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Family Office – Erosion of the Entrepeneurial Culture

The entrepreneurial stage is widely recognized as one that endows the organization with the capacity to be nimble, largely because at that formative stage owners know that the essence of being successful is making the sale.

But it does not take long for successful family businesses to be expected to comply with standard accounting principles that promote greater transparency – and the accompanying paperwork – and to have to comply with a growing number of industry standards and government-initiated requirements. Increased regulation and the expanding need for coordination create the impetus for more meetings, more memos and more e-mail that make the business of the family naturally become more bureaucratic. Collectively, these multiplying requirements may contribute to the family enterprise or family office experiencing time delays that the founder’s business never experienced during its entrepreneurial phase.

More importantly, there is the possibility that the family itself may have become an important source of inward-focused time-wasters (like who gets to use the company plane or the country home for the holidays, both administered by a nonfamily staff member), in which case, the family begins to represent a cost to the enterprise rather than the resource that a family member in a combined owner-manager role represented
during the entrepreneurial stage. And, more importantly, by focusing inward, it can lose its ability to keep an eye on new competitive dynamics, the everchanging marketplace, and the financial landscape.

Ignacio Osborne, reflecting on this very development, commented:
“The biggest source of resistance to any change may have been that the family name is on every product label. So we had to try to explain to family members who have been managing the company that in business today you have to focus on the customer and you have to forget a little bit about the vineyards, the countryside and the craftsmanship in production and look more into the market and what is going on in the world. I think that was the biggest resistance. After all the company has been very successful with the original business model for many years, so why change?”

For a number of companies with entrepreneurial cultures the costs of losing this competitive advantage only become evident when their leadership transfers to later generations of the owning family. Ownership-transfer policies motivated by a founder’s desire to love and treat all heirs equally or, from the next generation’s perspective, expectations by family members of equal treatment, are likely to promote an impasse, to the detriment of continued agility and competitiveness. Distributing voting shares equally among a growing list of shareholders often erodes a next-generation owner-manager’s ability to lead. Stock ownership by complicated trusts can also create difficulties for successor generation leaders. Unless ownership and management have been sufficiently differentiated through the presence of nonfamily managers with a great amount of influence in the top management team, trustees, too, can second-guess a firm’s management into paralysis. Successors need to be able to manage the company with agility, flexibility, and speed, and have ample leeway, including freedom from family constraints such as those mentioned above, to sustain the entrepreneurial culture of the first generation.

Multigenerational family-controlled businesses, even those with some exposure to public markets, are largely illiquid enterprises. This lack of liquidity and need for selfless interest can be a burden for family members operating in a society that tends to focus on the short term, the last quarter, the day trade. They will bear this responsibility willingly only if opportunities to acquire information, to be educated, and to engage with important family values of stewardship are plentiful. Inclusion, affection, and mutual influence across generations and between active and inactive shareholders are an absolute necessity.
Investing sweat equity in disseminating information to family members and encouraging multiple avenues of participation gives rise to trust, a spirit of service, and a sense that everyone is in the same boat on the same long journey.

 

For further information please contact us via LNKD or follow us on TWTR “Swiss Family Office”.

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