Chapter 2

Differences Between Family and Nonfamily Firms

Several significant differences are apparent between family and nonfamily firms. Family businesses often have a long-term view; a lasting mission, vision, and purpose; a desire to create a nurturing, caring community and to act as stewards; and an ability to build relationships, bonds, and connections with customers, suppliers, and other outsiders.¹

The Family

By far, the greatest difference between a family firm and a nonfamily firm is the addition of the family unit. The involvement of family is both an advantage and a disadvantage. It not only can lead to a tremendous competitive advantage but also can be the cause for serious dysfunction and complications. The nonfamily firm does not have to deal with many of the complex issues that family firms face, such as the upheaval of divorce, interpersonal conflict, inheritance and tax issues, and nonemployed family members with decision authority. Consider working for a family member you do not respect. Or one who is incompetent, but to complain would cause an irreparable rift in the family. Consider, for a minute, your life’s work, your employment, and your wealth, all intermingled with your extended family.

The characteristics of families include an inward focus, unconditional acceptance, sharing, and the offer of lifetime membership. Families are based on love and are often very emotional. Conversely, businesses look outward, are based on tasks, and are unemotional. They embrace and encourage change and they reward performance: the accepted philosophy is “perform or leave.” The two systems of organization are diametrically opposed to each other.

The family plays a dual role. First, they are a family, with the same kinds of similar issues and concerns as everyone else, such as what’s for dinner, getting the kids to school and soccer practice on time, and poor old Uncle Joe’s drug problem. Management becomes complicated when the family is involved in the business. Family issues or stresses may be brought to the business and vice versa. Now the usual concerns of business, such as money, investment, finances, employment, livelihood, and reputation, intertwine with the family. If Uncle Joe has a drug problem, it now affects the business as well as the family.

The family-owned business has complex family dynamics at work. Within the family business, conflicts can grow and become exaggerated. Communication within families is less formal than it is in professional settings. Some families communicate with respect, understanding, love, and compromise. Other families communicate by arguing, slinging accusations, and displaying feelings of distrust, dislike, and jealousy. Family business can be like a marriage: The parties can bring some baggage to the union. Instead of cooperating with each other, some family members constantly bring up unresolved issues and conflicts that have bruised their egos from early childhood.

Priorities

Family firms have different priorities than nonfamily firms have. Family businesses are associated with several nonfinancial objectives. Family companies are more likely to be concerned with the stability and continued family ownership of the business. Families often see employing family members as a priority. Families are less likely to seek rapid growth by selling equity, either privately or on the stock exchange. Families are not quick to lay off either family or nonfamily members. Families usually live and work in the same area, and their identity is often tied up in the business. They get a sense of satisfaction by employing members of their community. Often, their priorities are social or community related rather than strictly business or financial. In a long-standing firm, the family legacy is vitally important.

Values and Mission

In many companies, the mission statement is an unimportant but required component of a business plan. New business start-ups often write some platitudes that sound good to investors, such as caring for the community, the employees, and the environment. Once the mission statement is complete, they move on to the “more important business.”

In practice, the mission of a company is vital to the success of the organization. The great power of the mission statement is its use as a decision-making tool: an aid to the employees and members of the firm. It discusses the purpose of the firm and why the firm exists. Why is it different from other firms? What does the company stand for? When employees and others know the underlying mission of the firm, they can make decisions on their own in the absence of managerial supervision. It keeps every employee moving in the same direction. If, for example, the firm stands for the highest levels of customer service, fairness, ethical standards, and quality, an employee should feel empowered to decide to stop the shipment of subpar merchandise that violates the mission of the organization. Families in business need to discuss and decide the important topics: Why are they in business together? Does the family business exist solely to make money? Or does it also exist to provide jobs for family members and the community? Does it exist to carry on the legacy and goals of the founder? Is there an altruistic element to its purpose, such as employing family members or providing employees with more benefits than competing companies?

In family businesses, the mission and values of the firm are a major differentiating factor from nonfamily businesses. Family firms commonly act altruistically with customers, employees, and the local community, and they often make decisions that do not maximize profitability in the short run.

Family businesses care about their family’s legacy. Successive generations are concerned with the reputation of the family within the community, and they strive to honor the original mission and values created by the founders. For a family business, the mission statement and its corporate values are highly significant and very powerful.

The following are selected examples of family business mission and values statements:

• SC Johnson

  Employees: We believe that the fundamental vitality and strength of our worldwide company lies in our people.

  Consumers and users: We believe in earning the enduring goodwill of consumers and users of our products and services.

  General public: We believe in being a responsible leader within the free market economy.

  Neighbors and hosts: We believe in contributing to the well-being of the countries and communities where we conduct business.

  World community: We believe in improving international understanding.²

• Chick-fil-A’s mission statement is be America’s best quick-service restaurant at winning and keeping customers. Its corporate purpose is “to glorify God by being a faithful steward of all that is entrusted to us; and to have a positive influence on all who come in contact with Chick-fil-A.” The family and the organization stay true to the founder’s Christian principles; all restaurants are closed on Sundays.³
• Enterprise Rent-A-Car founder Jack Crawford described his business philosophy in this simple statement: “Take care of your customers and your employees first, and the profits will follow.” The company has detailed its values into the following guiding principles:
  • Our brands are the most valuable things we own.
  • We do business every day as if our success depends on our company’s good name—because it does. Our reputation and the powerful brands we build together are our most precious assets. Enterprise Holdings is a world-class company that was built by our employees—one transaction, one handshake, one kept promise at a time. That makes employees owners of our corporate identity and our service brands. In the marketplace and the communities we serve, they have the power to advance our standing and our reputation, one customer at a time.
  • Personal honesty and integrity are the foundation of our success.
  • As the personal face of our company to our customers and in our communities, our employees accept responsibility for demonstrating our true commitment to the highest ethical standards. We build loyal, long-term relationships with our customers and neighbors by treating them fairly, meeting their needs and earning their trust. These relationships, sustained by personal honesty and integrity, are the foundation of our success.
  • Customer service is our way of life.
  • We maintain an uncompromising commitment to customer service across each of our service brands, from our focus on complete customer satisfaction to directly linking career advancement opportunities to the actual level of service we provide. Customers seek us out—and stay with us—because we truly believe in and deliver a great customer experience. Our goal is simple but powerful: to exceed every customer’s expectations.
  • Our company is a fun and friendly place, where teamwork rules.
  • We work hard to meet our goals for growth and success. But we work just as hard to keep our workplace enjoyable. Even today, decades after he founded our company and many years after he stepped down from day-to-day management, Jack Taylor still greets employees with the question, “Are you having fun?” We are known for our enthusiasm, high energy, healthy competitive drive and team spirit. As we continue to grow, we understand we can best fuel our collective success with a workforce that is upbeat, motivated and highly committed to each other’s success.
  • We work hard…and we reward hard work.
  • Learning how to run a successful business from the ground up and delivering our high standard of service is hard work. It’s work that demands a deep personal commitment from each employee. But Enterprise Holdings is also a true meritocracy that rewards this commitment personally, professionally, and financially by providing employees with ample opportunities for growth. We provide a solid foundation in business operations and true entrepreneurship that few, if any, companies offer. That makes Enterprise Holdings a great fit for career-minded individuals who take real ownership of, and responsibility for, their goals and aspirations.
  • Great things happen when we listen…to our customers and to each other.
  • We have learned that when we truly listen to our customers and understand their needs, they lead us to opportunities—from little ways to serve them better, to new lines of business that open up exciting growth prospects for our company. We listen carefully to one another, too. Day-to-day, face-to-face, listening leads us to working more effectively together. At Enterprise Holdings, we understand that an open and respectful exchange of ideas is critical to maintaining our high standards for service and personal success.
  • We strengthen our communities, one neighborhood at a time.
  • Our company has a presence in thousands of communities, placing us on a first-name basis with the people who call those communities home. We purchase millions of dollars worth of vehicles locally, generate tax dollars through sales and employment, create meaningful jobs that generate significant income and benefits for employees and their families, and much more. We realize we owe our success to the support and goodwill of the people who live in those communities and who do business with us. That’s why we are committed to involving ourselves in the support of worthwhile endeavors wherever we operate our businesses, from local neighborhoods to the biggest cities and everywhere in between.
  • Our doors are open.⁴

Goals

Like other firms, family businesses have multiple goals and objectives. However, a key difference is that family firms often have noneconomic goals. This is unlike the strictly profit-oriented beliefs suggested by economist Milton Friedman, who espoused that a corporation’s sole purpose for existence is to increase shareholder wealth (stockholder approach).

Long-Term Viewpoint

Several significant differences are apparent between family and nonfamily firms. One of the most readily apparent is the long-term outlook of family firms. Most family businesses seek to keep the business in the family and pass it on to the next generation. The American Family Business Survey⁵ found that 85% of the firms surveyed wanted to continue with family ownership. The Laird Norton Tyee (LNT) Family Business Survey⁶ found that 55% of the senior generation wanted successive generations to take over and almost 85% of family businesses who had chosen a successor chose a family member to carry on the business.⁷

Family firms have significantly longer time horizons than nonfamily firms. A Swedish study reported family firms had a longer life span than nonfamily firms: 37 years versus 22 years. Families remained the principle owners of a business for almost 30 years, compared with 12–13 for nonfamily firms.⁸ Due to the average family CEO tenure of 24 years, compared to 3–4 years for nonfamily firms, family firms have no need to maximize short-term gains at the risk of long-term gains.⁹ They can make decisions that will affect the firm years later and generations in the future. Due to the shorter CEO tenure in nonfamily firms, especially public firms, nonfamily management often emphasizes short-term results. They are concerned with increasing the price of the company stock, providing an excellent return for investors, and maximizing profitability in the short run. This very often translates into quarter-by-quarter short-term thinking, which can have significant negative effects on the long-term financial health of the firm.

A negative issue associated with long-term family tenure is referred to as CEO entrenchment. In some firms, a company with a long-serving CEO can become conservative, moribund, and stuck in its ways, and it may miss opportunities for growth and expansion. For these reasons, professional and highly functioning family firms utilize good governance procedures, such as a board of directors to guard against CEO entrenchment and other negative issues that can result from long-term tenure.

An association of family and bicentenary companies, the Association les Hénokiens formed in 1981 to honor and celebrate their members’ long-standing family heritage. The association has 40 members: 14 Italian, 12 French, 5 Japanese, 3 German, 2 Dutch, 2 Swiss, 1 Belgian, and 1 from Northern Ireland. To become a member of the Hénokiens Association, a firm must have a minimum age of 200 years and the family must still own the company or be a majority shareholder. A relative of the founder must still manage the company or be on the board of directors. The company must also be in good financial health. The final requirement is being modern and up to date. Members of the organization include Fabbrica d’armi Pietro Beretta S.p.A., the large Italian firearms company, now in its 16th generation, and Netherlands-based liquor maker De Kuyper, which is now run by a 10th-generation family member.¹⁰

Trust

A major component of the family business’s competitive advantage is the high levels of trust among the family members. The trust is relational and interpersonal and is founded on connections that are significantly deeper than the sheer economics of the business. The stronger foundations of trust include shared common experiences, common family characteristics, shared family identity, and history, as well as a united value system and mutual goals. Trust is usually greater among family members than among nonfamily members or when compared with nonfamily firms. When trust is not sustained over time, conflict increases and management (agency) costs rise.

Business Size

Data on family business size varies by country, depending on the tax policies and inheritance regulations. However, most family firms are small, with many fitting in the small and medium enterprise size. Several countries have a significant number of family businesses that also rank as some of the countries’ largest businesses. The United States, Germany, and France all have extremely large family firms within their borders (see Table 1.2). The United Kingdom, conversely, does not have many large family firms, which is thought to be caused by tax and inheritance issues acting as barriers. Government and policy makers should be knowledgeable and aware of what is needed to properly support family firms in their country because of the substantial contributions of such companies to the overall economy.

Industry and Location

Throughout the world, family firms predominate in certain industries, such as service industries, agriculture, fishing, forestry, hotels, restaurants and catering, and distribution. Most family firms are not heavily represented in highly capital-intensive industries, such as finance, banking, and insurance firms. In the less developed economies, many families operate small farms. In the American Family Business Survey (2002), nearly a quarter of respondents (24.5%) were in the manufacturing industry. More than a sixth (16.6%) specialized in wholesale and distribution, 12.2% were in construction, and 11.1% were in retail. The rest of the industries combined—agriculture and forestry, financial services, high technology/biotechnology, mining/oil and gas, real estate, telecommunications and transportation—together accounted for 35.6% of family businesses responding to the survey.¹¹

Family firms often cluster together, usually due to the specific industry they are involved in. The concentrations of these locations vary by country. In most countries, because of the high prevalence of family-owned farming businesses, family firms are overrepresented in rural areas.

Altruism

One of the most puzzling aspects for nonfamily firms and business professionals to understand about family-owned firms is their altruistic behavior. Often family firms break the rules of normal accepted business practices of profit maximization. For example, they may keep a trusted long-term employee past their prime, avoid needed layoffs to support the local community, or pay employees more than their earned contribution. It often amazes and frustrates consultants and advisors when a family firm does not want to follow through on recommendations that are fiscally sound and responsible. The family balks at the suggestions based on their stated mission and values and altruistic behavior. The cultural norms concerning the respect and role of family in the Latin American culture have caused some U.S.-based consultants to been ignored or fired because of their recommendations to replace family members who are not contributing to the business. The family believes they are staying true to the founder’s values and the mission of the organization. For some family firms, adherence to long-term collective goals can be more valuable and fulfilling than profit.

Financial Performance

A recent area of research that has fueled considerable discussion and debate among scholars is the superior financial performance shown by larger family firms over their nonfamily counterparts. There is conflicting research on financial performance differences between family and nonfamily firms. Recent research has shown that family businesses show a higher return on investment,¹² have greater value, are operated more efficiently, and carry less debt compared to nonfamily businesses.¹³ Jim Lee¹⁴ showed that family firms in the Standard & Poor’s 500 over the period 1992–2002 had higher profit margins and a higher reinvestment of revenues when compared with nonfamily firms. Anderson and Reeb¹⁵ presented evidence showing that large family businesses in the Standard & Poor’s 500 performed better than nonfamily firms did. Miller and Le Breton-Miller¹⁶ wrote a book based on a yearlong study of 46 successful large family-controlled companies, including Hallmark, L. L. Bean, IKEA, the New York Times, SC Johnson, W. L. Gore, and Cargill. The authors showed evidence that family firms outperformed their nonfamily counterparts and presented key attributes of long-term, successful family firms. Family firms have been described as “nimbler, more customer oriented and quality focused, and more active in the community. As a result, they tend to outperform nonfamily firms.”¹⁷

Conversely, other research has presented the opposite view: that family firms are not efficient, do not manage their capital well, and have a lower return on investment. The difference may lie in the conflicting definitions of what a family firm is. More research needs to be performed in this vitally important area. If the superior financial performance of family firms is found to be true, it could change many people’s views of family businesses. The most important result may be a change in governmental policies to support and encourage family firms. Family business owners should be encouraged. They are doing some things right and actually may be doing them better than nonfamily firms.

Sources of Financial Capital

Debt

Family firms are famously debt averse. In a large nationwide study, 29% of surveyed firms reported no debt.¹⁸ On the positive side, the aversion to debt may help family firms to be able to survive by having a readily available source of capital during a recession. On the negative side, the firm could be underleveraged and it might not be capitalizing on opportunities for growth. Family firms famously do not like bank debt or the conditions, the lack of privacy, and the accountability that come with it. Instead, they rely on self-funding, or patient capital, from family members and friends.

Conservatism and Risk

Family businesses often have a different perception of risk than nonfamily firms have. They see risk as high stakes, or to put it another way, the price of a bad decision is seen as too costly and thus can be interpreted as being too great a risk. Many family firms are financially conservative. Because the vast majority of the entire family’s wealth is often tied up in the business itself, family decision makers are extremely reticent of putting the firm at risk of capital loss or, worse, insolvency. Family firms are not necessarily risk averse because being in business is a risk in itself. Instead, the family tries to minimize its risk as best as it can. When the risk has been reduced as much as possible, the family will then take steps to capitalize on an opportunity. The president of a $10 million agricultural, packaging, and distribution company described his attitude toward risk:

The general manager of a $15 million general construction firm discussed risk: “We don’t step into something we don’t know. If we have an opportunity about something we do not know, about an area that’s not in our area of expertise, we will pass on it.”²⁰

A family’s conservative nature is often interpreted by outside stakeholders, such as suppliers, employees, and other professionals, as being nonprofessional and avoiding decisions, which is often a source of tension and frustration. Nothing could be farther from the truth. The preceding quote from the president of the agricultural firm is from the company that created an entirely new regional industry. The family took a huge risk in starting their entrepreneurial venture.

Growth

Some family businesses have made a conscious decision to embrace slow growth. Based on their desire for control and an unfavorable opinion of debt, the choice is to finance their own growth in a fiscally conservative manner. Many, in fact, of the majority of family firms can be described as small. Often a family firm can be described as a lifestyle firm, where the family identity is tied to the business, the family works the business, and they have no plans for growth. In this manner, they can be considered as self-employed. The corner grocery store that employs family members and some neighbors and has no plans for opening another store is an example.

An opposite point of view is provided by family gazelles, family firms that have grown amazingly fast.²¹ The difference between slow-growth family firms and family gazelles is in their original mission, vision, and purpose. If the purpose of the firm is to seize opportunity and build wealth quickly without consideration of building a business to last for several generations, they embrace rapid growth strategies more readily.

Philanthropy and Community Service

Family businesses are significantly philanthropic and they give to the local community, educational institutions, religious charities, and international relief efforts. On average, family firms give a larger percentage of their profits than nonfamily firms. By far, the heaviest benefactor of the family’s good intentions is the local community. Family firms are closely linked to their communities. Due to the usual small to medium size of most family businesses, these firms are often local or regional regarding their customers and employees. The values of the first generation of founders often emphasize involvement in the local community as a way to pay the community back for supporting their business over the years. Giving reinforces the family’s values. Charitable giving is also a way for nonactive family members to be involved with the family and the business and to understand the relationship between business profits and giving. Many families take great pride in their philanthropic service and believe they are carrying on the legacy of the founder by doing so.

Often a family will decide to focus on certain issues, such as education, poverty, or entrepreneurship. This focus serves multiple functions: it enables the family to decide among numerous requests for funds, and it gives the family a broader influence and enables them to make a more visible difference by specifically targeting certain purposes. Often a family practices the social responsibility concept of “doing well by doing good,” and they focus their giving on issues that are closely related to the firm’s business. In this manner, the awareness of the family business is increased among its customers and community, as it is associated with the family giving and its support of a worthy purpose. The social status of the family is a motivational factor, as the family identity and respect within the community is valued, even among inactive family members.

SC Johnson has two charitable organizations: the SC Johnson Fund and the SC Johnson Foundation. The organization donates 5% of its pretax profits to charitable work, over twice that of the corporate average.²²

With 143 companies and over 22,000 employees, the Philippines-based Lopez family has created the Lopez Group Foundation Inc. to oversee its 200-year-old family legacy of social responsibility, with charitable giving in education, poverty alleviation, and the environment.

Family Competitive Advantage in the Marketplace

Because the family’s name and reputation is intertwined with the business, most family firms pursue a strategy of high quality at a fair price and provide excellent customer service. Customers of a family business reward the business by being loyal. The family has a long-term outlook, concern for stakeholders, and a good community standing. Mix these with the long-standing trust and loyalty the firm may have developed, and customers would rather do business with a family firm than with a faceless nonfamily corporate business. There is almost a sense of obligation from the firm’s loyal customers and suppliers. Community members want to support responsible local businesses.

Family businesses should promote their family ownership and heritage, as it can be a source of tremendous competitive advantage regarding customers. Family businesses are seen by consumers as trustworthy, fair, and offering good value and excellent customer service. Customers believe if there is a problem, the family business is more likely to handle the situation in a satisfactory manner than a nonfamily or faceless corporate business would. In this age of empowered consumers and a “think locally” viewpoint, family firms should take advantage of one of their key strengths and heavily promote the differences with their nonfamily competitors. One family business that unabashedly promotes its familiness is SC Johnson, who adds the tagline “A family company” to their corporate identification and logo. Their corporate website details five generations of the Johnson family through the history of the company.

Because family firms utilize their own capital, they are able to make opportunistic investments without accountability to outsiders. Family firms are able to change direction quickly in a dynamic environment, giving the firm a significant competitive advantage, especially in a field where a first-mover advantage is vital. They often make intuitive or heuristic decisions that enable rapid decision making and provide the ability to seize opportunities.

Sharma and Irving²³ discussed the benefits of family social networks, including a ready source of easy-to-obtain, flexible, “patient” financial capital and family personnel who unite to improve the survivability of the business during tough times. Families who are most committed to the continuity of the family business have been shown to have three characteristics: (a) they believe owning the business helps fulfill the family mission, (b) they view the values exemplified by the business as a source of family pride, and (c) they believe they are contributing to the community and society in a meaningful way.²⁴

International Sales

The majority of family firms in the United States do not have international sales. This is not surprising, considering their conservative nature, their aversion to debt, and their avoidance of risk. To do business internationally, the family would need to delegate to knowledgeable local professional managers and possibly lose the high level of control they usually prefer. As a result, most family firms surprisingly believe domestic competition and not international competition is their largest threat (mass mutual).

Conversely, family firms in smaller markets, such as European Union countries or in Latin America, have embraced international businesses as a way to diversify and break into new and larger markets. This may be an area for the succeeding generations to focus on as they enter their family firms. By gaining education or international business experience, they may add significant value when they join the family firm, which might lead them into new international business markets.

Spirituality and Religious Beliefs

A significant number of families in business together have strong religious beliefs and spiritual faith.²⁵ Their faith is an important element of who they are. It guides their value system and it affects how they do business. Based on their beliefs, their faith is exhibited in customer service and treating their customers and employees fairly. They embrace the stewardship and stakeholder approaches to family firms.

Chick-fil-A is a company whose owners have a strong faith. All locations are closed on Sundays due to their Christian beliefs. As discussed elsewhere in this book, those of the Muslim faith have strong beliefs concerning excessive profits. They do not charge interest, and their religion calls them to be philanthropic. Because of the family ownership and control of the business, they have more freedom to express their faith at their own place of business, compared with a nonfamily or corporate-owned firm.

Genogram

A tool that enables family members to better understand their family history and to recognize generational problematic issues is called the family genogram. The genogram is similar to a family tree, with the exception that it entails more detailed information than simply births and deaths. The genogram tracks branches of families; illnesses such as mental illness and alcoholism; genetic issues; marital status; and history, occupation, and critical incidents in the life of the family, such as tragic events or trauma. The genogram also can detail strong family messages through the generations, such as a family’s desire to instill the need to work hard or the importance of gaining an education.

In my own family, my father instilled in me the importance of being self-employed and “my own man.” I now pass this on to my children. Looking back, both of my grandfathers at one time or another were also self-employed. These types of family messages can be very powerful. Family therapists and consultants often advise families to create their genogram in order to understand and work through their issues more effectively. An example of a family genogram is in Figure 2.1.

The following are items of importance:

• Year of birth
• Year of death
• Relationships (marriage, living together, divorce, separation, broken relationship, adoption, close relationships or attachments among various family members)
• University graduates
• Occupations
• Entrepreneurial ventures and businesses

As shown in the Smith family genogram, there are some important issues for the family to be aware of in the form of divorces, family conflict, cancer, heart disease, alcoholism, and mental illness.