recession is pretty much a certainty for the UK, according to the commentators. Multiple business failures are predicted. But which businesses are best equipped to survive Covid 19? Leading research produced by Bath Spa academic Antonio Revilla and his colleagues suggests that this could well be family managed firms.
This research, produced following the 2008 banking crisis, showed that family businesses with family dominated management teams were significantly less likely to have failed than businesses with predominantly non-family management. For example, the researchers found that a firm with a Top Management Team (TMT) comprising 75% of family managers was 22% more likely to have survived than a firm with only 25% of family managers.
Okay, so this might have been the most read paper from the leading family business academic journal in the year it was published, but how applicable are the findings to the UK?
The research was based on a survey of about 400 Spanish mid to high tech manufacturing businesses, on average 33 years old and employing 300 people. Whilst academics are usually cautious about the ability to extrapolate between cultures, as practitioners, we see a lot of the positive indicators identified in the research and discussed below as equally relevant to family firms in the UK.
How lessons learned from the banking troubles can be applied to the Covid crisis is another matter. Regiments of keyboard warriors, are confined to barracks during the Coranavirus wars, using language like ‘uncharted territory’ and seeing a severe recession as inevitable, whilst speculating about whether this is likely to be V, U, W or the dreaded L shaped. We are clearly in for a hard time. Lockdown is also disproportionately affecting those sectors of the economy that can be seen as family business rich, such as hospitality. With falls in demand for office space, if working from home becomes the ‘new normal’, and pressure on retail businesses, even the family business safe havens of property investment will not be immune.
Nevertheless, many of the reasons identified by Dr Revilla and his colleagues for the relative resilience of the Spanish family managed firms studied are likely to hold good for family businesses in the UK today. These include:
- The tendency of family firms to take a long term view: as the researchers put it “to trade short term profitability for long term survivability”
- Family firms generally having lower borrowing
- The ability of the family to contribute what other researchers have termed ‘survivability capital’, in the form of equity or family pay cuts, to which we would add dividend waivers, personal guarantees and other security.
- The ability to draw on emotional capitalform within the family as a source of strength
- Many ‘business families’ having multiple business interests: so that particularly vulnerable businesses can be supported by better placed associated companies.
The researchers also found that size and age of family business was also an added strength: the muscle memory formed by weathering other crises, helps in overcoming later challenges.
Ultimately the researchers identified family cohesion as the over-riding determinant of survivability.
To some extent the above might read like a reminder of a standard exposition of the strengths of the family business model, of the sort often heard at family business conferences.
Turning to the specific findings of Dr Revilla’s research.
More ‘skin in the game’
The first of which was that survivability of a family business was directly related to the number of family managers engaged in it. The more family managers, the greater the resilience. The inference drawn by the researchers being that family managers have more to lose from the failure of their family firm, not only loss of income but also greater difficulty getting replacement jobs, loss of wealth tied up in the business, possible claims from banks and other secured creditors alongside loss of identity and prestige. A fairly compelling list of why family managers would try that much harder and why family cohesion could be stronger in family managed firms. In short more skin in the game.
Dr. Revilla’s research adds to the often-ambiguous research about which combination of family and non-family management and ownership produces the best financial outcome by suggesting that, when facing an existential crisis, family managed firms are more likely to be natural survivors.
Survival and Entrepreneurial Orientation
But perhaps the second key finding from this research is the most interesting. This is that this natural advantage is eroded with more entrepreneurially orientated family businesses. At first this seems counter intuitive. At least to me. But not to Dr Revilla and his colleagues who predicted that this would be the case. Conventional business logic would seem to dictate that it would be the most adaptable businesses that survive a crisis. Adapt or die surely? Not adapt and die.
However, the researchers identified an over-riding family business phenomenon. This was that entrepreneurial orientation (the dimensions studied being innovation, risk taking and proactiveness) would be likely to require other major changes, such as the introduction of non-family managers and rejecting tried and tested business practices, including those cherished by senior generation family members.
This is entirely consistent with views of other leading commentators. Gersick and his colleagues identified major changes in the life cycles of the three systems comprising the family business (business, ownership and family) as being points of high tension and vulnerability for a family firm (see Generation to Generation: Life Cycles of the Family Business). And so the argument goes on to suggest that the consequence of increased tension could well be a loss of family cohesion and accordingly reduced resilience in a crisis.
Again this rings true. As consultants, we often hear comments such as, ‘this doesn’t feel like my business anymore’, ‘nobody tells me what’s going on’, ‘they have got it wrong’, when ‘they’ might be any combination of the next generation, family business insiders or non-family managers.
Whereas firms with family-centric management are likely to have a unity of interest, family businesses undergoing change are correspondingly more likely to be categorised by disunity. There could be differences between the senior generation holding ownership control, with the next generation in charge of management or between wider family shareholders and a small number of ‘insider’ family managers. Proposed innovation and business change might, at best not be fully understood. At worst the changes might be bitterly resented. Family cohesion has evaporated. Investment decisions in this climate become near to impossible.
So what are the practical implications for family business members of all this, especially for those involved in family businesses undergoing change?
We would suggest the following:
- Be prepared to recognise that much, if not all, of increased tension surrounding family business strategy should, at root often be seen as systemic. Try as hard as possible to avoid it getting personal. It is no-one’s fault that your family business just happens to be experiencing natural and predictable consequences of change in the family business life cycle: albeit exacerbated by the worst economic outlook for three centuries.
- Recognise that the current climate is likely to make it even harder to resolve already difficult decisions as to whether to stick with an existing business model or to twist into innovation and change. The business case, both for and against, needs to be carefully and calmly examined.
- In many cases there might not be clear cut decisions to take. Instead some family members might simply be feeling that control of their family firm is slipping from their grasp. If so, it is unlikely that the changes already made can be safely reversed in the current economic climate (if at all).
- As a result of the above, the emotional pressures on family members, that lead to erosion of family cohesion, will be more pronounced and correspondingly harder to resolve
- Accordingly the communication and conflict management techniques discussed by my colleague Emma Rudge in her article ‘Going Nuclear’, including taking time to understand the perspective of the senior generation about the value of the core business, or the next generation of the need to adapt. The need to acknowledge the emotional investment in these different perspectives becomes ever more vital. Don’t let social distancing morph into emotional distancing.
- Put your family business governance mechanisms onto an emergency footing. Those families that have invested in family business governance processes, such as family councils should have their own version of COBRA through which to involve the wider business family in emergency discussions. Revisit family charters or the like for a reminder of what the family had previously said about its core values.
The conclusion? That for the reasons outlined above ‘stable’ and family managed family firms are most likely to be natural survivors of the Covid 19 economic crisis. So, the ultimate challenge, for those other family businesses presently experiencing tensions of change, is to successfully manage those tensions so as to bolster family cohesion and to become ‘unnatural survivors’.
Nicholas Smith is a consultant with the Family Business Consultancy: https://thefbc.co.uk